0000950147-01-501671.txt : 20011009 0000950147-01-501671.hdr.sgml : 20011009 ACCESSION NUMBER: 0000950147-01-501671 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20011001 EFFECTIVENESS DATE: 20011001 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILGRIM GROWTH & INCOME FUND INC CENTRAL INDEX KEY: 0000059146 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 221644924 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-14767 FILM NUMBER: 1749876 BUSINESS ADDRESS: STREET 1: LEXINGTON GROUP OF MUTUAL FUNDS STREET 2: PARK 80 WEST PLAZA TWO CITY: SADDLE BROOK STATE: NJ ZIP: 07662 BUSINESS PHONE: 2018457300 MAIL ADDRESS: STREET 1: LEXINGTON GROUP OF MUTUAL FUNDS STREET 2: PARK 80 WEST PLAZA TWO CITY: SADDLE BROOK STATE: NJ ZIP: 07662 FORMER COMPANY: FORMER CONFORMED NAME: LEXINGTON GROWTH & INCOME FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: LEXINGTON RESEARCH FUND INC DATE OF NAME CHANGE: 19910506 FORMER COMPANY: FORMER CONFORMED NAME: LEXINGTON RESEARCH INVESTING CORP DATE OF NAME CHANGE: 19690813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILGRIM GROWTH & INCOME FUND INC CENTRAL INDEX KEY: 0000059146 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 221644924 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-00865 FILM NUMBER: 1749877 BUSINESS ADDRESS: STREET 1: LEXINGTON GROUP OF MUTUAL FUNDS STREET 2: PARK 80 WEST PLAZA TWO CITY: SADDLE BROOK STATE: NJ ZIP: 07662 BUSINESS PHONE: 2018457300 MAIL ADDRESS: STREET 1: LEXINGTON GROUP OF MUTUAL FUNDS STREET 2: PARK 80 WEST PLAZA TWO CITY: SADDLE BROOK STATE: NJ ZIP: 07662 FORMER COMPANY: FORMER CONFORMED NAME: LEXINGTON GROWTH & INCOME FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: LEXINGTON RESEARCH FUND INC DATE OF NAME CHANGE: 19910506 FORMER COMPANY: FORMER CONFORMED NAME: LEXINGTON RESEARCH INVESTING CORP DATE OF NAME CHANGE: 19690813 485BPOS 1 e-7502.txt POST-EFFECTIVE AMENDMENT NO. 72 TO FORM N-1A As filed with the Securities and Exchange Commission on October 1, 2001 Securities Act File No. 002-14767 Investment Company Act File No. 811-00865 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM N-1A Registration Statement Under The Securities Act of 1933 [X] Pre-Effective Amendment No. Post-Effective Amendment No. 72 [X] and/or Registration Statement Under The Investment Company Act of 1940 [X] Amendment No. 27 [X] (Check appropriate box or boxes) PILGRIM GROWTH AND INCOME FUND, INC. (Exact Name of Registrant Specified in Charter) 7337 E. Doubletree Ranch Road Scottsdale, AZ 85258 (Address of Principal Executive Offices) Registrant's Telephone Number, Including Area Code: (800) 992-0180 James M. Hennessy, Esq. With copies to: ING Pilgrim Investments, LLC Jeffrey S. Puretz, Esq. 7337 E. Doubletree Ranch Road Dechert Scottsdale, AZ 85258 1775 Eye Street, N.W. (Name and Address of Agent for Service) Washington, DC 20006 It is proposed that this filing will become effective (check appropriate box): [ ] Immediately upon filing pursuant to paragraph (b) [X] on October 1, 2001 pursuant to paragraph (b) [ ] 60 days after filing pursuant to paragraph (a)(1) [ ] on (date) pursuant to paragraph (a)(1) [ ] 75 days after filing pursuant to paragraph (a)(2) [ ] on (date) pursuant to paragraph (a)(2) of Rule 485 If appropriate, check the following box: [ ] This post-effective amendment designated a new effective date for a previously filed post-effective amendment. ================================================================================ PROSPECTUS October 1, 2001 U.S. EQUITY FUNDS CLASSES A, B, C, M AND T Pilgrim MagnaCap Pilgrim Growth and Income Pilgrim Research Enhanced Index Pilgrim Tax Efficient Equity Pilgrim Growth Opportunities Pilgrim LargeCap Growth Pilgrim MidCap Opportunities Pilgrim MidCap Growth Pilgrim Growth + Value Pilgrim SmallCap Opportunities Pilgrim SmallCap Growth Pilgrim Financial Services Pilgrim Internet EQUITY & INCOME FUNDS Pilgrim Balanced Pilgrim Convertible [GRAPHIC] THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT INVESTING IN THE PILGRIM FUNDS. YOU SHOULD READ IT CAREFULLY BEFORE YOU INVEST, AND KEEP IT FOR FUTURE REFERENCE. PLEASE NOTE THAT YOUR INVESTMENT: IS NOT A BANK DEPOSIT, IS NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY AND IS AFFECTED BY MARKET FLUCTUATIONS. THERE IS NO GUARANTEE THAT THE FUNDS WILL ACHIEVE THEIR OBJECTIVES. AS WITH ALL MUTUAL FUNDS, THE U.S. 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. [LOGO] ING PILGRIM WHAT'S INSIDE -------------------------------------------------------------------------------- [GRAPHIC] OBJECTIVE These pages contain a description of each of our Funds included in this prospectus, including each Fund's objective, investment strategy and risks. [GRAPHIC] INVESTMENT STRATEGY You'll also find: [GRAPHIC] RISKS How the Fund has performed. A chart that shows the Fund's financial performance for the past ten years (or since inception, if shorter). [GRAPHIC] HOW THE FUND HAS PERFORMED What you pay to invest. A list of the fees and expenses you pay -- both directly and indirectly -- when you invest in a Fund. An Introduction to the Pilgrim Funds 1 Funds At A Glance 2 U.S. EQUITY FUNDS Pilgrim MagnaCap 4 Pilgrim Growth and Income 6 Pilgrim Research Enhanced Index 8 Pilgrim Tax Efficient Equity 10 Pilgrim Growth Opportunities 12 Pilgrim LargeCap Growth 14 Pilgrim MidCap Opportunities 16 Pilgrim MidCap Growth 18 Pilgrim Growth + Value 20 Pilgrim SmallCap Opportunities 22 Pilgrim SmallCap Growth 24 Pilgrim Financial Services 26 Pilgrim Internet 28 EQUITY & INCOME FUNDS Pilgrim Balanced 30 Pilgrim Convertible 32 What You Pay to Invest 34 Shareholder Guide 39 Management of the Funds 46 Dividends, Distributions and Taxes 49 More Information About Risks 50 Financial Highlights 54 Where To Go For More Information Back cover INTRODUCTION TO THE PILGRIM FUNDS -------------------------------------------------------------------------------- Risk is the potential that your investment will lose money or not earn as much as you hope. All mutual funds have varying degrees of risk, depending on the securities they invest in. Please read this prospectus carefully to be sure you understand the principal risks and strategies associated with each of our Funds. You should consult the Statement of Additional Information (SAI) for a complete list of the risks and strategies. [GRAPHIC] If you have any questions about the Pilgrim Funds, please call your financial consultant or us at 1-800-992-0180. This prospectus is designed to help you make informed decisions about your investments. U.S. EQUITY FUNDS ING Pilgrim's U.S. Equity Funds focus on long-term growth by investing primarily in domestic equities. They may suit you if you: * are investing for the long-term -- at least several years * are willing to accept higher risk in exchange for long-term growth. EQUITY AND INCOME FUNDS ING Pilgrim's Equity and Income Funds seek income and growth of capital. They may suit you if you: * want both regular income and capital appreciation * are looking for growth potential, but don't feel comfortable with the level of risk associated with the Equity Funds. [GRAPHIC] If you have any questions, please call 1-800-992-0180. 1 FUNDS AT A GLANCE -------------------------------------------------------------------------------- This table is a summary of the objectives, main investments and risks of each Pilgrim Fund. It is designed to help you understand the differences between the Funds, the main risks associated with each, and how risk and investment objectives relate. This table is only a summary. You should read the complete descriptions of each Fund's investment objectives, strategies and risks, which begin on page 4.
FUND INVESTMENT OBJECTIVE ---- -------------------- U.S. Equity MagnaCap Fund Growth of capital, with dividend income as a Funds Adviser: ING Pilgrim Investments, LLC secondary consideration Growth and Income Fund Long-term capital appreciation, with income as Adviser: ING Pilgrim Investments, LLC a secondary objective Research Enhanced Index Fund Capital appreciation Adviser: ING Pilgrim Investments, LLC Sub-Adviser: Aeltus Investment Management, Inc. Tax Efficient Equity Fund High total return on an after-tax basis Adviser: ING Pilgrim Investments, LLC Sub-Adviser: Delta Asset Management Growth Opportunities Fund Long-term growth of capital Adviser: ING Pilgrim Investments, LLC LargeCap Growth Fund Long-term capital appreciation Adviser: ING Pilgrim Investments, LLC MidCap Opportunities Fund Long-term capital appreciation Adviser: ING Pilgrim Investments, LLC MidCap Growth Fund Maximum long-term capital appreciation Adviser: ING Pilgrim Investments, LLC Growth + Value Fund Capital appreciation Adviser: ING Pilgrim Investments, LLC Sub-Adviser: Navellier Fund Management, Inc. SmallCap Opportunities Fund Capital appreciation Adviser: ING Pilgrim Investments, LLC SmallCap Growth Fund Maximum long-term capital appreciation Adviser: ING Pilgrim Investments, LLC Financial Services Fund Long-term capital appreciation Adviser: ING Pilgrim Investments, LLC Internet Fund Long-term capital appreciation Adviser: ING Pilgrim Investments, LLC Sub-Adviser: ING Investment Management Advisors B.V. Equity & Balanced Fund Long-term capital appreciation and current income Income Funds Adviser: ING Pilgrim Investments, LLC Convertible Fund Total return, consisting of capital appreciation Adviser: ING Pilgrim Investments, LLC and current income
2 FUNDS AT A GLANCE --------------------------------------------------------------------------------
MAIN INVESTMENTS MAIN RISKS ---------------- ---------- Equity securities that meet disciplined selection Price volatility and other risks that accompany an criteria designed to identify companies capable of investment in equity securities. paying rising dividends. Equity securities of large, ably managed, and Price volatility and other risks that accompany an well-financed U.S. companies. investment in equity securities. Equity securities of large U.S. companies that Price volatility and other risks that accompany an make up the S&P 500 Index. investment in equity securities. Equity securities and instruments whose returns Price volatility and other risks that accompany an depend upon stock market prices, managed in a investment in equity securities. May not provide manner that will attempt to reduce net realized as high a return before taxes as other funds, and gains each year. as a result may not be suitable for investors who are not subject to current income tax. Equity securities of large, medium, and small U.S. Price volatility and other risks that accompany an companies believed to have growth potential. investment in growth-oriented equity securities. Equity securities of large U.S. companies believed Price volatility and other risks that accompany an to have growth potential. investment in growth-oriented equity securities. Equity securities of medium-sized U.S. companies Price volatility and other risks that accompany an believed to have growth potential. investment in equity securities of growth-oriented and medium-sized companies. Particularly sensitive to price swings during periods of economic uncertainty. Equity securities of medium-sized U.S. companies Price volatility and other risks that accompany an believed to have growth potential. investment in equity securities of medium-sized companies. Particularly sensitive to price swings during periods of economic uncertainty. Equity securities of small-sized U.S. companies. Price volatility and other risks that accompany an investment in equity securities of growth-oriented and small-sized companies. Particularly sensitive to price swings during periods of economic uncertainty. Equity securities of small-sized U.S. companies Price volatility and other risks that accompany an believed to have growth potential. investment in equity securities of growth-oriented and small-sized companies. Particularly sensitive to price swings during periods of economic uncertainty. Equity securities of small-sized U.S. companies Price volatility and other risks that accompany an believed to have growth potential. investment in equity securities of growth-oriented and small-sized companies. Particularly sensitive to price swings during periods of economic uncertainty. Equity securities of financial services companies Price volatility and other risks that accompany an or their holding or parent companies. investment in equity securities. Susceptible to risks of decline in the price of securities concentrated in the financial services industries. U.S. and non-U.S. internet technology companies. Price volatility and other risks that accompany an investment in equity securities and maintaining a non diversified portfolio. Will also experience risks related to investments in foreign securities (for example, currency exchange rate fluctuations). Products and services of companies engaged in internet-related activities are subject to relatively high risks of rapid obsolescence caused by scientific and technological advances. A mix of equity and debt securities. Price volatility and other risks that accompany an investment in equity securities. Credit, interest rate and other risks that accompany an investment in debt securities. Convertible securities of companies of various Price volatility and other risks that accompany an sizes, as well as equities, and high-yield debt. investment in equity securities. Credit, interest rate, liquidity and other risks that accompany an investment in debt securities,and lower quality debt securities.
3 Adviser PILGRIM MAGNACAP FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks growth of capital, with dividend income as a secondary consideration. INVESTMENT STRATEGY [GRAPHIC] The Fund is managed with the philosophy that companies that can best meet the Fund's objectives have paid increasing dividends or have had the capability to pay rising dividends from their operations. The Fund normally invests at least 65% of its assets in equity securities of companies that meet the following disciplined criteria: Consistent Dividends -- A company must have paid or had the financial capability from its operations to pay a dividend in eight out of the last ten years. Substantial Dividend Increases -- A company must have increased its dividends or had the financial capability from its operations to have increased its dividends at least 100% over the past 10 years. Reinvested Earnings -- Dividend payout must be less than 65% of current earnings. Strong Balance Sheet -- Long term debt should be no more than 25% of the company's total capitalization or a company's bonds must be rated at least A- or A-3. Attractive Price -- A company's current share price should be in the lower half of the stock's price/earnings ratio range for the past ten years, or the ratio of the share price to its anticipated future earnings must be an attractive value in relation to the average for its industry peer group or that of the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index). The equity securities in which the Fund may invest include common stocks, convertible securities, and rights or warrants. Normally the Fund's investments are primarily in larger companies that are included in the largest 500 U.S. companies. The remainder of the Fund's assets may be invested in equity securities that the adviser believes have growth potential because they represent an attractive value. In selecting securities for the Fund, preservation of capital is also an important consideration. Although the Fund normally will be invested as fully as practicable in equity securities, assets that are not invested in equity securities may be invested in high quality debt securities. The Fund may invest up to 5% of its assets, measured at the time of investment, in foreign securities. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. Market Trends -- from time to time, the stock market may not favor the value securities that meet the Fund's disciplined investment criteria. Rather, the market could favor growth-oriented stocks or small company stocks, or may not favor equities at all. Debt securities -- the value of debt securities may fall when interest rates rise. Debt securities with longer maturities tend to be more sensitive to changes in interest rates, usually making them more volatile than debt securities with shorter maturities. Credit Risk -- the Fund could lose money if the issuer of a debt security is unable to meet its financial obligations or goes bankrupt. This is especially true during periods of economic uncertainty or economic downturns. Risks of Foreign Investing -- foreign investments may be riskier than U.S. investments for many reasons, including changes in currency exchange rates, unstable political and economic conditions, a lack of adequate company information, differences in the way securities markets operate, less secure foreign banks or securities depositories than those in the U.S., and foreign controls on investment. 4 Pilgrim MagnaCap Fund PILGRIM MAGNACAP FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance before and after income taxes is not an indication of future performance. Year by Year Total Returns (%)(1) The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 25.28 8.02 9.25 4.15 35.22 18.51 27.73 16.09 12.20 1.23 ---------- (1) These figures are for the year ended December 31 of each year. They do not reflect sales charges and would be lower if they did. Best and worst quarterly performance during this period: 4th quarter 1998: 18.93% 3rd quarter 1990: -15.99% The Fund's year-to-date total return as of June 30, 2001: -9.60% Average Annual Total Returns (For the periods ended December 31, 2000) The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the S&P 500 Index. The table also shows returns on a before tax and after tax basis. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Class A only. After-tax returns for other Classes will vary.
5 Years 10 Years 1 Year (or Life of Class) (or Life of Class) ------ ------------------ ------------------ Class A Return Before Taxes(1) -4.58% 13.47% 14.63% Class A Return After Taxes on Distributions(1) -7.00% 9.46% 11.81% Class A Return After Taxes on Distributions and Sale of Fund Shares(1) -0.65% 9.91% 11.50% Class B Return Before Taxes(2) -3.90% 13.84% 15.27%(3) Class C Return Before Taxes(4) -0.30% 4.11%(5) N/A Class M Return Before Taxes(6) -2.62% 13.54% 14.92%(7) S&P 500 Index (reflects no deduction for fees, expenses or taxes)(8) -9.11% 18.33% 17.46%(9)
---------- (1) Reflects deduction of sales charge of 5.75%. (2) Reflects deduction of deferred sales charge of 5%, 2% and 1% respectively, for 1 year, 5 year and since inception returns. (3) Class B commenced operations on July 17, 1995. (4) Reflects deduction of deferred sales charge of 1% for 1-year return. (5) Class C commenced operations on June 1, 1999. (6) Reflects deduction of sales charges of 3.5%. (7) Class M commenced operations on July 17, 1995. (8) Index return is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization companies whose securities are traded on major U.S. stock markets. (9) Index return of the S&P 500 Index since July 17, 1995 (inception date of Class B and Class M) is 19.03%, and the return since June 1, 1999 (the inception date of Class C) is 2.09%. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim MagnaCap Fund 5 Adviser PILGRIM GROWTH AND INCOME FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund's principal investment objective is long-term capital appreciation. Income is a secondary objective. INVESTMENT STRATEGY [GRAPHIC] The Fund will invest at least 65% of its total assets in common stocks of U.S. companies, which may include dividend paying securities and securities convertible into shares of common stock. The Fund seeks to invest in large, ably managed and well financed companies. The investment approach is to identify high quality companies with good earnings and price momentum which sell at attractive valuations. The Fund may invest the remaining 35% of its assets in foreign securities and smaller capitalization companies. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The Fund invests primarily in equity securities of larger companies, which sometimes have more stable prices than smaller companies. The Fund also may invest in small and medium-sized companies, which may be more susceptible to price swings because they have fewer financial resources, more limited product and market diversification, and many are dependent on a few key managers. Market Trends -- from time to time, the stock market may not favor the large company value securities in which the Fund invests. Rather, the market could favor growth-oriented stocks or small company stocks, or may not favor equities at all. Inability to Sell Securities -- securities of smaller companies trade in lower volume and may be less liquid than securities of larger, more established companies. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. Risks of Foreign Investing -- foreign investments may be riskier than U.S. investments for many reasons, including changes in currency exchange rates, unstable political and economic conditions, a lack of adequate company information, differences in the way securities markets operate, less secure foreign banks or securities depositories than those in the U.S., and foreign controls on investment. 6 Pilgrim Growth and Income Fund PILGRIM GROWTH AND INCOME FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance before and after income taxes is not an indication of future performance. Year by Year Total Returns (%)(1)(2) The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 24.87 12.36 13.22 -3.11 22.57 26.46 30.36 21.42 15.54 -3.13 ---------- (1) These figures are for the year ended December 31 of each year. They do not reflect sales charges and would be lower if they did. (2) Prior to July 26, 2000, Lexington Management Corporation served as the adviser to the Fund and the Fund's shares were sold on a no-load basis. Effective July 31, 2000, the Fund's outstanding shares were classified as Class A shares. Best and worst quarterly performance during this period: 4th quarter 1998: 21.95% 3rd quarter 1998: -12.33% The Fund's year-to-date total return as of June 30, 2001: -7.35% Average Annual Total Returns(1) (For the periods ended December 31, 2000) The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index). The table also shows returns on a before tax and after tax basis. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Class A only. After-tax returns for other Classes will vary.
5 Years 10 Years 1 Year (or Life of Class) (or Life of Class) ------ ------------------ ------------------ Class A Return Before Taxes(2) -8.70% 16.12% 14.82% Class A Return After Taxes on Distributions(2) -12.56% 12.53% 11.18% Class A Return After Taxes on Distributions and Sale of Fund Shares(2) -2.83% 12.67% 11.15% Class B Return Before Taxes(3) N/A N/A N/A Class C Return Before Taxes(4) N/A N/A N/A S&P 500 Index (reflects no deduction for fees, expenses or taxes)(5) -9.11% 18.33% 17.46%
---------- (1) The table shows the performance of Class A Shares of the Fund. Class B and Class C shares of the Fund did not have a full year's performance during the year ended December 31, 2000. (2) Reflects deductions of sales charge of 5.75%. (3) Reflects deduction of sales charge of 5%, and 3% respectively, for 1 year, since inception returns. (4) Reflects deduction of deferred sales charge of 1% for 1-year return. (5) The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization companies whose securities are traded on major U.S. stock markets. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Growth and Income Fund 7 Adviser ING Pilgrim Investments, LLC Sub-Adviser PILGRIM RESEARCH ENHANCED INDEX FUND Aeltus Investment Management, Inc. -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks capital appreciation. INVESTMENT STRATEGY [GRAPHIC] The Fund invests at least 80% of its net assets in stocks included in the Standard & Poor's Composite Stock Price Index (S&P 500 Index). The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization companies whose securities are traded on major U.S. stock markets. In managing the Fund, the portfolio managers attempt to achieve the investment objective by overweighting those stocks in the S&P 500 Index that the portfolio managers believe will outperform the index, and underweighting (or avoiding altogether) those stocks that the portfolio managers believe will underperform the index. In determining stock weightings, the portfolio managers use internally developed quantitative computer models to evaluate various criteria such as the financial strength of each company and its potential for strong, sustained earnings growth. At any one time, the portfolio managers generally include in the Fund approximately 400 of the stocks included in the S&P 500 Index. Although the Fund will not hold all the stocks in the S&P 500 Index. the portfolio managers expect that there will be a close correlation between the performance of the Fund and that of the S&P 500 Index in both rising and falling markets, as the Fund is designed to have risk characteristics (e.g. price-to-earnings ratio, dividend yield, volatility) which approximate those of the S&P 500 Index. The Fund may also invest in certain higher-risk investments, including derivatives (generally, these investments will be limited to S&P 500 Index options and futures on the S&P 500 Index). -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The Fund invests primarily in equity securities of larger companies, which sometimes have more stable prices than smaller companies. The portfolio managers try to remain fully invested in companies included in the S&P 500 Index, and generally do not change this strategy even temporarily, which could make the Fund more susceptible to poor market conditions. Market Trends -- from time to time, the stock market may not favor the large company securities that are ranked as undervalued or fairly valued in which the Fund invests. Rather, the market could favor small company stocks, growth- oriented stocks, or may not favor equities at all. Risks of Using Derivatives -- derivatives are subject to the risk of changes in the market price of the security and the risk of loss due to changes in interest rates. The use of certain derivatives may also have a leveraging effect, which may increase the volatility of the Fund. The use of derivatives may reduce returns for the Fund. 8 Pilgrim Research Enhanced Index Fund PILGRIM RESEARCH ENHANCED INDEX FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance before and after income taxes is not an indication of future performance. Year by Year Total Return %(1)(2) The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 18.59 -12.79 ---------- (1) These figures are for the year ended December 31 of each year. They do not reflect sales charges and would be lower if they did. (2) Prior to August 1, 2001, the Fund was managed by another sub-adviser. Best and worst quarterly performance during this period: 4th quarter 1999: 12.41% 4th quarter 2000: -8.54% The Fund's year-to-date total return as of June 30, 2001: -6.52% Average Annual Total Returns (For the periods ended December 31, 2000) The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the S&P 500 Index. The table also shows returns on a before tax and after tax basis. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Class A only. After-tax returns for other Classes will vary.
5 Years 10 Years 1 Year (or Life of Class) (1) (or Life of Class) ------ ---------------------- ------------------ Class A Return Before Taxes(2) -17.23% -0.94% N/A Class A Return After Taxes on Distributions(2) -17.23% -1.17% N/A Class A Return After Taxes on Distributions and Sale of Fund Shares(2) -10.41% -0.84% N/A Class B Return Before Taxes(3) -17.16% -0.10% N/A Class C Return Before Taxes(4) -13.66% 1.43% N/A S&P 500 Index (reflects no deduction for fees, expenses or taxes)(5) -9.11% 4.89%(6) N/A
---------- (1) The Fund commenced operations on December 30, 1998. (2) Reflects deduction of sales charge of 5.75%. (3) Reflects deduction of deferred sales charge of 5%, and 3% respectively, for the 1 year and since inception returns. (4) Reflects deduction of deferred sales charge of 1% for the 1-year return. (5) The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization companies whose securities are traded on major U.S. stock markets. (6) Index return is for the period beginning as of January 1, 1999. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Research Enhanced Index Fund 9 Adviser ING Pilgrim Investments, LLC Sub-Adviser PILGRIM TAX EFFICIENT EQUITY FUND Delta Asset Management -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks capital appreciation. The Fund seeks to provide taxable investors with a high total return on an after-tax basis. INVESTMENT STRATEGY [GRAPHIC] Under normal market conditions, the Fund will operate as a diversified fund and invest at least 80% of its total assets in a portfolio of equity securities whose returns depend upon stock market prices. The Sub-Adviser will manage the Fund's portfolio in a manner that will attempt to reduce net realized capital gains each year. An emphasis will be placed on common stocks of companies which the Sub-Adviser believes to have superior appreciation potential. As a general matter, the Fund expects these investments to be in common stocks of large, mid-sized, and small companies. In choosing investments for the Fund, the Sub-Adviser employs a highly disciplined investment process, combining macroeconomic analysis and fundamental company research that seeks to identify growth at a reasonable price: * The Sub-Adviser first determines the outlook for market sectors and industries based on business cycle characteristics. * The Sub-Adviser next searches for companies with improving fundamentals and accelerating growth. * Finally, the Sub-Adviser assesses company stock prices relative to their expected earnings growth rates and to the overall equity markets. The Sub-Adviser attempts to minimize tax consequences to investors by focusing on non-dividend paying or low-dividend paying stocks and by reducing annual portfolio turnover. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others. Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The Fund invests primarily in equity securities of larger companies, which sometimes have more stable prices than smaller companies. The Fund also may invest in small and medium-sized companies, which may be more susceptible to price swings because they have fewer financial resources, more limited product and market diversification, and many are dependent on a few key managers. Market Trends -- from time to time, the stock market may not favor the securities that meet the Fund's disciplined investment criteria. Rather, the market could favor more value-oriented stocks or may not favor equities at all. Tax Efficient Management -- the Fund is managed to provide high after-tax returns. Therefore, it may not provide as high a return before tax as other funds, and as a result may not be suitable for investors who are not subject to current income tax (for example, those investing through a tax-deferred retirement account, such as an IRA or a 401(k) Plan). 10 Pilgrim Tax Efficient Equity Fund PILGRIM TAX EFFICIENT EQUITY FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance before and after income taxes is not an indication of future performance. Year by Year Total Return (%)(1) The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 18.53 -8.21 ---------- (1) These figures are for the year ended December 31 of each year. They do not reflect sales charges and would be lower if they did. Best and worst quarterly performance during this period: 4th quarter 1999: 11.98% 3rd quarter 1999: -6.79% The Fund's year-to-date total return as of June 30, 2001: -4.12% Average Annual Total Returns (For the periods ended December 31, 2000) The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index). The table also shows returns on a before tax and after tax basis. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Class A only. After-tax returns for other Classes will vary.
5 Years 10 Years 1 Year (or Life of Class) (1) (or Life of Class) ------ ---------------------- ------------------ Class A Return Before Taxes(2) -13.52% 4.96% N/A Class A Return After Taxes on Distributions(2) -13.59% 4.83% N/A Class A Return After Taxes on Distributions and Sale of Fund Shares(2) -8.16% 3.93% N/A Class B Return Before Taxes(3) -13.41% 5.71% N/A Class C Return Before Taxes(4) -9.86% 7.36% N/A S&P 500 Index (reflects no deduction for fees, expenses or taxes)(5) -9.11% 4.89%(6) N/A
---------- (1) The Fund commenced operations on December 15, 1998. (2) Reflects deduction of sales charge of 5.75%. (3) Reflects deduction of deferred sales charge of 5%, and 3% respectively, for the 1 year and since inception returns. (4) Reflects deduction of deferred sales charge of 1% for the 1-year return. (5) The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization companies whose securities are traded on major U.S. stock markets. (6) Index return is for the period beginning as of January 1, 1999. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Tax Efficient Equity Fund 11 Adviser PILGRIM GROWTH OPPORTUNITIES FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] This Fund seeks long-term growth of capital. INVESTMENT STRATEGY [GRAPHIC] The Fund invests primarily in common stock of U.S. companies that the portfolio manager feels have above average prospects for growth. Under normal market conditions, the Fund invests at least 65% of its total assets in securities purchased on the basis of the potential for capital appreciation. These securities may be from large-cap, mid-cap or small-cap companies. The portfolio managers use a "top down" disciplined investment process, which includes extensive database screening, frequent fundamental research, identification and implementation of a trend-oriented approach in structuring the portfolio and a sell discipline. The portfolio managers seek to invest in companies expected to benefit most from major social, economic and technological trends that are likely to shape the future of business and commerce over the next three to five years, and attempt to provide a framework for identifying the industries and companies expected to benefit most. This top down approach is combined with rigorous fundamental research (a bottom-up approach) to guide stock selection and portfolio structure. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. This Fund invests in companies that the portfolio manager feels have the potential for rapid growth, which may give the Fund a higher risk of price volatility than a Fund that emphasizes other styles, such as a value-oriented style. The Fund may invest in small and medium-sized companies, which may be more susceptible to price swings than larger companies because they have fewer financial resources, more limited product and market diversification and many are dependent on a few key managers. Market Trends -- from time to time, the stock market may not favor the growth securities in which the Fund invests. Rather, the market could favor value-oriented stocks, or may not favor equities at all. Inability to Sell Securities -- securities of smaller companies trade in lower volume and may be less liquid than securities of larger, more established companies. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. 12 Pilgrim Growth Opportunities Fund PILGRIM GROWTH OPPORTUNITIES FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance before and after income taxes is not an indication of future performance. Year by Year Total Returns (%)(1) The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's shares from year to year. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 38.10 8.05 10.36 -7.66 24.40 20.54 23.59 23.61 93.26 -19.11 ---------- (1) These figures are for the year ended December 31 of each year. They do not reflect sales charges and would be lower if they did. The figures shown for 1996 to 2000 provide performance for Class A shares of the Fund. The figures shown for the years 1991 to 1995 provide performance for Class T shares of the Fund. Class T shares would have substantially similar annual returns as the Class A shares because the classes are invested in the same portfolio of securities. Annual returns would differ only to the extent Class A shares and Class T shares have different expenses. Best and worst quarterly performance during this period: 4th quarter 1999: 39.10% 4th quarter 2000: -24.38% The Fund's year-to-date total return as of June 30, 2001: -28.53% Average Annual Total Returns (For the periods ended December 31, 2000) The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index). The table also shows returns on a before tax and after tax basis. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Class A only. After-tax returns for other Classes will vary.
5 Years 10 Years 1 Year (or Life of Class) (or Life of Class) ------ ------------------ ------------------ Class A Return Before Taxes(1)(2) -23.75% 22.09% 21.95% Class A Return After Taxes on Distributions(1)(2) -24.67% 18.76% 17.46% Class A Return After Taxes on Distributions and Sale of Fund Shares(1)(2) -13.62% 17.72% 16.73% Class B Return Before Taxes(2)(3) -24.66% 22.53% 22.37% Class C Return Before Taxes(2)(4) -20.65% 22.73% 22.45% Class T Return Before Taxes(5)(6) -23.60% 22.77% 18.10% S&P 500 Index (reflects no deduction for fees, expenses or taxes)(7) -9.11% 18.33% 17.46%(8)
---------- (1) Reflects deduction of sales charge of 5.75%. (2) Classes A, B and C commenced operations on June 5, 1995. (3) Reflects deduction of deferred sales charge of 5%, 2% and 1% respectively, for 1 year, 5 year and since inception returns. (4) Reflects deduction of deferred sales charge of 1% for 1-year return. (5) Class T commenced operations on February 3, 1986. (6) Reflects deduction of deferred sales charge of 4% for the 1-year return. (7) The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization companies whose securities are traded on major U.S. stock markets. (8) Index return since June 5, 1995 (inception date of Classes A, B and C) is 19.52%. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Growth Opportunities Fund 13 Adviser PILGRIM LARGECAP GROWTH FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks long-term capital appreciation. INVESTMENT STRATEGY [GRAPHIC] The Fund normally invests at least 65% of its net assets in equity securities of large U.S. companies that the portfolio managers believe have above-average prospects for growth. The equity securities in which the Fund may invest include common and preferred stock and warrants. The Fund considers a company to be large if its market capitalization corresponds at the time of purchase to the upper 90% of the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index). As of June 30, 2001, this meant market capitalizations in the range of $8.4 billion to $484 billion. Capitalization of companies in the S&P 500 Index will change with market conditions. The portfolio managers emphasize a growth approach by searching for companies that they believe are managing change advantageously and may be poised to exceed growth expectations. The portfolio managers use both a "bottom-up" analysis that evaluates the financial condition and competitiveness of individual companies and a "top-down" thematic approach and a sell discipline. The portfolio managers seek to identify themes that reflect the major social, economic and technological trends that they believe are likely to shape the future of business and commerce over the next three to five years, and seek to provide a framework for identifying the industries and companies they believe may benefit most. This "top-down" approach is combined with rigorous fundamental research (a "bottom-up" approach) to guide stock selection and portfolio structure. The Fund also may lend portfolio securities on a short-term or long-term basis, up to 30% of its total assets. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. This Fund invests in companies that the Adviser believes have the potential for rapid growth, which may give the Fund a higher risk of price volatility than a Fund that emphasizes other styles, such as a value-oriented style. The Fund invests primarily in equity securities of larger companies, which sometimes have more stable prices than smaller companies. Market Trends -- from time to time, the stock market may not favor the large company, growth-oriented securities in which the Fund invests. Rather, the market could favor value stocks or small company stocks, or may not favor equities at all. Securities Lending -- there is the risk that when lending portfolio securities, the securities may not be available to the Fund on a timely basis and the Fund may, therefore, lose the opportunity to sell the securities at a desirable price. 14 Pilgrim LargeCap Growth Fund PILGRIM LARGECAP GROWTH FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance before and after income taxes is not an indication of future performance. Year by Year Total Returns (%)(1)(2) The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 59.45 96.41 -19.12 ---------- (1) These figures are for the year ended December 31 of each year. They do not reflect sales charges and would be lower if they did. (2) ING Pilgrim Investments, LLC has been the Fund's investment adviser since May 24, 1999; however, prior to October 1, 2000, the Fund was advised by a sub-adviser. Best and worst quarterly performance during this period: 4th quarter 1999: 45.04% 4th quarter 2000: -23.23% The Fund's year-to-date total return as of June 30, 2001: -27.10% Average Annual Total Returns (For the periods ended December 31, 2000) The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the Russell 1000 Growth Index and the S&P 500 Index. The table also shows returns on a before tax and after tax basis. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Class A only. After-tax returns for other Classes will vary.
5 Years 10 Years 1 Year (or Life of Class)(1) (or Life of Class) ------ --------------------- ------------------ Class A Return Before Taxes(2) -23.77% 31.42% N/A Class A Return After Taxes on Distributions(2) -24.04% 30.67% N/A Class A Return After Taxes on Distributions and Sale of Fund Shares(2) -14.21% 26.13% N/A Class B Return Before Taxes(3) -23.67% 32.38% N/A Class C Return Before Taxes(4) -20.51% 32.82% N/A Russell 1000 Growth Index (reflects no deduction for fees, expenses or taxes)(5) -22.42% 11.19%(6) N/A S&P 500 Index (reflects no deduction for fees, expenses or taxes)(7) -9.11% 11.46%(8) N/A
---------- (1) The Fund commenced operations on July 21, 1997. (2) Reflects deduction of sales charge of 5.75%. (3) Reflects deduction of deferred sales charge of 5%, and 3% respectively, for the 1 year and since inception returns. (4) Reflects deduction of deferred sales charge of 1% for the 1-year return. (5) The Russell 1000 Growth Index is an unmanaged index that measures the performance of those companies among the Russell 1000 Index with higher than average price-to-book ratios and forecasted growth. (6) The Russell 1000 Growth Index return is for period beginning July 1, 1997. (7) The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization companies whose securities are traded on major U.S. stock markets. (8) The S&P 500 Index return is for period beginning August 1, 1997. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim LargeCap Growth Fund 15 Adviser PILGRIM MIDCAP OPPORTUNITIES FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] This Fund seeks long-term capital appreciation. INVESTMENT STRATEGY [GRAPHIC] The Fund normally invests at least 65% of its total assets in the common stocks of mid-sized U.S. companies that the portfolio managers feel have above average prospects for growth. For this Fund, mid-sized companies are companies with market capitalizations that fall within the range of companies in the Standard & Poor's MidCap 400 Index (S&P MidCap 400 Index). As of June 30, 2001, the market capitalization of companies in the S&P MidCap 400 Index ranged from $312 million to $11.8 billion. The market capitalization range will change as the range of the companies included in the S&P MidCap 400 Index changes. The portfolio managers use a "top-down" disciplined investment process, which includes extensive database screening, frequent fundamental research, identification and implementation of a trend-oriented approach in structuring the portfolio and a sell discipline. The portfolio managers seek to invest in companies expected to benefit most from the major social, economic and technological trends that are likely to shape the future of business and commerce over the next three to five years, and attempt to provide a framework for identifying the industries and companies expected to benefit most. This top-down approach is combined with rigorous fundamental research (a bottom-up approach) to guide stock selection and portfolio structure. The Fund may invest in initial public offerings. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. This Fund invests in companies that the portfolio managers feel have the potential for growth, which may give the Fund a higher risk of price volatility than a Fund that emphasizes other styles, such as a value-oriented style. The Fund invests in medium-sized companies, which may be more susceptible to price swings than larger companies because they have fewer financial resources, more limited product and market diversification, and may be dependent on a few key managers. Market Trends -- from time to time, the stock market may not favor the mid-cap growth securities in which the Fund invests. Rather, the market could favor value-oriented stocks or large or small company stocks, or may not favor equities at all. The Fund's investment in technology sectors of the stock market and in initial public offerings has had a significant impact on performance in 1999 and other periods. There can be no assurance that these factors will continue to have a positive effect on the Fund. Inability to Sell Securities -- securities of mid-size companies usually trade in lower volume and may be less liquid than securities of larger, more established companies. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. Initial Public Offerings -- A significant portion of the Fund's return may be attributable to its investment in initial public offerings. When the Fund's asset base is small, the impact of such investments on the Fund's return will be magnified. As the Fund's assets grow, it is probable that the effect of the Fund's investment in initial public offerings on the Fund's total return will decline. 16 Pilgrim MidCap Opportunities Fund PILGRIM MIDCAP OPPORTUNITIES FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance before and after income taxes is not an indication of future performance. Year by Year Total Return (%)(1) The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 103.24 -0.35 ---------- (1) These figures are for the year ended December 31 of each year. They do not reflect sales charges and would be lower if they did. Best and worst quarterly performance during this period: 4th quarter 1999: 44.90% 4th quarter 2000: -19.33% The Fund's year-to-date total return as of June 30, 2001: -26.94% Average Annual Total Returns (For the periods ended December 31, 2000) The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the S&P MidCap 400 Index. The table also shows returns on a before tax and after tax basis. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Class A only. After-tax returns for other Classes will vary.
5 Years 10 Years 1 Year (or Life of Class)(1) (or Life of Class) ------ --------------------- ------------------ Class A Return Before Taxes(2) -6.08% 46.55% N/A Class A Return After Taxes on Distributions(2) -8.87% 39.95% N/A Class A Return After Taxes on Distributions and Sale of Fund Shares(2) -2.68% 35.38% N/A Class B Return Before Taxes(3) -6.13% 48.64% N/A Class C Return Before Taxes(4) -2.03% 49.17% N/A S&P MidCap 400 Index (reflects no deduction for fees, expenses or taxes)(5) 17.51% 30.86%(6) N/A
---------- (1) The Fund commenced operations on August 20, 1998. (2) Reflects deduction of sales charge of 5.75%. (3) Reflects deduction of deferred sales charge of 5%, 2% and 1% respectively, for 1 year, 5 year and since inception returns. (4) Reflects deduction of deferred sales charge of 1% for 1-year return. (5) The S&P MidCap 400 Index is an unmanaged index that measures the performance of the mid-size company segment of the U.S. market. (6) The S&P MidCap 400 Index return is for period beginning August 20, 1998. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim MidCap Opportunities Fund 17 Adviser PILGRIM MIDCAP GROWTH FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks maximum long-term capital appreciation. INVESTMENT STRATEGY [GRAPHIC] Under normal conditions, the Fund invests at least 65% of its total assets in equity securities of medium-sized U.S. companies, and at least 75% of its total assets in common stocks that the portfolio managers feel have above average prospects for growth. Medium-sized companies are companies with market capitalizations between $1.6 billion and $10.7 billion. The market capitalization range will change as the range of the companies included in the Standard & Poor's MidCap 400 Index (S&P MidCap 400 Index) changes and with market conditions. The portfolio managers emphasize a growth approach by searching for successful, growing companies that are managing change advantageously and may be poised to exceed growth expectations. The portfolio managers use both a "bottom-up" analysis that evaluates the financial condition and competitiveness of individual companies and a thematic approach in structuring the portfolio and a sell discipline. Themes attempt to articulate the major social, economic and technological trends that are likely to shape the future of business and commerce over the next three to five years, and provide a framework for identifying the industries and companies expected to benefit most. This top down approach is combined with rigorous fundamental research (a "bottom up" approach) to guide stock selection and portfolio structure. The Fund may invest in initial public offerings. 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. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. This Fund invests in companies that the portfolio manager feels have the potential for growth, which may give the Fund a higher risk of price volatility than a Fund that emphasizes other styles, such as a value-oriented style. The Fund invests in medium-sized companies, which may be more susceptible to price swings than larger companies because they have fewer financial resources and more limited product and market diversification, and may be dependent on a few key managers. Market Trends -- from time to time, the stock market may not favor the mid-cap growth securities in which the Fund invests. Rather, the market could favor value-oriented stocks or large or small company stocks, or may not favor equities at all. The Fund's investment in technology sectors of the stock market and in initial public offerings has had a significant impact on performance in 1999 and other periods. There can be no assurance that these factors will continue to have a positive effect on the Fund. Inability to Sell Securities -- securities of mid-size companies usually trade in lower volume and may be less liquid than securities of larger, more established companies. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. Initial Public Offerings -- A significant portion of the Fund's return may be attributable to its investment in initial public offerings. When the Fund's asset base is small, the impact of such investments on the Fund's return will be magnified. As the Fund's assets grow, it is probable that the effect of the Fund's investment in initial public offerings on the Fund's total return will decline. 18 Pilgrim MidCap Growth Fund PILGRIM MIDCAP GROWTH FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance before and after income taxes is not an indication of future performance. Year by Year Total Returns (%)(1)(2) The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -11.00 37.64 15.84 15.88 14.14 97.56 -4.57 ---------- (1) These figures are for the year ended December 31 of each year. They do not reflect sales charges and would be lower if they did. (2) ING Pilgrim Investments, LLC has been the Fund's investment adviser since May 24, 1999; however, prior to April 1, 2000, the Fund was managed by a sub-adviser. Best and worst quarterly performance during this period: 4th quarter 1999: 62.66% 4th quarter 2000: -21.09% The Fund's year-to-date total return as of June 30, 2001: -26.60% Average Annual Total Returns (For the periods ended December 31, 2000) The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the S&P MidCap 400 Index and the Russell Midcap Growth Index. The table also shows returns on a before tax and after tax basis. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Class A only. After-tax returns for other Classes will vary.
5 Years 10 Years 1 Year (or Life of Class) (or Life of Class)(1) ------ ------------------ --------------------- Class A Return Before Taxes(2) -10.07% 22.17% 19.00% Class A Return After Taxes on Distributions(2) -13.93% 16.90% 15.63% Class A Return After Taxes on Distributions and Sale of Fund Shares(2) -3.21% 16.65% 15.07% Class B Return Before Taxes(3) -8.99% 22.68% 24.85% Class C Return Before Taxes(4) -5.95% 22.88% 19.18% S&P MidCap 400 Index (reflects no deduction for fees, expenses or taxes)(5) 17.51% 20.41% 18.27%(6) Russell MidCap Growth Index (reflects no deduction for fees, expenses or taxes)(7) -11.75% 17.77% 17.36%(8)
---------- (1) Classes A and C commenced operations on April 19, 1993. Class B commenced operations on June 1, 1995. (2) Reflects deduction of sales charge of 5.75%. (3) Reflects deduction of deferred sales charge of 5%, 2% and 1% respectively, for 1 year, 5 year and since inception returns. (4) Reflects deduction of deferred sales charge of 1% for 1-year return. (5) The S&P MidCap 400 Index is an unmanaged index that measures the performance of the mid-size company segment of the U.S. market. (6) Index return since April 19, 1993 (inception date of Class A and Class C) is 18.27%. Index return since June 1, 1995 (the inception date of Class B) is 20.18%. (7) The Russell Midcap Growth Index is an unmanaged index that measures the performance of the 800 smallest companies in the Russell 1000 Index. (8) Index return since April 19, 1993 (inception date of Class A and Class C) is 17.36%. Index return since June 1, 1995 (the inception date of Class B) is 19.08%. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim MidCap Growth Fund 19 Adviser ING Pilgrim Investments, LLC Sub-Adviser PILGRIM GROWTH + VALUE FUND Navellier Fund Management, Inc. -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks capital appreciation. INVESTMENT STRATEGY [GRAPHIC] The Fund invests primarily in a diversified portfolio of equity securities, including common and preferred stock, warrants and convertible securities. The Fund invests in common stock of companies the portfolio manager believes are poised to rise in price. The Sub-Adviser uses a "bottom-up" quantitative screening process designed to identify and select inefficiently priced stocks that achieved superior returns compared to their risk characteristics. The Sub-Adviser first uses a proprietary computer model designed to identify stocks with above average market returns and risk levels which are reasonable for higher return rates. The Sub-Adviser then applies a quantitative analysis which focuses on growth and value fundamental characteristics, such as earnings growth, earnings momentum, price to earnings (P/E) ratios, and internal reinvestment rates. The Sub-Adviser then allocates stocks according to how they complement other portfolio holdings. Under normal market conditions, the Fund invests at least 65% of its total assets in securities purchased on the basis of the potential for capital appreciation. These securities may be from large-cap, mid-cap, or small-cap companies. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The Fund's performance will be affected if the Sub-Adviser makes an inaccurate assessment of economic conditions and investment opportunities, and chooses growth companies that do not grow as quickly as hoped, or value companies that continue to be undervalued by the market. Although the sub-adviser invests in value companies to decrease volatility, these investments may also lower the Fund's performance. The Fund's investments in smaller and mid-sized companies may be more susceptible to price swings than investments in larger companies because they have fewer financial resources, more limited product and market diversification and many are dependent on a few key managers. Market Trends -- from time to time, the stock market may not favor the mix of growth and value securities in which the Fund invests. Rather, the market could favor growth stocks to the exclusion of value stocks, or favor value stocks to the exclusion of growth stocks, or may not favor equities at all. Inability to Sell Securities -- securities of smaller and mid-sized companies usually trade in lower volume and may be less liquid than securities of larger, more established companies. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. Changes in Interest Rates -- the value of the Fund's convertible securities may fall when interest rates rise. Convertible securities with longer durations tend to be more sensitive to changes in interest rates, usually making them more volatile than debt securities with shorter durations. Credit Risk -- the Fund could lose money if the issuer of a convertible security is unable to meet its financial obligations or goes bankrupt. 20 Pilgrim Growth + Value Fund PILGRIM GROWTH + VALUE FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance before and after income taxes is not an indication of future performance. Year by Year Total Returns (%)(1) The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 18.10 17.72 88.10 -13.02 ---------- (1) These figures are for the year ended December 31 of each year. They do not reflect sales charges and would be lower if they did. Best and worst quarterly performance during this period: 4th quarter 1999: 43.50% 4th quarter 2000: -27.69% The Fund's year-to-date total return as of June 30, 2001: -23.44% Average Annual Total Returns (For the periods ended December 31, 2000) The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the Russell 2000 Index and the Russell 3000 Index. The table also shows returns on a before tax and after tax basis. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Class A only. After-tax returns for other Classes will vary.
5 Years 10 Years 1 Year (or Life of Class)(1) (or Life of Class) ------ --------------------- ------------------ Class A Return Before Taxes(2) -18.02% 19.51% N/A Class A Return After Taxes on Distributions(2) -19.67% 17.73% N/A Class A Return After Taxes on Distributions and Sale of Fund Shares(2) -8.94% 16.05% N/A Class B Return Before Taxes(3) -17.46% 20.12% N/A Class C Return Before Taxes(4) -14.33% 20.38% N/A Russell 2000 Index (reflects no deduction for fees, expenses or taxes)(5) -3.02% 9.32%(6) N/A Russell 3000 Index (reflects no deduction for fees, expenses or taxes)(7) -7.46% 15.61%(8) N/A
---------- (1) The Fund commenced operations on November 18, 1996. (2) Reflects deduction of sales charge of 5.75%. (3) Reflects deduction of deferred sales charge of 5%, 2% and 1% respectively, for 1 year, 5 year and since inception returns. (4) Reflects deduction of deferred sales charge of 1% for 1-year return. (5) The Russell 2000 Index is an unmanaged index that measures the performance of securities of smaller U.S. companies. (6) The Russell 2000 Index return is for period beginning December 1, 1996. (7) The Russell 3000 Index is an unmanaged index that measures the performance of 3000 U.S companies based on total market capitalization. (8) The Russell 3000 Index return is for period beginning December 1, 1996. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Growth + Value Fund 21 Adviser PILGRIM SMALLCAP OPPORTUNITIES FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks capital appreciation. INVESTMENT STRATEGY [GRAPHIC] The Fund invests at least 65% of its total assets in the common stock of smaller, lesser-known U.S. companies that the portfolio manager believes have above average prospects for growth. For this Fund, smaller companies are those with market capitalizations that fall within the range of companies in the Russell 2000 Index, which is an index that measures the performance of small companies. The market capitalization range will change as the range of the companies included in the Russell 2000 changes. The market capitalization of companies held by the Fund as of June 30, 2001 ranged from $133 million to $8.9 billion. The portfolio manager uses a "top-down" disciplined investment process, which includes extensive database screening, frequent fundamental research, identification and implementation of a brand-oriented approach in structuring the portfolio and a sell discipline. The portfolio manager seeks to invest in companies expected to benefit most from the major social, economic and technological trends that are likely to shape the future of business and commerce over the next three to five years, and attempts to provide a framework for identifying the industries and companies expected to benefit most. This top-down approach is combined with rigorous fundamental research (a bottom-up approach) to guide stock selection and portfolio structure. The Fund may invest in initial public offerings. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. This Fund invests in companies that the portfolio manager feels have above average prospects for growth, which may give the Fund a higher risk of price volatility than a Fund that emphasizes other styles, such as a value-oriented style. The Fund invests in smaller companies, which may be more susceptible to price swings than larger companies because they have fewer financial resources, more limited product and market diversification and many are dependent on a few key managers. Market Trends -- from time to time, the stock market may not favor the small sized growth securities in which the Fund invests. Rather, the market could favor value-oriented stocks or large company stocks, or may not favor equities at all. The Fund's investment in technology sectors of the stock market and in initial public offerings has had a significant impact on performance in 1999 and other periods. There can be no assurance that these factors will continue to have a positive effect on the Fund. Inability to Sell Securities -- securities of smaller companies usually trade in lower volume and may be less liquid than securities of larger, more established companies. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. Initial Public Offerings -- A significant portion of the Fund's return may be attributable to its investment in initial public offerings. When the Fund's asset base is small, the impact of such investments on the Fund's return will be magnified. As the Fund's assets grow, it is probable that the effect of the Fund's investment in initial public offerings on the Fund's total return will decline. 22 Pilgrim SmallCap Opportunities Fund PILGRIM SMALLCAP OPPORTUNITIES FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance before and after income taxes is not an indication of future performance. Year by Year Total Returns (%)(1) The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's shares from year to year. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 57.27 14.54 20.16 -4.86 11.34 18.16 14.92 7.59 146.94 -6.04 ---------- (1) These figures are for the year ended December 31 of each year. They do not reflect sales charges and would be lower if they did. The figures shown for the years 1996 to 2000 provide performance for Class A shares of the Fund. The figures shown for the years 1991 to 1995 provide performance for Class T shares of the Fund. Class T shares would have substantially similar annual returns as the Class A shares because the classes are invested in the same portfolio of securities. Annual returns would differ only to the extent Class A shares and Class T shares have different expenses. Best and worst quarterly performance during this period: 4th quarter 1999: 68.12% 3rd quarter 1998: -24.07% The Fund's year-to-date total return as of June 30, 2001: -18.59% Average Annual Total Returns (For the periods ended December 31, 2000) The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance - the Russell 2000 Index. The table also shows returns on a before tax and after tax basis. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Class A only. After-tax returns for other Classes will vary.
5 Years 10 Years 1 Year (or Life of Class) (or Life of Class) ------ ------------------ ------------------ Class A Return Before Taxes(1)(2) -11.44% 26.15% 25.71% Class A Return After Taxes on Distributions(1)(2) -16.03% 22.84% 22.46% Class A Return After Taxes on Distributions and Sale of Fund Shares(1)(2) -5.97% 20.65% 20.39% Class B Return Before Taxes(2)(3) -11.71% 26.62% 26.11% Class C Return Before Taxes(2)(4) -7.76% 26.72% 26.14% Class T Return Before Taxes (5)(6) -10.52% 26.93% 22.41% Russell 200 Index (reflects no deduction for fees, expenses or taxes)(7) -3.02% 10.31% 15.53%(8)
---------- (1) Reflects deduction of sales charge of 5.75%. (2) Classes A, B and C commenced operations on June 5, 1995. (3) Reflects deduction of deferred sales charge of 5%, 2% and 1% respectively, for 1 year, 5 year and since inception returns. (4) Reflects deduction of deferred sales charge of 1% for 1-year return. (5) Class T commenced operations on February 3, 1986. (6) Reflects deduction of deferred sales charge of 4%, for the 1-year return. (7) The Russell 2000 Index is an unmanaged index that measures the performance of securities of small companies. (8) Index return since June 5, 1995 (inception date of Classes A, B and C) is 12.49%. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim SmallCap Opportunities Fund 23 Adviser PILGRIM SMALLCAP GROWTH FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks maximum long-term capital appreciation. INVESTMENT STRATEGY [GRAPHIC] Under normal conditions, the Fund invests at least 65% of its total assets in equity securities of small U.S. companies, and at least 75% of its total assets in common stocks that the portfolio manager feels have above average prospects for growth. Smaller companies are companies with market capitalizations that fall within the range of companies in the Russell 2000 Growth Index. As of June 30, 2001, the market capitalization of companies held by the Fund ranged from $133 million to $9.2 billion. The market capitalization range will change as the range of the companies included in the Russell 2000 Growth Index changes. The Fund emphasizes a growth approach by searching for successful, growing companies that are managing change advantageously and may be poised to exceed growth expectations. It focuses on both a "bottom-up" analysis that evaluates the financial condition and competitiveness of individual companies and a thematic approach in structuring the portfolio and a sell discipline. Themes attempt to articulate the major social, economic and technological trends that are likely to shape the future of business and commerce over the next three to five years, and provide a framework for identifying the industries and companies expected to benefit most. This top down approach is combined with rigorous fundamental research (a "bottom up" approach) to guide stock selection and portfolio structure. The Fund may invest in initial public offerings. 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. The Fund considers a company to be small if it has a market capitalization corresponding at the time of purchase to the middle 90% of the Russell 2000 Growth Index. In the Adviser's opinion, the middle 90% includes companies with capitalizations between $255 million and $1.4 billion. Capitalization of companies in the Index will change with market conditions. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. This Fund invests in companies that the portfolio manager feels have above average prospects for growth, which may give the Fund a higher risk of price volatility than a Fund that emphasizes other styles, such as a value-oriented style. The Fund invests in small-cap companies, which may be more susceptible to price swings than larger companies because they have fewer financial resources, more limited product and market diversification and many are dependent on a few key managers. Market Trends -- from time to time, the stock market may not favor the small-cap growth securities in which the Fund invests. Rather, the market could favor value-oriented stocks or large company stocks, or may not favor equities at all. The Fund's investment in technology sectors of the stock market and in initial public offerings has had a significant impact on performance in 1999 and other periods. There can be no assurance that these factors will continue to have a positive effect on the Fund. Initial Public Offerings -- A significant portion of the Fund's return may be attributable to its investment in initial public offerings. When the Fund's asset base is small, the impact of such investments on the Fund's return will be magnified. As the Fund's assets grow, it is probable that the effect of the Fund's investment in initial public offerings on the Fund's total return will decline. 24 Pilgrim SmallCap Growth Fund PILGRIM SMALLCAP GROWTH FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance before and after income taxes is not an indication of future performance. Year by Year Total Returns (%)(1)(2) The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -4.03 34.87 18.27 11.24 3.68 89.97 -5.52 ---------- (1) These figures are for the year ended December 31 of each year. They do not reflect sales charges and would be lower if they did. (2) ING Pilgrim Investments, LLC has been the Fund's investment adviser since May 24, 1999; however, prior to April 1, 2000, the Fund was managed by a sub-adviser. Best and worst quarterly performance during this period: 4th quarter 1999: 50.47% 3rd quarter 1998: -23.64% The Fund's year-to-date total return as of June 30, 2001: -17.73% Average Annual Total Return (For the periods ended December 31, 2000) The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the Russell 2000 Growth Index. The table also shows returns on a before tax and after tax basis. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Class A only. After-tax returns for other Classes will vary.
5 Years 10 Years 1 Year (or Life of Class) (or Life of Class)(1) ------ ------------------ --------------------- Class A Return Before Taxes(2) -10.95% 18.21% 17.42% Class A Return After Taxes on Distributions(2) -13.05% 12.86% 13.59% Class A Return After Taxes on Distributions and Sale of Fund Shares(2) -4.45% 13.41% 13.56% Class B Return Before Taxes(3) -10.36% 18.56% 21.17% Class C Return Before Taxes(4) -7.05% 18.87% 17.67% Russell 2000 Growth Index (reflects no deduction for fees, expenses or taxes)(5) -22.43% 7.14% 8.81%(6)
---------- (1) Classes A and C commenced operations on December 27, 1993. Class B commenced operations on May 31, 1995. (2) Reflects deduction of sales charge of 5.75%. (3) Reflects deduction of deferred sales charge of 5%, and 3% respectively, for the 1 year and since inception returns. (4) Reflects deduction of deferred sales charge of 1% for the 1-year return. (5) The Russell 2000 Growth Index is an unmanaged index that measures the performance of securities of smaller U.S. companies with greater-than-average growth orientation. (6) Index return since December 27, 1993 (inception date of Class A and Class C) is 8.81%. Index return since May 31, 1995 (inception date of Class B) is 10.04%. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim SmallCap Growth Fund 25 Adviser PILGRIM FINANCIAL SERVICES FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks long-term capital appreciation. INVESTMENT STRATEGY [GRAPHIC] The Fund invests, under normal market conditions, at least 65% of its total assets in equity securities of companies principally engaged in financial services. The equity securities in which the Fund invests are normally common stock, but may also include preferred stocks, warrants, and convertible securities. As a general matter, the Fund expects these investments to be in common stocks of large, mid-sized, and small companies. Financial services companies may include the following: banks; bank holding companies; investment banks; trust companies; insurance companies; insurance brokers; finance companies; securities broker-dealers; electronic trading networks; investment management firms; custodians of financial assets; companies engaged in trading, dealing or managing commodities; companies that invest significantly in or deal in, financial instruments; government-sponsored financial enterprises; thrifts and savings banks; mortgage companies; title companies; conglomerates with significant interests in financial services companies; foreign financial services companies; companies that process financial transactions; administrators of financial products or services; companies that render services primarily to other financial services companies; companies that produce, sell, or market software or hardware related to financial services or products or directed to financial services companies; and other companies whose assets or earnings can be significantly affected by financial instruments or services. The Fund may invest the remaining 35% of its assets in equity or debt securities of financial services companies or companies that are not financial services companies, and in money market instruments. The Fund may also invest in savings accounts of mutual thrifts that may allow the Fund to participate in potential future stock conversions of the thrift. The portfolio manager emphasizes a value approach, and selects securities that are undervalued relative to the market and have potential for future growth, including securities of institutions that the portfolio manager believes are well positioned to take advantage of investment opportunities in the banking and thrift industries. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The Fund may invest in small- to medium-sized companies, which may be more susceptible to price swings than larger companies because they have fewer financial resources, more limited product and market diversification and many are dependent on a few key managers. Market Trends -- from time to time, the stock market may not favor the value-oriented securities in which the Fund invests. Rather, the market could favor growth-oriented stocks or large company stocks, or may not favor equities at all. Risks of Concentration -- because the Fund's investments are concentrated in the financial services industries, the value of the Fund may be subject to greater volatility than a fund with a portfolio that is less concentrated. If securities of financial services companies as a group falls out of favor, the Fund could underperform funds that have greater industry diversification. Changes in Interest Rates -- because the profitability of financial services companies may be largely dependent on the availability and cost of capital, which fluctuates significantly in responses to changes in interest rates and general economic conditions, the value of the Fund's securities may fall when interest rates rise. Illiquid Securities -- if a security is illiquid, the Fund might be unable to sell the security at a time when the Adviser might wish to sell, and the security could have the effect of decreasing the overall level of the Fund's liquidity. Further, the lack of an established secondary market may make it more difficult to value illiquid securities, which could vary from the amount the Fund could realize upon disposition. Debt Securities -- the value of debt securities may fall when interest rates rise. Debt securities with longer maturities tend to be more sensitive to changes in interest rates, usually making them more volatile than debt securities with shorter maturities. 26 Pilgrim Financial Services Fund PILGRIM FINANCIAL SERVICES FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance before and after income taxes is not an indication of future performance. Year by Year Total Returns (%)(1)(2) The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 49.49 32.36 7.79 -1.89 49.69 41.10 64.86 -1.83 -18.64 27.79 ---------- (1) These figures are for the year ended December 31 of each year. They do not reflect sales charges and would be lower if they did. (2) Prior to October 17, 1997, the Fund operated as a closed-end investment company. Prior to May 22, 2001, the Fund operated under a different investment strategy. Best and worst quarterly performance during this period: 3rd quarter 2000: 20.34% 3rd quarter 1998: -19.30% The Fund's year-to-date total return as of June 30, 2001: 11.12% Average Annual Total Returns (For the periods ended December 31, 2000) The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index), the S&P Major Regional Banks Index, the NASDAQ 100 Financial Index, and the S&P Financial Index. The table also shows returns on a before tax and after tax basis. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Class A only. After-tax returns for other Classes will vary.
5 Years 10 Years 1 Year (or Life of Class) (or Life of Class) ------ ------------------ ------------------ Class A Return Before Taxes(1) 20.43% 17.43% 20.97% Class A Return After Taxes on Distributions(1) 19.21% 14.65% 17.96% Class A Return After Taxes on Distributions and Sale of Fund Shares(1) 12.23% 13.63% 16.87% Class B Return Before Taxes(2) 21.82% 2.68%(3) N/A S&P 500 Index (reflects no deduction for fees, expenses or taxes)(4) -9.11% 18.33% 17.46%(5) S&P Major Regional Banks Index (reflects no deduction for fees, expenses or taxes)(6) 27.32% 19.87% 24.43%(7) NASDAQ 100 Financial Index (reflects no deduction for fees, expenses or taxes)(8) 13.61% 14.50%(9) N/A S&P Financial Index (reflects no deduction for fees, expenses or taxes)(10) 26.09% 23.92% 24.47%(11)
---------- (1) Reflects deduction of sales charge of 5.75%. (2) Reflects deduction of deferred sales charge of 5%, and 3% respectively, for 1 year, since inception returns. (3) Class B commenced operations on October 17, 1997. (4) The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization companies whose securities are traded on major U.S. stock markets. (5) Index return since October 17, 1997 (inception date of Class B) is 13.79%. (6) The S&P Major Regional Banks Index is an unmanaged index that measures the performance of securities of major regional banks in the S&P 500 Index. (7) Index return since October 17, 1997 (inception date of Class B) is 9.81%. (8) The NASDAQ 100 Financial Index is an unmanaged index that measures the performance of securities of the 100 largest financial companies traded on NASDAQ. (9) Index return since October 17, 1997 (inception date of Class B) is 5.07%. (10) The S&P Financial Index is a capitalization-weighted index of all stocks designed to measure the performance of the financial sector of the S&P 500 Index. (11) Index return since October 17, 1997 (inception date of Class B) is 15.89%. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Financial Services Fund 27 Adviser ING Pilgrim Investments, LLC Sub-Adviser PILGRIM INTERNET FUND ING Investment Management Advisors B.V. -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks to provide investors with long-term capital appreciation. INVESTMENT STRATEGY [GRAPHIC] Under normal market conditions, the Fund will operate as a non-diversified fund and invest at least 65% of its total assets in a portfolio of equity securities of U.S. and non-U.S. internet technology companies. The Fund defines internet technology companies as those companies with internet businesses or internet related consulting or services businesses, or that derive at least 50% of their total revenues or earnings from business operations in internet related hardware, software or infrastructure industries. As a general matter, the Fund expects these investments to be in common stocks of large, mid-sized, and small companies. The Sub-Adviser believes that the internet is in the early stages of a period of promising growth. The internet has enabled companies to tap into new markets, use new distribution channels and do business with end users of their products all over the world without having to go through wholesalers and distributors. The Sub-Adviser believes that investment in companies related to the internet should offer substantial opportunities for long-term capital appreciation. Generally, the Sub-Adviser's overall stock selection for the Fund will be based on an assessment of a company's fundamental prospects. The Sub-Adviser anticipates, however, that a portion of the Fund's holdings will be invested in newly issued securities being sold in the primary or secondary market. In choosing investments for the Fund, the Sub-Adviser first identifies themes which it believes will drive the internet in the future. Then, by conducting extensive fundamental research, the Sub-Adviser analyzes individual companies worldwide to identify those firms that are most likely to benefit from the selected investment themes. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The Fund invests primarily in small and medium-sized companies, which may be more susceptible to price swings because they have fewer financial resources, more limited product and market diversification, and many are dependent on a few key managers. The Fund may also invest in equity securities of larger companies, which sometimes have more stable prices than smaller companies. Market Trends -- from time to time, the stock market may not favor the securities that meet the Fund's disciplined investment criteria. Rather, the market could favor value-oriented stocks or may not favor equities at all. Risks of Foreign Investing -- foreign investments may be riskier than U.S. investments for many reasons, including changes in currency exchange rates, unstable political and economic conditions, a lack of adequate company information, differences in the way securities markets operate, less secure foreign banks or securities depositories than those in the U.S., and foreign controls on investment. Lack of Diversification -- the Fund is classified as a non-diversified investment company, which means that, compared with other funds, the Fund may invest a greater percentage of its assets in a particular issuer. The investment of a large percentage of the Fund's assets in the securities of a smaller number of issuers may cause the Fund's share price to fluctuate more than that of a diversified investment company. Industry Concentration -- as a result of the Fund concentrating its assets in securities related to a particular industry, the Fund may be subject to greater market fluctuation than a fund which has securities representing a broader range of investment alternatives. Internet Technology Risk -- Internet and internet-related companies are generally subject to the rate of change in technology, which is higher than other industries. In addition, products and services of companies engaged in internet and internet-related activities are subject to relatively high risks of rapid obsolescence caused by scientific and technological advances. Swings in investor psychology or significant trading by large institutional investors can result in significant price fluctuations and stock price declines. 28 Pilgrim Internet Fund PILGRIM INTERNET FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance before and after income taxes is not an indication of future performance. Year by Year Total Return (%)(1) The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -69.16 ---------- (1) These figures are as of December 31, 2000. They do not reflect sales charges and would be lower if they did. Best and worst quarterly performance during this period: 1st quarter 2000: 0.35% 4th quarter 2000: -53.08% The Fund's year-to-date total return as of June 30, 2001: -36.33% Average Annual Total Returns (For the periods ended December 31, 2000) The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index) and the @Net Index. The table also shows returns on a before tax and after tax basis. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Class A only. After-tax returns for other Classes will vary.
5 Years 10 Years 1 Year (or Life of Class)(1) (or Life of Class) ------ --------------------- ------------------ Class A Return Before Taxes(2) -70.93% -22.49% N/A Class A Return After Taxes on Distributions(2) -72.04% -24.68% N/A Class A Return After Taxes on Distributions and Sale of Fund Shares(2) -41.13% -16.53% N/A Class B Return Before Taxes(3) -70.56% -21.60% N/A Class C Return Before Taxes(4) -69.66% -19.99% N/A S&P 500 Index (reflects no deduction for fees, expenses or taxes)(5) -9.11% -1.41%(6) N/A @Net Index (reflects no deduction for fees, expenses or taxes)(7) -51.24% -7.19%(8) N/A
---------- (1) The Fund commenced operations on July 1, 1999. (2) Reflects deduction of sales charge of 5.75%. (3) Reflects deduction of deferred sales charge of 5%, 2% and 1% respectively, for 1 year, 5 year and since inception returns. (4) Reflects deduction of deferred sales charge of 1% for 1-year return. (5) The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization companies whose securities are traded on major U.S. stock markets. (6) The S&P 500 Index return is for period beginning July 1, 1999. (7) The @Net Index encompasses 50 companies which are key components in the development of the Internet. The Index is weighted based upon market capitalization of each of the component stocks. (8) The @Net Index return is for period beginning June 30, 1999. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Internet Fund 29 Adviser PILGRIM BALANCED FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks a balance of long-term capital appreciation and current income. INVESTMENT STRATEGY [GRAPHIC] The Fund's Adviser actively manages a blended portfolio of equity and debt securities with an emphasis on overall total return. The Fund normally maintains 40% to 60% of its assets in debt securities of any maturity issued by corporations or other business entities and the U.S. Government and its agencies and instrumentalities, and government sponsored enterprises, and normally seeks a target allocation of 50%, although this may vary with market conditions. The remainder of the Fund's assets are normally invested in equity securities of large companies that the Adviser believes are leaders in their industries. The Adviser considers whether these companies have a sustainable competitive edge. The portfolio managers emphasize a value approach in equity selection, and seek securities whose prices in relation to projected earnings are believed to be reasonable in comparison to the market. For this Fund, a company with a market capitalization of over $5 billion is considered to be a large company, although the Fund may also invest to a limited degree in companies that have a market capitalization between $1 billion and $5 billion. A portion of the Fund's net assets (up to 35%) may be invested in high yield debt securities (commonly known as "junk bonds") rated below investment grade (i.e., lower than the four-highest rating categories) by a nationally recognized statistical rating agency, or of comparable quality if unrated. There is no minimum credit quality for the high yield debt securities in which the Fund may invest. The Fund may invest up to 10% of its assets in other investment companies that invest in secured floating rate loans, including up to 5% of its assets in Pilgrim Prime Rate Trust, a closed-end investment company. The Fund may invest up to 20% of its total assets in foreign securities. The Fund may use options on securities, securities indices, interest rates and foreign currencies as a hedging technique or in furtherance of its investment objective. The Fund may invest up to 35% of its net assets in zero coupon securities. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The Fund also may invest in smaller companies, which may be more susceptible to price swings than larger companies. Market Trends -- from time to time, the stock market may not favor the large company value securities in which the Fund invests. Rather, the market could favor growth-oriented stocks or small company stocks, or may not favor equities at all. Changes in Interest Rates -- the value of debt and equity securities can change in response to changes in interest rates. The value of the debt securities held by the Fund may fall when interest rates rise. The Fund may be sensitive to changes in interest rates because it may invest in debt securities with intermediate and long terms to maturity. Debt securities with longer maturities tend to be more sensitive to changes in interest rates, usually making them more volatile than debt securities with shorter maturities. Zero coupon securities are particularly sensitive to changes in interest rates. Credit Risk -- the Fund could lose money if the issuer of a debt security is unable to meet its financial obligations or goes bankrupt. This Fund may be subject to more credit risk than the other income funds, because it may invest in high yield debt securities, which are considered predominantly speculative with respect to the issuer's continuing ability to meet interest and principal payments. This is especially true during periods of economic uncertainty or economic downturns. Inability to Sell Securities -- high yield securities and securities of smaller companies may be less liquid than other investments. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. Risks of Foreign Investing -- foreign investments may be riskier than U.S. investments for many reasons, including changes in currency exchange rates, unstable political and economic conditions, a lack of adequate company information, differences in the way securities markets operate, less secure foreign banks or securities depositories than those in the U.S., and foreign controls on investment. Risks of Using Derivatives -- derivatives are subject to the risk of changes in the market price of the security, credit risk with respect to the counterparty to the derivatives instrument, and the risk of loss due to changes in interest rates. The use of certain derivatives may also have a leveraging effect, which may increase the volatility of the Fund. The use of derivatives may reduce returns for the Fund. 30 Pilgrim Balanced Fund PILGRIM BALANCED FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance before and after income taxes is not an indication of future performance. Year by Year Total Returns (%)(1)(2) The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -6.29 23.43 16.39 20.50 23.35 8.48 -3.23 ---------- (1) These figures are for the year ended December 31 of each year. They do not reflect sales charges and would be lower if they did. (2) Prior to May 24, 1999, a different adviser managed the Fund. Best and worst quarterly performance during this period: 3rd quarter 1997: 14.44%. 2nd quarter 1994: -5.93% The Fund's year-to-date total return as of June 30, 2001: -3.13% Average Annual Total Returns (For the periods ended December 31, 2000) The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the Standard & Poor's Barra Value Index (S&P Barra Value Index), the Lehman Aggregate Bond Index, the Lipper Balanced Fund Index and a composite index consisting of 60% S&P 500 Composite Stock Price Index (S&P 500 index) and 40% Lehman Brothers Government/Corporate Bond Index. The table also shows returns on a before tax and after tax basis. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Class A only. After-tax returns for other Classes will vary.
5 Years 10 Years 1 Year (or Life of Class) (or Life of Class) ------ ------------------ ------------------ Class A Return Before Taxes(1)(2) -8.78% 11.34% 11.07% Class A Return After Taxes on Distributions(1)(2) -11.25% 7.00% 7.99% Class A Return After Taxes on Distributions and Sale of Fund Shares(1)(2) -4.02% 7.92% 8.20% Class B Return Before Taxes(2)(3) -8.17% 11.83% 12.66% Class C Return Before Taxes(2)(4) -4.68% 11.93% 11.23% Class T Return Before Taxes(5) N/A N/A N/A S&P Barra Value Index (reflects no deduction for fees, expenses or taxes)(6) 27.84% 17.04% 16.10%(7) Lehman Aggregate Bond Index (reflects no deduction for fees, expenses or taxes)(8) 11.63% 6.46% 6.72%(9) Lipper Balanced Fund Index (reflects no deduction for fees, expenses or taxes)(10) 2.39% 11.80% N/A Composite Index (reflects no deduction for fees, expenses or taxes)(11) 1.50% 11.38% N/A
---------- (1) Reflects deduction of sales charge of 5.75%. (2) Classes A and C commenced operations on April 19, 1993. Class B commenced operations on May 31, 1995. (3) Reflects deduction of deferred sales charge of 5%, 2% and 1% respectively, for 1 year, 5 year and since inception returns. (4) Reflects deduction of deferred sales charge of 1% for 1-year return. (5) Class T did not have a full year's performance as of December 31, 2000. Class T commenced operations on January 4, 2000. (6) The S&P Barra Value Index is a capitalization-weighted index of all stocks in the S&P 500 Index that have low price-to-book ratios. It is designed so that approximately 50% of the market capitalization of the S&P 500 Index is in the S&P Barra Value Index. (7) Index return since April 19, 1993 (inception date of Class A and Class C) is 16.10% and the return since May 31, 1995 (the inception date of Class B) is 18.46%. (8) The Lehman Aggregate Bond Index is an unmanaged index that measures the performance of the U.S. investment grade fixed rate bond market, including government and corporate securities, mortgage pass-through securities, and asset-backed securities. (9) Index return since April 19, 1993 (inception date of Class A and Class C) is 6.72% and the return since May 31, 1995 (the inception date of Class B) is 7.07%. (10) The Lipper Balanced Fund Index is an unmanaged index that measures the performance of balanced funds (funds that seek current income balanced with capital appreciation). (11) The Composite Index consists of 60% of the S&P 500 Index and 40% Lehman Brothers Government/Corporate Bond Index. The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization companies whose securities are traded on major U.S. stock markets. The Lehman Brothers Government/Corporate Bond Index is a widely recognized unmanaged index of publicly issued fixed rate U.S. Government investment grade mortgage-backed and corporate debt securities [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Balanced Fund 31 Adviser PILGRIM CONVERTIBLE FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks maximum total return, consisting of capital appreciation and current income. INVESTMENT STRATEGY [GRAPHIC] Under normal conditions, the Fund invests at least 65% of its total assets in convertible securities. Convertible securities are generally preferred stock or other securities, including debt securities, that are convertible into common stock. The Fund emphasizes companies with market capitalizations above $500 million. The convertible debt securities in which the Fund invests my be rated below investment grade (high risk instruments), or, if not rated, may be of comparable quality. There is no minimum credit rating for securities in which the Fund may invest. Through investments in convertible securities, the Fund seeks to capture the upside potential of the underlying equities with less downside exposure. The Fund may also invest up to 35% of its total assets in common and nonconvertible preferred stocks, and in nonconvertible debt securities, which may include high yield debt (commonly known as "junk bonds") rated below investment grade, or of comparable quality if unrated. The Fund may also invest in securities issued by the U.S. government and its agencies and instrumentalities. Most but not all of the bonds in which the Fund invests have a remaining maturity of 10 years or less, or, in the case of convertible debt securities, have a remaining maturity or may be put back to the issuer in 10 years or less. In evaluating convertibles, the Fund's Adviser evaluates each security's investment characteristics as a fixed income instrument as well as its potential for capital appreciation. In analyzing specific companies for possible investment, the Adviser ordinarily looks for several of the following characteristics: above-average per share earnings growth; high return on invested capital; a healthy balance sheet; sound financial and accounting policies and overall financial strength; strong competitive advantages; effective research and product development and marketing; development of new technologies; efficient service; pricing flexibility; strong management; and general operating characteristics that will enable the companies to compete successfully in their respective markets. The Adviser usually considers whether to sell a particular security when any of those factors materially changes. The Fund may also lend portfolio securities on a short-term or long-term basis, up to 30% of its total assets. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Convertible securities have investment characteristics of both equity and debt securities. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The Fund may invest in small and medium-sized companies, which may be more susceptible to greater price swings than larger companies because they may have fewer financial resources, more limited product and market diversification and many are dependent on a few key managers. Changes in Interest Rates -- the value of the convertible and debt securities held by the Fund may fall when interest rates rise. The Fund may be sensitive to changes in interest rates because it may invest in securities with intermediate and long terms to maturity. Securities with longer durations tend to be more sensitive to changes in interest rates, usually making them more volatile than securities with shorter durations. Due to their hybrid nature, convertible securities are typically more sensitive to changes in interest rates than the underlying common stock, but less sensitive to interest rate changes than a fixed rate corporate bond. Credit Risk -- the Fund could lose money if the issuer of a security is unable to meet its financial obligations or goes bankrupt. This is especially true during periods of economic uncertainty or economic downturns. This Fund may be subject to more credit risk than many bond funds, because the convertible securities and debt securities in which it invests may be lower-rated securities. Inability to Sell Securities -- convertible securities and lower rated debt may be less liquid than other investments. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. Securities Lending -- there is the risk that when lending portfolio securities, the securities may not be available to the Fund on a timely basis and the Fund may, therefore, lose the opportunity to sell the securities at a desirable price. 32 Pilgrim Convertible Fund PILGRIM CONVERTIBLE FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance before and after income taxes is not an indication of future performance. Year by Year Total Returns (%)(1)(2) The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -8.23 21.67 20.29 22.58 20.86 50.20 -9.03 ---------- (1) These figures are for the year ended December 31 of each year. They do not reflect sales charges and would be lower if they did. (2) ING Pilgrim Investments, LLC has been the Fund's investment adviser since May 24, 1999; however, prior to October 1, 2000, the Fund was advised by a sub-adviser. Best and worst quarterly performance during this period: 3rd quarter 1997: 14.44% 4th quarter 2000: -16.02% The Fund's year-to-date total return as of June 30, 2001: -6.25% Average Annual Total Returns (For the periods ended December 31, 2000) The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the First Boston Convertible Index. The table also shows returns on a before tax and after tax basis. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's tax situation and may differ from those shown, and after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for Class A only. After-tax returns for other Classes will vary.
5 Years 10 Years 1 Year (or Life of Class) (or Life of Class)(1) ------ ------------------ --------------------- Class A Return Before Taxes(2) -14.26% 18.07% 16.04% Class A Return After Taxes on Distributions(2) -20.26% 13.81% 12.45% Class A Return After Taxes on Distributions and Sale of Fund Shares(2) -6.98% 13.51% 12.03% Class B Return Before Taxes(3) -13.08% 18.65% 19.34% Class C Return Before Taxes(4) -10.18% 18.76% 16.19% S&P First Boston Convertible Index (reflects no deduction for fees, expenses or taxes)(5) -7.83% 13.21% 12.23%(6)
---------- (1) Classes A and C commenced operations on April 19, 1993. Class B commenced operations on May 31, 1995. (2) Reflects deduction of sales charge of 5.75%. (3) Reflects deduction of deferred sales charge of 5%, 2% and 1% respectively, for 1 year, 5 year and since inception returns. (4) Reflects deduction of deferred sales charge of 1% for 1-year return. (5) The First Boston Convertible Index is an unmanaged index that measures the performance of a universe of convertible securities that are similar, but not identical, to those in the Fund's portfolio. (6) Index return since April 19, 1993 (inception date of Class A and Class C) is 12.23%, and the return since May 31, 1995 (the inception date of Class B) is 13.86%. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Convertible Fund 33 WHAT YOU PAY TO INVEST -------------------------------------------------------------------------------- There are two types of fees and expenses when you invest in mutual funds: fees, including sales charges, you pay directly when you buy or sell shares, and operating expenses paid each year by the Fund. The tables that follow show the fees and expenses for each of the Pilgrim Funds. Fees You Pay Directly
Class A Class B Class C(1) Class M(1) Class T(2) ------- ------- ---------- ---------- ---------- Maximum sales charge on your investment (as a % of offering price) % Equity Funds and Equity & Income Funds 5.75(3) none none 3.50(3) none Maximum deferred sales charge (as a % of purchase or sales price, whichever is less) Equity Funds and Equity & Income Funds none(4) 5.00(5) 1.00(6) none 4.00(7)
---------- (1) Not all Funds offer Classes C and M. Please see page 39. (2) Class T shares are available only for certain exchanges or reinvestment of dividends. Please see page 39. (3) Reduced for purchases of $50,000 and over. Please see page 40. (4) A contingent deferred sales charge of no more than 1% may be assessed on redemptions of Class A shares that were purchased without an initial sales charge as part of an investment of $1 million or more. Please see page 40. (5) Imposed upon redemption within 6 years from purchase. The fee has scheduled reductions after the first year. Please see page 40. (6) Imposed upon redemption within 1 year from purchase. Please see page 40. (7) Imposed upon redemption within 4 years from purchase. The fee has scheduled reductions after the first year. Please see page 40. Operating Expenses Paid Each Year by the Funds(1) (as a % of average net assets) Class A
Distribution Total and Service Fund Waivers Management (12b-1) Other Operating and Net Fund Fee Fees Expenses Expenses Reimbursements(2)(3) Expenses ---- --- ---- -------- -------- -------------------- -------- MagnaCap(4) % 0.72 0.30 0.28 (5) 1.30 (5) -- 1.30 (5) Growth and Income(4) % 0.63 0.25 0.54 (6)(10) 1.42 (6) -- 1.42 (6) Research Enhanced Index % 0.70 0.30 0.45 (10) 1.45 -- 1.45 Tax Efficient Equity % 0.80 0.35 0.63 (10) 1.78 -0.38 1.40 Growth Opportunities % 0.95 0.30 0.48 (10) 1.73 -- 1.73 LargeCap Growth(4) % 0.73 0.35 0.38 (7) 1.46 (7) -- 1.46 (7) MidCap Opportunities(4) % 1.00 0.30 0.67 (8)(10) 1.97 (8) -- 1.97 (8) MidCap Growth % 0.75 0.35 0.34 1.44 0.01 (11) 1.45 Growth + Value % 1.00 0.30 0.47 (10) 1.77 -- 1.77 SmallCap Opportunities(4) % 1.00 0.30 0.36 (9)(10) 1.66 (9) -- 1.66 (9) SmallCap Growth % 1.00 0.35 0.37 1.72 0.01 (11) 1.73 Financial Services % 0.73 0.25 0.44 1.42 -- 1.42 Internet % 1.25 0.35 1.03 (10) 2.63 -1.01 1.62 Balanced % 0.75 0.35 0.43 1.53 -0.21 1.32 Convertible % 0.75 0.35 0.31 1.41 0.01 (11) 1.42
34 What You Pay to Invest WHAT YOU PAY TO INVEST -------------------------------------------------------------------------------- Operating Expenses Paid Each Year by the Funds(1) (as a % of average net assets) Class B
Distribution Total and Service Fund Waivers Management (12b-1) Other Operating and Net Fund Fee Fees Expenses Expenses Reimbursements(2) Expenses ---- --- ---- -------- -------- ----------------- -------- MagnaCap(4) % 0.72 1.00 0.28 (5) 2.00 (5) -- 2.00 (5) Growth and Income(4) % 0.63 1.00 0.54 (6)(10) 2.17 (6) -- 2.17 (6) Research Enhanced Index % 0.70 1.00 0.45 (10) 2.15 -- 2.15 Tax Efficient Equity % 0.80 1.00 0.63 (10) 2.43 -0.38 2.05 Growth Opportunities % 0.95 1.00 0.48 (10) 2.43 -- 2.43 LargeCap Growth(4) % 0.73 1.00 0.38 (7) 2.11 (7) -- 2.11 (7) MidCap Opportunities(4) % 1.00 1.00 0.67 (8)(10) 2.67 (8) -- 2.67 (8) MidCap Growth % 0.75 1.00 0.34 2.09 0.01 (11) 2.10 Growth + Value % 1.00 1.00 0.47 (10) 2.47 -- 2.47 SmallCap Opportunities(4) % 1.00 1.00 0.36 (9)(10) 2.36 (9) -- 2.36 (9) SmallCap Growth % 1.00 1.00 0.37 2.37 0.01 (11) 2.38 Financial Services % 0.73 1.00 0.44 2.17 -- 2.17 Internet % 1.25 1.00 1.03 (10) 3.28 -0.96 2.32 Balanced % 0.75 1.00 0.43 2.18 -0.21 1.97 Convertible % 0.75 1.00 0.31 2.06 0.01 (11) 2.07
Class C
Distribution Total and Service Fund Waivers Management (12b-1) Other Operating and Net Fund Fee Fees Expenses Expenses Reimbursements(2) Expenses ---- --- ---- -------- -------- ----------------- -------- MagnaCap(4) % 0.72 1.00 0.28 (5) 2.00 (5) -- 2.00 (5) Growth and Income(4) % 0.63 1.00 0.54 (6)(10) 2.17 (6) -- 2.17 (6) Research Enhanced Index % 0.70 1.00 0.45 (10) 2.15 -- 2.15 Tax Efficient Equity % 0.80 1.00 0.63 (10) 2.43 -0.38 2.05 Growth Opportunities % 0.95 1.00 0.48 (10) 2.43 -- 2.43 LargeCap Growth(4) % 0.73 1.00 0.38 (7) 2.11 (7) -- 2.11 (7) MidCap Opportunities(4) % 1.00 1.00 0.67 (8)(10) 2.67 (8) -- 2.67 (8) MidCap Growth % 0.75 1.00 0.34 2.09 0.01 (11) 2.10 Growth + Value % 1.00 1.00 0.47 (10) 2.47 -- 2.47 SmallCap Opportunities(4) % 1.00 1.00 0.36 (9)(10) 2.36 (9) -- 2.36 (9) SmallCap Growth % 1.00 1.00 0.37 2.37 0.01 (11) 2.38 Internet % 1.25 1.00 1.03 (10) 3.28 -0.96 2.32 Balanced % 0.75 1.00 0.43 2.18 -0.21 1.97 Convertible % 0.75 1.00 0.31 2.06 0.01 (11) 2.07
[GRAPHIC] If you have any questions, please call 1-800-992-0180. What You Pay to Invest 35 WHAT YOU PAY TO INVEST -------------------------------------------------------------------------------- Operating Expenses Paid Each Year by the Funds(1) (as a % of average net assets) Class M
Distribution Total and Service Fund Waivers Management (12b-1) Other Operating and Net Fund Fee Fees Expenses Expenses Reimbursements(2) Expenses ---- --- ---- -------- -------- ----------------- -------- MagnaCap(4) % 0.72 0.75 0.28 (5) 1.75 (5) -- 1.75 (5) Class T Distribution Total and Service Fund Waivers Management (12b-1) Other Operating and Net Fund Fee Fees Expenses Expenses Reimbursements(2) Expenses ---- --- ---- -------- -------- ----------------- -------- Growth Opportunities % 0.95 0.95 0.48 (10) 2.38 -- 2.38 SmallCap Opportunities(4) % 1.00 0.95 0.36 (9)(10) 2.31 (9) -- 2.31 (9) Balanced % 0.75 0.75 0.43 1.93 -0.21 1.72
---------- (1) These tables show the estimated operating expenses for each Fund by class as a ratio of expenses to average daily net assets. These estimates, unless otherwise noted, are based on each Fund's actual operating expenses for its most recent complete fiscal year, as adjusted for contractual changes, and fee waivers to which the Adviser has agreed for each Fund. (2) ING Pilgrim Investments has entered into written expense limitation agreements with each Fund which it advises except MagnaCap, Financial Services, Research Enhanced Index, Growth Opportunities, MidCap Opportunities, Growth + Value, and SmallCap Opportunities, under which it will limit expenses of the Fund, excluding interest, taxes, brokerage and extraordinary expenses, subject to possible reimbursement to ING Pilgrim Investments within three years. The amount of each Fund's expenses waived or reimbursed during the last fiscal year by ING Pilgrim Investments is shown under the heading "Waivers and Reimbursements". For each Fund, except the Tax Efficient Equity and Internet Funds, the expense limit will continue through at least October 31, 2001. For the Tax Efficient Equity and Internet Funds, the expense limit will continue through at least February 28, 2002. The expense limitation agreements are contractual and shall renew automatically for one-year terms unless the Adviser provides written notice of the termination of the expense limitation agreement at least 30 days prior to the end of the then current term or upon termination of the investment management agreement. (3) This includes a waiver of 0.10% of Distribution Fee for Tax Efficient Equity and Internet Funds for Class A only. (4) Effective February 23, 2001 and March 23, 2001, certain funds merged with MagnaCap, Growth and Income, LargeCap Growth, MidCap Opportunities and SmallCap Opportunities Funds. It is expected that as a result of the mergers, operating expenses will be lower than the operating expenses prior to the mergers. (5) Excludes one-time merger fees of 0.01%, 0.01%, 0.01% and 0.01% for Class A, B, C and M, respectively, incurred in connection with the merger of another investment company into Pilgrim MagnaCap Fund. (6) Excludes one-time merger fees of 0.06%, 0.06% and 0.06% for Class A, B and C, respectively, incurred in connection with the merger of another investment company into Pilgrim Growth and Income Fund. (7) Excludes one-time merger fees of 0.01%, 0.01% and 0.01% for Class A, B and C, respectively, incurred in connection with the merger of another investment company into Pilgrim LargeCap Growth Fund. (8) Excludes one-time merger fees of 0.09%, 0.09% and 0.09% for Class A, B and C, respectively, incurred in connection with the merger of another investment company into Pilgrim MidCap Opportunities Fund. (9) Excludes one-time merger fees of 0.03%, 0.03%, 0.03% and 0.03% for Class A, B, C and T, respectively, incurred in connection with the merger of another investment company into Pilgrim SmallCap Opportunities Fund. (10) ING Pilgrim Group, LLC receives an annual administration fee equal to 0.10% of average daily net assets. (11) Amount recouped by ING Pilgrim Investments, LLC pursuant to the Expense Limitation Agreement between the Fund and ING Pilgrim Investments, LLC. 36 What You Pay to Invest WHAT YOU PAY TO INVEST -------------------------------------------------------------------------------- Examples The examples that follow are intended to help you compare the cost of investing in the Pilgrim Funds with the cost of investing in other mutual funds. Each example assumes that you invested $10,000, reinvested all your dividends, the Fund earned an average annual return of 5%, and annual operating expenses remained at the current level. Keep in mind that this is only an estimate -- actual expenses and performance may vary. Class A Fund 1 year 3 years 5 years 10 years ---- ------ ------- ------- -------- MagnaCap $ 700 963 1,247 2,053 Growth and Income $ 711 999 1,307 2,179 Research Enhanced Index $ 714 1,007 1,322 2,210 Tax Efficient Equity $ 745 1,103 1,484 2,549 Growth Opportunities $ 741 1,089 1,460 2,499 LargeCap Growth $ 715 1,010 1,327 2,221 MidCap Opportunities $ 763 1,158 1,576 2,739 MidCap Growth $ 713 1,004 1,317 2,200 Growth + Value $ 745 1,100 1,479 2,539 SmallCap Opportunities $ 734 1,068 1,425 2,427 SmallCap Growth $ 740 1,086 1,455 2,488 Financial Services $ 711 999 1,307 2,179 Internet $ 826 1,345 1,890 3,368 Balanced $ 722 1,031 1,361 2,294 Convertible $ 710 996 1,302 2,169 Class B
If you sell your shares If you don't sell your shares ---------------------------------------- ---------------------------------------- Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years ---- ------ ------- ------- -------- ------ ------- ------- -------- MagnaCap $ 703 927 1,278 2,147 203 627 1,078 2,147 Growth and Income $ 720 979 1,364 2,313 220 679 1,164 2,313 Research Enhanced Index $ 718 973 1,354 2,305 218 673 1,154 2,305 Tax Efficient Equity $ 746 1,058 1,496 2,606 246 758 1,296 2,606 Growth Opportunities $ 746 1,058 1,496 2,593 246 758 1,296 2,593 LargeCap Growth $ 714 961 1,334 2,276 214 661 1,134 2,276 MidCap Opportunities $ 770 1,129 1,615 2,834 270 829 1,415 2,834 MidCap Growth $ 712 955 1,324 2,255 212 655 1,124 2,255 Growth + Value $ 750 1,070 1,516 2,634 250 770 1,316 2,634 SmallCap Opportunities $ 739 1,036 1,460 2,522 239 736 1,260 2,522 SmallCap Growth $ 740 1,039 1,465 2,545 240 739 1,265 2,545 Financial Services $ 720 979 1,364 2,313 220 679 1,164 2,313 Internet $ 831 1,310 1,912 3,429 331 1,010 1,712 3,429 Balanced $ 721 982 1,369 2,349 221 682 1,169 2,349 Convertible $ 709 946 1,308 2,223 209 646 1,108 2,223
[GRAPHIC] If you have any questions, please call 1-800-992-0180. What You Pay to Invest 37 WHAT YOU PAY TO INVEST -------------------------------------------------------------------------------- Examples Class C
If you sell your shares If you don't sell your shares ---------------------------------------- ---------------------------------------- Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years ---- ------ ------- ------- -------- ------ ------- ------- -------- MagnaCap $ 303 627 1,078 2,327 203 627 1,078 2,327 Growth and Income $ 320 679 1,164 2,506 220 679 1,164 2,506 Research Enhanced Index $ 318 673 1,154 2,483 218 673 1,154 2,483 Tax Efficient Equity $ 346 758 1,296 2,766 246 758 1,296 2,766 Growth Opportunities $ 346 758 1,296 2,766 246 758 1,296 2,766 LargeCap Growth $ 314 661 1,134 2,441 214 661 1,134 2,441 MidCap Opportunities $ 370 829 1,415 3,003 270 829 1,415 3,003 MidCap Growth $ 312 655 1,124 2,421 212 655 1,124 2,421 Growth + Value $ 350 770 1,316 2,806 250 770 1,316 2,806 SmallCap Opportunities $ 339 736 1,260 2,696 239 736 1,260 2,696 SmallCap Growth $ 340 739 1,265 2,706 240 739 1,265 2,706 Internet $ 431 1,010 1,712 3,576 331 1,010 1,712 3,576 Balanced $ 321 682 1,169 2,513 221 682 1,169 2,513 Convertible $ 309 646 1,108 2,390 209 646 1,108 2,390
Class M Fund 1 year 3 years 5 years 10 years ---- ------ ------- ------- -------- MagnaCap $ 522 882 1,266 2,340 Class T
If you sell your shares If you don't sell your shares ---------------------------------------- ---------------------------------------- Fund 1 year 3 years 5 years 10 years 1 year 3 years 5 years 10 years ---- ------ ------- ------- -------- ------ ------- ------- -------- Growth Opportunities $ 641 942 1,270 2,555 241 742 1,270 2,555 SmallCap Opportunities $ 634 921 1,235 2,483 234 721 1,235 2,483 Balanced $ 596 806 1,042 2,150 196 606 1,042 2,150
38 What You Pay to Invest CHOOSING A SHARE CLASS SHAREHOLDER GUIDE -------------------------------------------------------------------------------- PILGRIM PURCHASE OPTIONS(TM) Depending upon the Fund, you may select from up to five separate classes of shares: Class A, Class B, Class C, Class M and Class T. Class A * Front-end sales charge, as described on the next page. * Distribution and service (12b-1) fees of 0.25% to 0.35% (varies by Fund). Class B * No front-end sales charge; all your money goes to work for you right away. * Distribution and service (12b-1) fees of 1%. * A contingent deferred sales charge, as described on the next page. * Automatic conversion to Class A shares after eight years, thus reducing future annual expenses. Class B shares acquired initially through Funds that were part of the Nicholas-Applegate Mutual Funds at the time of purchase will convert after seven years from the date of original purchase. Class C * No front-end sales charge; all your money goes to work for you right away. * Distribution and service (12b-1) fees of 1%. * A 1% contingent deferred sales charge on shares sold within one year of purchase. * No automatic conversion to Class A shares, so annual expenses continue at the Class C level throughout the life of your investment. * Not offered by Financial Services Fund. Class M * Lower front-end sales charge than Class A, as described on the next page. * Distribution and service (12b-1) fees of 0.75%. * No automatic conversion to Class A shares, so annual expenses continue at the Class M level throughout the life of your investment. * Offered only by MagnaCap Fund. Class T * No longer available for purchase, unless you are investing income earned on Class T shares or exchanging Class T shares of another Fund. * Distribution and service (12b-1) fees of 0.75 to 0.95% (varies by Fund). * A contingent deferred sales charge, as described on the next page. * Automatic conversion to Class A shares after 8 years, thus reducing future annual expenses. * Offered only by Growth Opportunities Fund, SmallCap Opportunities Fund and Balanced Fund. When choosing between classes, you should carefully consider the ongoing annual expenses along with the initial sales charge or the contingent deferred sales charge. The relative impact of the initial sales charges and ongoing annual expenses will depend on the length of time a share is held. Higher distribution fees mean a higher expense ratio, so Class B and Class C shares pay correspondingly lower dividends and may have a lower net asset value than Class A or Class M shares. Orders for Class B shares and Class M shares in excess of $250,000 and $1,000,000, respectively, will be accepted as orders for Class A shares or declined. You should discuss which Class of shares is right for you with your investment professional. Distribution and Shareholder Service Fees To pay for the cost of promoting the Funds and servicing your shareholder account, each class of each Fund has adopted a Rule 12b-1 plan which requires fees to be paid out of the assets of each class. Over time the fees will increase your cost of investing and may exceed the cost of paying other types of sales charges. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Shareholder Guide 39 SHAREHOLDER GUIDE CHOOSING A SHARE CLASS -------------------------------------------------------------------------------- SALES CHARGE CALCULATION Class A(1) Class A shares of the Funds are sold subject to the following sales charge: U.S. Equity Funds and Equity & Income Funds --------------------- As a % As a % of the of net offering asset Your Investment price value --------------- ----- ----- Less than $50,000 5.75 6.10 $50,000 - $99,999 4.50 4.71 $100,000 - $249,999 3.50 3.63 $250,000 - $499,999 2.50 2.56 $500,000 - $1,000,000 2.00 2.04 $1,000,000 and over See below ---------- (1) Shareholders that purchased funds that were a part of the Lexington family of funds at the time of purchase are not subject to sales charges for the life of their account. Investments of $1 Million or More. There is no front-end sales charge if you purchase Class A shares in an amount of $1 million or more. However, the shares will be subject to a contingent deferred sales charge if they are redeemed within one or two years of purchase, depending on the amount of the purchase, as follows: Period during which Your investment CDSC CDSC applies --------------- ---- ------------ $1,000,000 - $2,499,999 1.00% 2 years $2,500,000 - $4,999,999 0.50% 1 year $5,000,000 and over 0.25% 1 year However, Class A shares that were purchased in an amount of $1 million or more through Funds that were part of the Nicholas-Applegate Mutual Funds at the time of purchase will be subject to a contingent deferred sales charge of 1% within one year from the date of purchase. Class A shares that were purchased in an amount of $1 million or more through funds that were part of the Northstar family of funds and the ING family of funds at the time of purchase may be subject to a different contingent deferred sales charge period of 18 months and 12 months, respectively, from the date of purchase. See the SAI for further information. Class B, Class C and Class T Class B, Class C and Class T shares are offered at their net asset value per share without any initial sales charge. However, you may be charged a contingent deferred sales charge (CDSC) on shares that you sell within a certain period of time after you bought them. The amount of the CDSC is based on the lesser of the net asset value of the shares at the time of purchase or redemption. There is no CDSC on shares acquired through the reinvestment of dividends and capital gains distributions. The CDSCs are as follows: Class B Deferred Sales Charge(2) CDSC on shares Years after purchase being sold -------------------- ---------- 1st year 5% 2nd year 4% 3rd year 3% 4th year 3% 5th year 2% 6th year 1% After 6th year none ---------- (2) Class B shares that were purchased through funds that were part of the Northstar family of funds at the time of purchase are subject to a different contingent deferred sales charge. Please see the SAI for further information. Class C Deferred Sales Charge CDSC on shares Years after purchase being sold -------------------- ---------- 1st year 1% After 1st year none Class T Deferred Sales Charge CDSC on shares Years after purchase being sold -------------------- ---------- 1st year 4% 2nd year 3% 3rd year 2% 4th year 1% After 4th year none To keep your CDSC as low as possible, each time you place a request to redeem shares the Funds will first redeem shares in your account that are not subject to a CDSC, and then will sell shares that have the lowest CDSC. Class M Class M shares of the Funds are sold subject to the following sales charge. MagnaCap Fund ----------------- As a % As a % of the of net offering asset Your Investment price value --------------- ----- ----- Less than $50,000 3.50% 3.63% $50,000 - $99,999 2.50% 2.56% $100,000 - $249,999 1.50% 1.52% $250,000 - $499,999 1.00% 1.01% $500,000 and over none none 40 Shareholder Guide CHOOSING A SHARE CLASS SHAREHOLDER GUIDE -------------------------------------------------------------------------------- Sales Charge Reductions and Waivers Reduced Sales Charges. You may reduce the initial sales charge on a purchase of Class A or Class M shares of the Funds by combining multiple purchases to take advantage of the breakpoints in the sales charge schedules. You may do this by: * Letter of Intent -- lets you purchase shares over a 13 month period and pay the same sales charge as if the shares had all been purchased at once. * Rights of Accumulation -- lets you add the value of shares of any open-end Pilgrim Fund (excluding the Pilgrim Money Market and ING Pilgrim Money Market Funds and the Lexington Money Market Trust) you already own to the amount of your next purchase for purposes of calculating the sales charge. * Combination Privilege -- shares held by investors in the Pilgrim Funds which impose a CDSC may be combined with Class A or Class M shares for a reduced sales charge. See the Account Application or the SAI for details, or contact your financial representative or the Shareholder Servicing Agent for more information. CDSC Waivers. If you notify the Transfer Agent at the time of redemption, the CDSC for each Class will be waived in the following cases: * Redemptions following the death or permanent disability of a shareholder if made within one year of death or the initial determination of permanent disability. The waiver is available only for shares held at the time of death or initial determination of permanent disability. * For Class B and Class C Shares, redemptions pursuant to a Systematic Withdrawal Plan, up to a maximum of 12% per year of a shareholder's account value based on the value of the account at the time the plan is established and annually thereafter, provided all dividends and distributions are reinvested and the total redemptions do not exceed 12% annually. * Mandatory distributions from a tax-deferred retirement plan or an IRA. However, if you purchased shares that were part of the Nicholas-Applegate Mutual Funds, you may be eligible for a CDSC waiver prior to the mandatory distribution age. * If you think you may be eligible for a CDSC waiver, contact your financial representative or the Shareholder Servicing Agent. Reinstatement Privilege. If you sell Class B, Class C or Class T shares of a Pilgrim Fund, you may reinvest some or all of the proceeds in the same share class within 90 days without a sales charge. Reinstated Class B, Class C and Class T shares will retain their original cost and purchase date for purposes of the CDSC. This privilege can be used only once per calendar year. If you want to use the Reinstatement Privilege, contact your financial representative or the Shareholder Servicing Agent. Consult the SAI for more information. Sales Charge Waivers. Class A or Class M shares may be purchased without a sales charge by certain individuals and institutions. For additional information, contact the Shareholder Servicing Agent, or see the SAI. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Shareholder Guide 41 SHAREHOLDER GUIDE HOW TO PURCHASE SHARES -------------------------------------------------------------------------------- The minimum initial investment amounts for the Pilgrim Funds are as follows: * Non-retirement accounts: $1,000 * Retirement accounts: $250 * Pre-Authorized Investment Plan: $100 to open; you must invest at least $100 a month. The minimum additional investment is $100. Make your investment using the table on the right. The Funds and the Distributor reserve the right to reject any purchase order. Please note that cash, travelers checks, third party checks, money orders and checks drawn on non-U.S. banks (even if payment may be effected through a U.S. bank) will not be accepted. The Pilgrim Funds reserve the right to waive minimum investment amounts. The Funds reserve the right to liquidate sufficient shares to recover annual transfer agent fees or to close your account and redeem your shares should you fail to maintain your account value at a minimum of $1,000 ($250 for IRAs). Retirement Plans The Funds have available prototype qualified retirement plans for both corporations and for self-employed individuals. They also have available prototype IRA, Roth IRA and Simple IRA plans (for both individuals and employers), Simplified Employee Pension Plans, Pension and Profit Sharing Plans and Tax Sheltered Retirement Plans for employees of public educational institutions and certain non-profit, tax-exempt organizations. State Street Bank and Trust Co. (SSB) acts as the custodian under these plans. For further information, contact the Shareholder Servicing Agent at (800) 992-0180. SSB currently receives a $12 custodial fee annually for the maintenance of such accounts. Initial Additional Method Investment Investment ------ ---------- ---------- By Contacting An investment Your professional with an Investment authorized firm Professional can help you establish and maintain your account. By Mail Visit or consult an Visit or consult an investment investment professional. Make professional. Fill out your check payable the Account to the Pilgrim Funds Additions form and mail it, along included on the with a completed bottom of your Application. Please account statement indicate your along with your investment check payable to the professional on the Fund and mail them New Account to the address on the Application. account statement. Remember to write your account number on the check. By Wire Call the ING Pilgrim Wire the funds in the Operations same manner Department at (800) described under 336-3436 to obtain "Initial Investment." an account number and indicate your investment professional on the account. Instruct your bank to wire funds to the Fund in the care of: State Street Bank and Trust Company ABA #101003621 Kansas City, MO credit to: ___________ (the Fund) A/C #751-8315; for further credit to: __________________ Shareholder A/C #_________________ (A/C # you received over the telephone) Shareholder Name: ______________________ (Your Name Here) After wiring funds you must complete the Account Application and send it to: Pilgrim Funds P.O. Box 219368 Kansas City, MO 64121-9368 42 Shareholder Guide HOW TO REDEEM SHARES SHAREHOLDER GUIDE -------------------------------------------------------------------------------- You may redeem shares using the table on the right. Under unusual circumstances, a Fund may suspend the right of redemption as allowed by federal securities laws. Systematic Withdrawal Plan You may elect to make periodic withdrawals from your account on a regular basis. * Your account must have a current value of at least $10,000. * Minimum withdrawal amount is $100. * You may choose from monthly, quarterly, semi-annual or annual payments. For additional information, contact the Shareholder Servicing Agent, see the Account Application or the SAI. Payments Normally, payment for shares redeemed will be made within three days after receipt by the Transfer Agent of a written request in good order. The Fund has the right to take up to seven days to pay your redemption proceeds, and may postpone payment longer in the event of an economic emergency as determined by the U.S. Securities and Exchange Commission. When you place a request to redeem shares for which the purchase money has not yet been collected, the request will be executed at the next determined net asset value, but the Fund will not release the proceeds until your purchase payment clears. This may take up to 15 days or more. To reduce such delay, purchases should be made by bank wire or federal funds. Each Fund normally intends to pay in cash for all shares redeemed, but under abnormal conditions that make payment in cash unwise, a Fund may make payment wholly or partly in securities at their then current market value equal to the redemption price. In such case, a Fund could elect to make payment in securities for redemptions in excess of $250,000 or 1% of its net assets during any 90-day period for any one shareholder. An investor may incur brokerage costs in converting such securities to cash. Method Procedures ------ ---------- By Contacting Your You may redeem by contacting your investment Investment Professional professional. Investment professionals may charge for their services in connection with your redemption request, but neither the Fund nor the Distributor imposes any such charge. By Mail Send a written request specifying the Fund name and share class, your account number, the name(s) in which the account is registered, and the dollar value or number of shares you wish to redeem to: Pilgrim Funds P.O. Box 219368 Kansas City, MO 64121-9368 If certificated shares have been issued, the certificate must accompany the written request. Corporate investors and other associations must have an appropriate certification on file authorizing redemptions. A suggested form of such certification is provided on the Account Application. A signature guarantee may be required. By Telephone -- You may redeem shares by telephone on all accounts Expedited Redemption other than retirement accounts, unless you check the box on the Account Application which signifies that you do not wish to use telephone redemptions. To redeem by telephone, call the Shareholder Servicing Agent at (800) 992-0180. Receiving Proceeds By Check: You may have redemption proceeds (up to a maximum of $100,000) mailed to an address which has been on record with Pilgrim Funds for at least 30 days. Receiving Proceeds By Wire: You may have redemption proceeds (subject to a minimum of $5,000) wired to your pre-designated bank account. You will not be able to receive redemption proceeds by wire unless you check the box on the Account Application which signifies that you wish to receive redemption proceeds by wire and attach a voided check. Under normal circumstances, proceeds will be transmitted to your bank on the business day following receipt of your instructions, provided redemptions may be made. In the event that share certificates have been issued, you may not request a wire redemption by telephone. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Shareholder Guide 43 SHAREHOLDER GUIDE TRANSACTION POLICIES -------------------------------------------------------------------------------- Net Asset Value The net asset value (NAV) per share for each Fund and class is determined each business day as of the close of regular trading on the New York Stock Exchange (usually at 4:00 p.m. Eastern Time). The NAV per share of each class of each Fund is calculated by taking the value of the Fund's assets attributable to that class, subtracting the Fund's liabilities attributable to that class, and dividing by the number of shares of that class that are outstanding. Because foreign securities may trade on days when the Funds do not price shares, the NAV of a Fund that invests in foreign securities may change on days when shareholders will not be able to purchase or redeem the Fund's shares. In general, assets are valued based on actual or estimated market value, with special provisions for assets not having readily available market quotations, and short-term debt securities, and for situations where market quotations are deemed unreliable. Short-term debt securities having a maturity of 60 days or less are valued at amortized cost, unless the amortized cost does not approximate market value. Securities prices may be obtained from automated pricing services. When market quotations are not readily available or are deemed unreliable, securities are valued at their fair value as determined in good faith under the supervision of the Board of Directors or Trustees. Valuing securities at fair value involves greater reliance on judgment than securities that have readily available market quotations. Price of Shares When you buy shares, you pay the NAV plus any applicable sales charge. When you sell shares, you receive the NAV minus any applicable deferred sales charge. Exchange orders are effected at NAV. Execution of Requests Purchase and sale requests are executed at the next NAV determined after the order is received in proper form by the Transfer Agent or Distributor. A purchase order will be deemed to be in proper form when all of the required steps set forth above under "How to Purchase Shares" have been completed. If you purchase by wire, however, the order will be deemed to be in proper form after the telephone notification and the federal funds wire have been received. If you purchase by wire, you must submit an application form in a timely fashion. If an order or payment by wire is received after the close of regular trading on the New York Stock Exchange (normally 4:00 p.m. Eastern Time), the shares will not be credited until the next business day. You will receive a confirmation of each new transaction in your account, which also will show you the number of Fund shares you own including the number of shares being held in safekeeping by the Transfer Agent for your account. You may rely on these confirmations in lieu of certificates as evidence of your ownership. Certificates representing shares of the Funds will not be issued unless you request them in writing. Telephone Orders The Funds and their Transfer Agent will not be responsible for the authenticity of phone instructions or losses, if any, resulting from unauthorized shareholder transactions if they reasonably believe that such instructions were genuine. The Funds and their Transfer Agent have established reasonable procedures to confirm that instructions communicated by telephone are genuine. These procedures include recording telephone instructions for exchanges and expedited redemptions, requiring the caller to give certain specific identifying information, and providing written confirmation to shareholders of record not later than five days following any such telephone transactions. If the Funds and their Transfer Agent do not employ these procedures, they may be liable for any losses due to unauthorized or fraudulent telephone instructions. Exchanges You may exchange shares of a Fund for shares of the same class of any other Pilgrim Fund, except for Lexington Money Market Trust and Pilgrim Corporate Leaders Trust Fund, without paying any additional sales charge, except that Class A shares of the Pilgrim Money Market and ING Pilgrim Money Market Funds for which no sales charge was paid must pay the applicable sales load on an exchange into Class A shares of another Fund. In addition, Class T shares of any Fund may be exchanged for Class B shares of the Pilgrim Money Market and ING Pilgrim Money Market Funds. Shares subject to a CDSC will continue to age from the date that the original shares were purchased. If you exchange shares of a Fund that at the time you acquired the shares was a Nicholas-Applegate Mutual Fund, the shares you receive on the exchange will be subject to the current CDSC structure and conversion rights of the Fund being acquired, although the shares will continue to age for CDSC and conversion purposes from the date the original shares were acquired. You should review the prospectus of the Pilgrim Fund you intend to exchange into before exchanging your shares. If you exchange into Pilgrim Senior Income Fund, your ability to sell or liquidate your investment will be limited. Pilgrim Senior Income Fund, is a closed-end interval fund and does not redeem its shares on a daily basis, and it is not expected that a secondary market for the fund's shares will develop, so you will not be able to sell them through a broker or other investment professional. To provide a measure of liquidity, the fund will normally make quarterly repurchase offers for 5% of its outstanding common shares. If more than 5% of the fund's common shares are tendered, you may not be able to completely liquidate your holdings in any one quarter. You also would not have liquidity between these quarterly repurchase dates. Investors exercising the exchange privilege with Pilgrim Senior Income Fund should carefully review the prospectus of that fund. Investors may obtain a copy of the Pilgrim Senior Income Fund prospectus or any other Pilgrim Fund prospectus by calling (800) 992-0180. 44 Shareholder Guide TRANSACTION POLICIES SHAREHOLDER GUIDE -------------------------------------------------------------------------------- The total value of shares being exchanged must at least equal the minimum investment requirement of the Fund into which they are being exchanged. Exchanges of shares are sales and may result in a gain or loss for federal and state income tax purposes. There is no specific limit on exchange frequency; however, the Funds are intended for long-term investment and not as a short-term trading vehicle. The Adviser may prohibit excessive exchanges (more than four per year). The Adviser also may, on 60 days' prior notice, restrict the frequency of, otherwise modify, or impose charges of up to $5.00 upon exchanges. You will automatically have the ability to request an exchange by calling the Shareholder Service Agent unless you mark the box on the Account Application that indicates that you do not wish to have the telephone exchange privilege. A Fund may change or cancel its exchange policies at any time, upon 60 days' written notice to shareholders. CDSC on Exchange to Pilgrim Senior Income Fund You are not required to pay an applicable CDSC upon an exchange from any Pilgrim Fund described in this prospectus to the Pilgrim Senior Income Fund. However, if you exchange into Pilgrim Senior Income Fund and subsequently offer your common shares for repurchase by that fund, the CDSC will apply from the original Pilgrim Fund from which you exchanged. The time period for application of the CDSC will be calculated based on the first date you acquired your shares in the original Pilgrim Fund. Systematic Exchange Privilege With an initial account balance of at least $5,000 and subject to the information and limitations outlined above, you may elect to have a specified dollar amount of shares systematically exchanged, monthly, quarterly, semi-annually or annually (on or about the 10th of the applicable month), from your account to an identically registered account in the same class of any other open-end Pilgrim Fund. This exchange privilege may be modified at any time or terminated upon 60 days' written notice to shareholders. Small Accounts Due to the relatively high cost of handling small investments, the Funds reserve the right upon 30 days' written notice to redeem, at NAV, the shares of any shareholder whose account (except for IRAs) has a value of less than $1,000, other than as a result of a decline in the NAV per share. Account Access Unless your Pilgrim shares are held through a third-party fiduciary or in an omnibus registration at your bank or brokerage firm, you may be able to access your acount information over the internet at www.pilgrimfunds.com, or via a touch tone telephone by calling (800) 992-0180 and selecting Option 1. Should you wish to speak with a Shareholder Service Representative, you may call the toll-free number listed above and select Option 2. Privacy Policy You may review the Fund's policy concerning investor privacy over the internet at www.pilgrimfunds.com, or you may obtain a copy of the policy by calling (800) 992-0180 and selecting Option 1. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Shareholder Guide 45 MANAGEMENT OF THE FUNDS ADVISER -------------------------------------------------------------------------------- ING Pilgrim Investments, LLC. (ING Pilgrim) a Delaware limited liability company serves as the investment adviser to each of the Funds. ING Pilgrim has overall responsibility for the management of the Funds. ING Pilgrim provides or oversees all investment advisory and portfolio management services for each Fund, and assists in managing and supervising all aspects of the general day-to-day business activities and operations of the Funds, including custodial, transfer agency, dividend disbursing, accounting, auditing, compliance and related services. Organized in December 1994, ING Pilgrim is registered as an investment adviser. ING Pilgrim is an indirect wholly-owned subsidiary of ING Groep N.V. (NYSE: ING) (ING Group). ING Group is a global financial institution active in the field of insurance, banking, and asset management in more than 65 countries, with almost 100,000 employees. Prior to April 30, 2001, ING Mutual Funds Management Co. LLC (IMFC) served as investment adviser to certain of the Funds. On April 30, 2001, IMFC, an indirect wholly-owned subsidiary of ING Group that had been under common control with ING Pilgrim Investments, merged with ING Pilgrim Investments. As of June 30, 2001, ING Pilgrim managed over $18.4 billion in assets. ING Pilgrim's principal address is 7337 East Doubletree Ranch Road, Scottsdale, Arizona 85258. ING Pilgrim receives a monthly fee for its services based on the average daily net assets of each of the Funds. The following table shows the aggregate annual management fee paid by each Fund for the most recent fiscal year as a percentage of that Fund's average daily net assets: Management Fund Fee ---- --- MagnaCap 0.72% Growth and Income 0.63 Research Enhanced Index 0.70 Tax Efficient Equity 0.80 Growth Opportunities 0.95 LargeCap Growth 0.73 MidCap Opportunities 1.00 MidCap Growth 0.75 Growth + Value 1.00 SmallCap Opportunities 1.00 SmallCap Growth 1.00 Financial Services 0.73 Internet 1.25 Balanced 0.75 Convertible 0.75 ING Pilgrim Directly Manages the Portfolios of the Following Funds: Growth Opportunities Fund, LargeCap Growth Fund, MidCap Opportunities Fund and MidCap Growth Fund. The following individuals share responsibility for the day-to-day management of the Growth Opportunities Fund, LargeCap Growth Fund, MidCap Opportunities Fund and MidCap Growth Fund. Mary Lisanti, Executive Vice President and Chief Investment Officer -- Domestic Equities of ING Pilgrim, has served as a Senior Portfolio Manager of MidCap Opportunities Fund since the fund was formed in August 1998, Growth Opportunities Fund since November 1998, MidCap Growth Fund since April 2000, and LargeCap Growth Fund since October 2000. Prior to joining ING Pilgrim in October 1999, Ms. Lisanti was Executive Vice President and Chief Investment Officer -- Domestic Equities with Northstar Investment Management Corp., which subsequently merged into ING Pilgrim. From 1996 to 1998, Ms. Lisanti was a Portfolio Manager at Strong Capital Management. From 1993 to 1996, Ms. Lisanti was a Managing Director and Head of Small- and Mid-Capitalization Equity Strategies at Bankers Trust Corp. Jeffrey Bernstein, Senior Vice President of ING Pilgrim, has served as a Senior Portfolio Manager of MidCap Opportunities Fund since the fund was formed in August 1998, Growth Opportunities Fund since November 1998, and MidCap Growth Fund since April 2000. Mr. Bernstein has served as Co-Portfolio Manager of LargeCap Growth Fund since January 2001. Prior to joining ING Pilgrim in October 1999, Mr. Bernstein was a portfolio manager at Northstar Investment Management Corp., which subsequently merged into ING Pilgrim. Prior to May 1998, Mr. Bernstein was a Portfolio Manager at Strong Capital Management. From 1995 to 1997, Mr. Bernstein was a Portfolio Manager at Berkeley Capital. SmallCap Opportunities Fund and SmallCap Growth Fund Mary Lisanti, whose background is described above, has served as a manager of the SmallCap Opportunities Fund since July 1998 and SmallCap Growth Fund since April 2000. Growth and Income Fund Thomas Jackson, Senior Vice President and Senior Portfolio Manager for value equity strategies at ING Pilgrim, has served as Portfolio Manager of Growth and Income Fund since June 2001. Prior to joining ING Pilgrim in June 2001, Mr. Jackson was a Managing Director at Prudential Investments (April 1990 through December 2000). Prior to April 1990, Mr. Jackson was Co-Chief Investment Officer and Managing Director at Century Capital Associates and Red Oak Advisors Inc. 46 Management of the Funds ADVISER MANAGEMENT OF THE FUNDS -------------------------------------------------------------------------------- Financial Services Fund The following individuals share responsibility for the day-to-day management of the Financial Services Fund: Robert M. Kloss, Vice President of ING Pilgrim, has served as Co-Portfolio Manager of Financial Services Fund since January 2001. Mr. Kloss has served as an Equity Analyst and Portfolio Manager for ING Pilgrim since 1998. >From 1995 to 1998, he served as a Product Manager for the Pilgrim America Masters Series funds. Prior to 1995, Mr. Kloss was Vice President for Financial Planning at Express America Holdings, Corp., which subsequently acquired ING Pilgrim's predecessor (Pilgrim America Investments, Inc.). Mr. Kloss has also served as a principal with Phoenix Strategies, and as a Vice President of Operations and Vice President and Vice President and Director of Financial Planning for Wells Fargo Credit Corporation. Steven L. Rayner, Vice President of ING Pilgrim, has served as Co-Portfolio Manager of Financial Services Fund since January 2001. Mr. Rayner has served as Equity Analyst for the Financial Services Fund since June 1995. Mr. Rayner held the same position at ING Pilgrim's predecessor (Pilgrim America Investments, Inc.) from 1993 to 1994. Mr. Rayner holds the professional designations of Chartered Financial Analyst and Certified Public Accountant. Mary Lisanti, Executive Vice President and Chief Investment Officer -- Domestic Equities of ING Pilgrim, has oversight for the Fund's strategy. MagnaCap Fund Thomas Jackson, whose background is described above, has served as Portfolio Manager of MagnaCap Fund since June 2001. Howard Kornblue, Senior Vice President and Senior Portfolio Manager for ING Pilgrim, has served as Auxiliary Portfolio Manager of MagnaCap Fund since June 2001. From January 2001 to present, Mr. Kornblue has served as Director of Value Strategies at ING Pilgrim. Mr. Kornblue served as Portfolio Manager of MagnaCap Fund from 1989 until January 2001. Balanced Fund The following individuals share responsibility for the day-to-day management of the Balanced Fund: Thomas Jackson, whose background is described above, has served as Portfolio Manager of the equity portion of the Balanced Fund since June 2001. Robert K. Kinsey, Vice President and Portfolio Manager, has served as a Portfolio Manager of Balanced Fund since May 24, 1999. Mr. Kinsey manages Balanced Fund's assets that are invested in assets other than high yield debt securities. Prior to joining ING Pilgrim, Mr. Kinsey was a Vice President and Fixed Income Portfolio Manager for Federated Investors from January 1995 to March 1999. From July 1992 to January 1995, Mr. Kinsey was a Principal and Portfolio Manager for Harris Investment Management. Edwin Schriver, Senior Vice President of ING Pilgrim, has served as a Senior Portfolio Manager of the high yield portion of the Balanced Fund's assets since October 2000. Prior to joining ING Pilgrim, Mr. Schriver was a Senior High Yield Analyst for Dreyfus Corporation since 1998. From 1996 to 1997, Mr. Schriver was the President of Crescent City Research, an investment research and software firm. Prior to 1996, Mr. Schriver was President of an SEC registered investment adviser and held various senior portfolio management positions. Convertible Fund Andrew Chow, Vice President of ING Pilgrim, has served as a Portfolio Manager of Convertible Fund since October 1, 2000. Prior to joining ING Pilgrim, Mr. Chow was the portfolio manager of the Conseco Convertible Securities Fund since 1998. He joined Conseco in 1991 where he was also responsible for managing convertible securities accounts. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Management of the Funds 47 MANAGEMENT OF THE FUNDS SUB-ADVISERS -------------------------------------------------------------------------------- SUB-ADVISERS For the following Funds, ING Pilgrim has engaged a Sub-Adviser to provide the day-to-day management of the Fund's portfolio. The Sub-Advisers are among the most respected institutional investment advisers in the world, and have been selected primarily on the basis of their successful application of a consistent, well-defined, long-term investment approach over a period of several market cycles. Research Enhanced Index Fund Aeltus Investment Management, Inc. Aeltus Investment Management, Inc., (Aeltus) serves as Sub-Adviser to the Pilgrim Research Enhanced Index Fund. Founded in 1972, Aeltus is registered as an investment adviser. Aeltus is an indirect wholly-owned subsidiary of ING Group, and is an affiliate of ING Pilgrim. Aeltus has acted as adviser or sub-adviser to mutual funds since 1994 and has managed institutional accounts since 1972. As of June 30, 2001, Aeltus managed over $41 billion in assets. Its principal office is located at 10 State House Square, Hartford, Connecticut 06103-3602. Hugh T. M. Whelan and Douglas E. Cote share the responsibility for the day-to-day management of the Pilgrim Research Enhanced Index Fund. Mr. Whelan has served as co-manager of the Pilgrim Research Enhanced Index Fund since August 1, 2001. At Aeltus, he has served as a quantitative equity analyst since 1999. Previously, Mr. Whelan was a quantitative portfolio manager in Aeltus' fixed income group, specializing in corporate securities since 1944. Mr. Cote has served as co-manager of the Pilgrim Research Enhanced Index Fund since August 1, 2001. At Aeltus, Mr. Cote has been serving as a quantitative equity analyst since 1996. Previously, Mr. Cote was responsible for developing quantitative applications for Aeltus' equity department. Tax Efficient Equity Fund Delta Asset Management Delta Asset Management (Delta) serves as Sub-Advisor to the Pilgrim Tax Efficient Equity Fund. Delta is a division of Furman Selz Capital Management LLC (FSCM) a registered investment adviser. Delta manages over $5 billion for institutions and high net worth individuals. Delta's principal address is 333 South Grand Avenue, Los Angeles, CA 90071. Mr. Robert Sandroni, Mr. Carl Goldsmith and Ms. Marla K. Ryan have primary responsibility for managing the Fund. Mr. Sandroni and Mr. Goldsmith have been investment professionals with Delta since 1991 and each has over 20 years of investment experience. Ms. Ryan has been an investment professional with Delta since 1998 and has over 10 years of investment experience. Growth + Value Fund Navellier Fund Management, Inc. A registered investment adviser, Navellier Fund Management Inc. (Navellier) serves as Sub-Adviser to the Pilgrim Growth + Value Fund. Navellier and its affiliate, Navellier & Associates, Inc., manage over $5 billion for institutions, pension funds and high net worth individuals. Navellier's principal address is 1 East Liberty, Third Floor, Reno, Nevada 89501. Louis Navellier has managed the Pilgrim Growth + Value Fund since the Fund was formed in November 1996. Mr. Navellier has over 19 years of investment management experience and is the principal owner of Navellier & Associates, Inc., a registered investment adviser that manages investments for institutions, pension funds and high net worth individuals. Mr. Navellier's investment newsletter, MPT Review, has been published for over 19 years and is widely renowned throughout the investment community. Internet Fund ING Investment Management Advisors B.V. A registered investment adviser, ING Investment Management Advisors B.V. (IIMA) serves as sub-advisor to the Pilgrim Internet Fund. As of December 31, 2000, IIMA manages over $144.4 billion for entities affiliated and unaffiliated with ING Group. IIMA's principal address is Schenkkede 65, 2595 AS The Hague, The Netherlands. Mr. Guy Uding has primary responsibility for managing the Fund and heads a three-member team of investment professionals. Mr. Uding has been employed by IIMA and its affiliates since 1995 and has five years of investment experience. 48 Management of the Funds DIVIDENDS, DISTRIBUTIONS AND TAXES -------------------------------------------------------------------------------- Dividends The Funds generally distribute most or all of their net earnings in the form of dividends. Each Fund pays dividends, if any, as follows: Annually(1) Semi-Annually(1) Quarterly(2) ----------- ---------------- ------------ Research Enhanced MagnaCap Balanced Index Growth and Convertible Tax Efficient Equity Income Growth Opportunities LargeCap Growth MidCap Opportunities MidCap Growth Growth + Value SmallCap Opportunities SmallCap Growth Financial Services Internet ---------- (1) Distributions normally expected to consist primarily of capital gains. (2) Distributions normally expected to consist on an annual basis of a variable combination of capital gains and ordinary income. Each Fund distributes capital gains, if any, annually. Dividend Reinvestment Unless you instruct a Fund to pay you dividends in cash, dividends and distributions paid by a Fund will be reinvested in additional shares of the Fund. You may, upon written request or by completing the appropriate section of the Account Application, elect to have all dividends and other distributions paid on Class A, B, C, M or T shares of a Fund invested in another Pilgrim Fund which offers the same class shares. If you are a shareholder of Pilgrim Prime Rate Trust, whose shares are not held in a broker or nominee account, you may, upon written request, elect to have all dividends invested into a pre-existing Class A account of any open-end Pilgrim Fund. Taxes The following information is meant as a general summary for U.S. shareholders. Please see the SAI for additional information. You should rely on your own tax adviser for advice about the particular federal, state and local tax consequences to you of investing in a Fund. Each Fund will distribute all or substantially all of its net investment income and net capital gains to its shareholders each year. Although the Funds will not be taxed on amounts they distribute, most shareholders will be taxed on amounts they receive. A particular distribution generally will be taxable as either ordinary income or long-term capital gains. It does not matter how long you have held your Fund shares or whether you elect to receive your distributions in cash or reinvest them in additional Fund shares. For example, if a Fund designates a particular distribution as a long-term capital gains distribution, it will be taxable to you at your long-term capital gains rate. Dividends declared by a Fund in October, November or December and paid during the following January may be treated as having been received by shareholders in the year the distributions were declared. You will receive an annual statement summarizing your dividend and capital gains distributions. If you invest through a tax-deferred account, such as a retirement plan, you generally will not have to pay tax on dividends until they are distributed from the account. These accounts are subject to complex tax rules, and you should consult your tax adviser about investment through a tax-deferred account. There may be tax consequences to you if you sell or redeem Fund shares. You will generally have a capital gain or loss, which will be long-term or short-term, generally depending on how long you hold those shares. If you exchange shares, you may be treated as if you sold them. You are responsible for any tax liabilities generated by your transactions. As with all mutual funds, a Fund may be required to withhold U.S. federal income tax at the rate of 30.5% (30% in 2002 and 2003) of all taxable distributions payable to you if you fail to provide the Fund with your correct taxpayer identification number or to make required certifications, or if you have been notified by the IRS that you are subject to backup withholding. Backup withholding is not an additional tax; rather, it is a way in which the IRS ensures it will collect taxes otherwise due. Any amounts withheld may be credited against your U.S. federal income tax liability. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Dividends, Distributions and Taxes 49 MORE INFORMATION ABOUT RISKS -------------------------------------------------------------------------------- All mutual funds involve risk -- some more than others -- and there is always the chance that you could lose money or not earn as much as you hope. A Fund's risk profile is largely a factor of the principal securities in which it invests and investment techniques that it uses. The following pages discuss the risks associated with certain of the types of securities in which the Funds may invest and certain of the investment practices that the Funds may use. For more information about these and other types of securities and investment techniques that may be used by the Funds, see the Statement of Additional Information (the SAI). Many of the investment techniques and strategies discussed in this prospectus and in the SAI are discretionary, which means that the adviser or sub-adviser can decide whether to use them or not. The Funds named below invest in these securities or use these techniques as part of the Fund's principal investment strategy. However, the Adviser or Sub-Adviser of any Fund may also use these investment techniques or make investments in securities that are not a part of the Fund's principal investment strategy. PRINCIPAL RISKS Investments in Foreign Securities (MagnaCap, Balanced, Growth and Income, and Internet Funds). There are certain risks in owning foreign securities, including those resulting from: fluctuations in currency exchange rates; devaluation of currencies; political or economic developments and the possible imposition of currency exchange blockages or other foreign governmental laws or restrictions; reduced availability of public information concerning issuers; accounting, auditing and financial reporting standards or other regulatory practices and requirements that are not uniform when compared to those applicable to domestic companies; settlement and clearance procedures in some countries that may not be reliable and can result in delays in settlement; higher transaction and custody expenses than for domestic securities; and limitations on foreign ownership of equity securities. Also, securities of many foreign companies may be less liquid and the prices more volatile than those of domestic companies. With certain foreign countries, there is the possibility of expropriation, nationalization, confiscatory taxation and limitations on the use or removal of funds or other assets of the Funds, including the withholding of dividends. Each Fund that invests in foreign securities may enter into foreign currency transactions either on a spot or cash basis at prevailing rates or through forward foreign currency exchange contracts to have the necessary currencies to settle transactions, or to help protect Fund assets against adverse changes in foreign currency exchange rates, or to provide exposure to a foreign currency commensurate with the exposure to securities from that country. Such efforts could limit potential gains that might result from a relative increase in the value of such currencies, and might, in certain cases, result in losses to the Fund. Inability to Sell Securities (All Funds except MagnaCap, Research Enhanced Index, LargeCap Growth and Financial Services Funds). Some securities usually trade in lower volume and may be less liquid than securities of large established companies. These less liquid securities could include securities of small and mid-size U.S. companies, high-yield securities, convertible securities, unrated debt and convertible securities, securities that originate from small offerings, and foreign securities, particularly those from companies in emerging markets. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. High Yield Securities (Balanced and Convertible Funds). Investments in high yield securities generally provide greater income and increased opportunity for capital appreciation than investments in higher quality debt securities, but they also typically entail greater potential price volatility and principal and income risk. High yield securities are not considered investment grade, and are regarded as predominantly speculative with respect to the issuing company's continuing ability to meet principal and interest payments. The prices of high yield securities have been found to be less sensitive to interest rate changes than higher-rated investments, but more sensitive to adverse economic downturns or individual corporate developments. High yield securities structured as zero coupon or pay-in-kind securities tend to be more volatile. The secondary market in which high yield securities are traded is generally less liquid than the market for higher grade bonds. At times of less liquidity, it may be more difficult to value high yield securities. Corporate Debt Securities (Balanced and Convertible Funds). Corporate debt securities are subject to the risk of the issuer's inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to such factors as interest rate sensitivity, market perception of the credit-worthiness of the issuer and general market liquidity. When interest rates decline, the value of the Fund's debt securities can be expected to rise, and when interest rates rise, the value of those securities can be expected to decline. Debt securities with longer maturities tend to be more sensitive to interest rate movements than those with shorter maturities. 50 More Information About Risks MORE INFORMATION ABOUT RISKS -------------------------------------------------------------------------------- One measure of risk for fixed income securities is duration. Duration is one of the tools used by a portfolio manager in selection of fixed income securities. Historically, the maturity of a bond was used as a proxy for the sensitivity of a bond's price to changes in interest rates, otherwise known as a bond's "interest rate risk" or "volatility." According to this measure, the longer the maturity of a bond, the more its price will change for a given change in market interest rates. However, this method ignores the amount and timing of all cash flows from the bond prior to final maturity. Duration is a measure of average life of a bond on a present value basis, which was developed to incorporate a bond's yield, coupons, final maturity and call features into one measure. For point of reference, the duration of a noncallable 7% coupon bond with a remaining maturity of 5 years is approximately 4.5 years, and the duration of a noncallable 7% coupon bond with a remaining maturity of 10 years is approximately 8 years. Material changes in interest rates may impact the duration calculation. Convertible Securities (All Funds except Research Enhanced Index and Growth Opportunities Funds). The price of a convertible security will normally fluctuate in some proportion to changes in the price of the underlying equity security, and as such is subject to risks relating to the activities of the issuer and general market and economic conditions. The income component of convertible securities causes fluctuations based upon changes in interest rates and the credit quality of the issuer. Convertible securities are often lower rated securities. A Fund may be required to redeem or convert a convertible security before the holder would otherwise choose. Other Investment Companies (Financial Services and Balanced Funds). Each Fund may invest up to 10% of its assets in other investment companies. When a Fund invests in other investment companies, you indirectly pay a proportionate share of the expenses of that other investment company (including management fees, administration fees, and custodial fees) in addition to the expenses of the Fund. Interests in Loans (Balanced Fund). The Fund may invest in participation interests or assignments in secured variable or floating rate loans, which include participation interests in lease financings. Loans are subject to the credit risk of nonpayment of principal or interest. Substantial increases in interest rates may cause an increase in loan defaults. Although the loans will generally be fully collateralized at the time of acquisition, the collateral may decline in value, be relatively illiquid, or lose all or substantially all of its value subsequent to the Fund's investment. Many loans are relatively illiquid, and may be difficult to value. Derivatives (Balanced and Research Enhanced Index Funds). Generally, derivatives can be characterized as financial instruments whose performance is derived, at least in part, from the performance of an underlying asset or assets. Some derivatives are sophisticated instruments that typically involve a small investment of cash relative to the magnitude of risks assumed. These may include swap agreements, options, forwards and futures. Derivative securities are subject to market risk, which could be significant for those that have a leveraging effect. Many of the Funds do not invest in these types of derivatives, and some do, so please check the description of the Fund's policies. Derivatives are also subject to credit risks related to the counterparty's ability to perform, and any deterioration in the counterparty's creditworthiness could adversely affect the instrument. A risk of using derivatives is that the adviser or sub-adviser might imperfectly judge the market's direction. For instance, if a derivative is used as a hedge to offset investment risk in another security, the hedge might not correlate to the market's movements and may have unexpected or undesired results, such as a loss or a reduction in gains. Portfolio Turnover. Each Fund (except MagnaCap Fund) is generally expected to engage in frequent and active trading of portfolio securities to achieve its investment objective. A high portfolio turnover rate involves greater expenses to a Fund, including brokerage commissions and other transaction costs, and is likely to generate more taxable short-term gains for shareholders, which may have an adverse effect on the performance of the Fund. Investments in Small- and Mid-Capitalization Companies (MidCap Opportunities, MidCap Growth, SmallCap Opportunities, SmallCap Growth, Tax Efficient Equity, Financial Services and Internet Funds). The Funds may invest in small and mid capitalization companies. Investments in mid-and small-capitalization companies involve greater risk than is customarily associated with larger, more established companies due to the greater business risks of small size, limited markets and financial resources, narrow product lines and the frequent lack of depth of management. The securities of smaller companies are often traded over-the-counter and may not be traded in volumes typical on a national securities exchange. Consequently, the securities of smaller companies may have limited market stability and may be subject to more abrupt or erratic market movements than securities of larger, more established growth companies or the market averages in general. Non-diversified Investment Companies (Internet Fund). Certain Funds are classified as non-diversified investment companies under the 1940 Act, which means that each Fund is not limited by the 1940 Act in the proportion of its assets that it may invest in the obligations of a single issuer. The investment of a large percentage of a Fund's assets in the securities of a small number of issuers may cause that Fund's share price to fluctuate more than that of a diversified investment company. [GRAPHIC] If you have any questions, please call 1-800-992-0180. More Information About Risks 51 MORE INFORMATION ABOUT RISKS -------------------------------------------------------------------------------- Concentration (Financial Services and Internet Funds). Certain Funds "concentrate" (for purposes of the 1940 Act) their assets in securities related to a particular sector or industry, which means that at least 25% of its assets will be invested in these assets at all times. As a result, each Fund may be subject to greater market fluctuation than a fund which has securities representing a broader range of investment alternatives. Lending Portfolio Securities (LargeCap Growth, MidCap Growth, SmallCap Growth, Balanced, and Convertible.) In order to generate additional income, certain Funds may lend portfolio securities in an amount up to 331|M/3% of total Fund assets to broker-dealers, major banks, or other recognized domestic institutional borrowers of securities. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the collateral should the borrower default or fail financially. OTHER RISKS Emerging Markets Investments. Because of less developed markets and economies and, in some countries, less mature governments and governmental institutions, the risks of investing in foreign securities can be intensified in the case of investments in issuers domiciled or doing substantial business in emerging market countries. These risks include: high concentration of market capitalization and trading volume in a small number of issuers representing a limited number of industries, as well as a high concentration of investors and financial intermediaries; political and social uncertainties; over-dependence on exports, especially with respect to primary commodities, making these economies vulnerable to changes in commodity prices; overburdened infrastructure and obsolete or unseasoned financial systems; environmental problems; less well developed legal systems; and less reliable custodial services and settlement practices. U.S. Government Securities. Some U.S. Government agency securities may be subject to varying degrees of credit risk particularly those not backed by the full faith and credit of the United States Government. All U.S. Government securities may be subject to price declines in the securities due to changing interest rates. Restricted and Illiquid Securities. Each Fund may invest in restricted and illiquid securities (except MagnaCap Fund may not invest in restricted securities). If a security is illiquid, the Fund might be unable to sell the security at a time when the Adviser might wish to sell, and the security could have the effect of decreasing the overall level of the Fund's liquidity. Further, the lack of an established secondary market may make it more difficult to value illiquid securities, which could vary from the amount the Fund could realize upon disposition. Restricted securities, i.e., securities subject to legal or contractual restrictions on resale, may be illiquid. However, some restricted securities may be treated as liquid, although they may be less liquid than registered securities traded on established secondary markets. Mortgage-Related Securities. Although mortgage loans underlying a mortgage-backed security may have maturities of up to 30 years, the actual average life of a mortgage-backed security typically will be substantially less because the mortgages will be subject to normal principal amortization, and may be prepaid prior to maturity. Like other fixed income securities, when interest rates rise, the value of a mortgage-backed security generally will decline; however, when interest rates are declining, the value of mortgage-backed securities with prepayment features may not increase as much as other fixed income securities. The rate of prepayments on underlying mortgages will affect the price and volatility of a mortgage-related security, and may have the effect of shortening or extending the effective maturity of the security beyond what was anticipated at the time of the purchase. Unanticipated rates of prepayment on underlying mortgages can be expected to increase the volatility of such securities. In addition, the value of these securities may fluctuate in response to the market's perception of the creditworthiness of the issuers of mortgage-related securities owned by a Fund. Additionally, although mortgages and mortgage-related securities are generally supported by some form of government or private guarantee and/or insurance, there is no assurance that private guarantors or insurers will be able to meet their obligations. Temporary Defensive Strategies. When the Adviser or Sub-Adviser to a Fund anticipates unusual market or other conditions, the Fund may temporarily depart from its principal investment strategies as a defensive measure. To the extent that a Fund invests defensively, it likely will not achieve capital appreciation. Repurchase Agreements. Each Fund may enter into repurchase agreements, which involve the purchase by a Fund of a security that the seller has agreed to buy back. If the seller defaults and the collateral value declines, the Fund might incur a loss. If the seller declares bankruptcy, the Fund may not be able to sell the collateral at the desired time. Borrowing. Certain Funds may borrow for certain types of temporary or emergency purposes subject to certain limits. Borrowing may exaggerate the effect of any increase or decrease in the value of portfolio securities or the net asset value of a Fund, and money borrowed will be subject to interest costs. Interest costs on borrowings may fluctuate with changing market rates of interest and may partially offset or exceed the return earned on borrowed funds. Under adverse market conditions, a Fund might have to sell portfolio securities to meet interest or principal payments at a time when fundamental investment considerations would not favor such sales. 52 More Information About Risks MORE INFORMATION ABOUT RISKS -------------------------------------------------------------------------------- Reverse Repurchase Agreements and Dollar Rolls. A reverse repurchase agreement or dollar roll involves the sale of a security, with an agreement to repurchase the same or substantially similar securities at an agreed upon price and date. Whether such a transaction produces a gain for a Fund depends upon the costs of the agreements and the income and gains of the securities purchased with the proceeds received from the sale of the security. If the income and gains on the securities purchased fail to exceed the costs, net asset value will decline faster than otherwise would be the case. Reverse repurchase agreements and dollar rolls, as leveraging techniques, may increase a Fund's yield; however, such transactions also increase a Fund's risk to capital and may result in a shareholder's loss of principal. Short Sales. Certain Funds may make short sales. A "short sale" is the sale by a Fund of a security which has been borrowed from a third party on the expectation that the market price will drop. If the price of the security rises, the Fund may have to cover its short position at a higher price than the short sale price, resulting in a loss. Pairing Off Transactions. A pairing-off transaction occurs when a Fund commits to purchase a security at a future date, and then the Fund "pairs-off" the purchase with a sale of the same security prior to or on the original settlement date. Whether a pairing-off transaction on a debt security produces a gain depends on the movement of interest rates. If interest rates increase, then the money received upon the sale of the same security will be less than the anticipated amount needed at the time the commitment to purchase the security at the future date was entered and the Fund will experience a loss. Percentage and Rating Limitations Unless otherwise stated, the percentage limitations in this prospectus apply at the time of investment. [GRAPHIC] If you have any questions, please call 1-800-992-0180. More Information About Risks 53 FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- The financial highlights tables on the following pages are intended to help you understand each Fund's financial performance for the past five years or, if shorter, the period of the Fund's operations. Certain information reflects financial results for a single share. The total returns in the tables represent the rate that an investor would have earned (or lost) on an investment in the Fund (assuming reinvestment of all dividends and distributions). A report of each Fund's independent auditors, along with the Fund's financial statements, is included in the Fund's annual report, which is available upon request. 54 Financial Highlights FINANCIAL HIGHLIGHTS PILGRIM MAGNACAP FUND -------------------------------------------------------------------------------- The information in the table below has been audited by KPMG LLP, independent auditors.
Class A ------------------------------------------------------------------------------ Eleven Months Ended Year Ended June 30, May 31, ---------------------------------------------------------- 2001(4) 2000 1999 1998 1997 1996 ------- ---- ---- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 15.84 17.69 17.07 15.92 16.69 14.03 Income from investment operations: Net investment income (loss) $ 0.05 0.07 0.07 0.04 0.10 0.09 Net realized and unrealized gain (loss) on investments $ (0.38) (0.08) 2.37 3.02 4.16 2.87 Total from investment operations $ (0.33) (0.01) 2.44 3.06 4.26 2.96 Less distributions from: Net investment income $ 0.09 0.05 0.04 0.06 0.12 0.06 Net realized gain on investments $ 1.88 1.79 1.78 1.85 4.91 0.24 Total distributions 1.97 1.84 1.82 1.91 5.03 0.30 Net asset value, end of period $ 13.54 15.84 17.69 17.07 15.92 16.69 Total Return(2): % (2.77) (0.36) 15.93 20.53 30.82 21.31 Ratios/Supplemental Data: Net assets, end of period (000's) $ 277,722 303,864 368,508 348,759 290,355 235,393 Ratios to average net assets: Expenses(3) % 1.31 1.29 1.35 1.37 1.46 1.68 Net investment income (loss)(3) % 0.33 0.41 0.41 0.29 0.64 0.54 Portfolio turnover rate % 92 26 48 53 77 15 Class B --------------------------------------------------------------------------------------- Eleven Months July 17, Ended Year Ended June 30, 1995(1) to May 31, ------------------------------------------------- June 30, 2001(4) 2000 1999 1998 1997 1996 ------- ---- ---- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 15.44 17.36 16.86 15.81 16.59 14.22 Income from investment operations: Net investment income (loss) $ (0.01) (0.05) (0.04) (0.04) -- 0.06 Net realized and unrealized gain (loss) on investments $ (0.41) (0.08) 2.32 2.97 4.13 2.61 Total from investment operations $ (0.42) (0.13) 2.28 2.93 4.13 2.67 Less distributions from: Net investment income $ -- -- -- 0.03 -- 0.06 Net realized gain on investments $ 1.88 1.79 1.78 1.85 4.91 0.24 Total distributions 1.88 1.79 1.78 1.88 4.91 0.30 Net asset value, end of period $ 13.14 15.44 17.36 16.86 15.81 16.59 Total Return(2): % (3.40) (1.11) 15.12 19.76 29.92 18.98 Ratios/Supplemental Data: Net assets, end of period (000's) $ 112,286 87,167 116,227 77,787 37,427 10,509 Ratios to average net assets: Expenses(3) % 2.01 1.99 2.05 2.07 2.16 2.38 Net investment income (loss)(3) % (0.37) (0.29) (0.29) (0.41) (0.04) 0.07 Portfolio turnover rate % 92 26 48 53 77 15 Class C ---------------------------------------- Eleven Months Year June 1, Ended Ended 1999(1) to May 31, June 30, June 30, 2001(4) 2000 1999 ------- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 15.44 17.37 16.69 Income from investment operations: Net investment income (loss) $ (0.01) (0.10) -- Net realized and unrealized gain (loss) on investments $ (0.41) (0.04) 0.68 Total from investment operations $ (0.42) (0.14) 0.68 Less distributions from: Net investment income $ -- -- -- Net realized gain on investments $ 1.88 1.79 -- Total distributions 1.88 1.79 -- Net asset value, end of period $ 13.14 15.44 17.37 Total Return(2): % (3.41) (1.17) 4.07 Ratios/Supplemental Data: Net assets, end of period (000's) $ 10,887 3,660 601 Ratios to average net assets: Expenses(3) % 2.01 1.99 1.12 Net investment income (loss)(3) % (0.37) (0.29) 0.42 Portfolio turnover rate % 92 26 48 Class M ------------------------------------------------------------------------ Eleven Months July 17, Ended Year Ended June 30, 1995(1) to May 31, ---------------------------------------- June 30, 2001(4) 2000 1999 1998 1997 1996 ------- ---- ---- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 15.64 17.51 16.95 15.87 16.63 14.22 Income from investment operations: Net investment income (loss) $ -- (0.01) (0.01) -- 0.02 0.08 Net realized and unrealized gain (loss) on investments $ (0.39) (0.06) 2.35 2.98 4.16 2.63 Total from investment operations $ (0.39) (0.07) 2.34 2.98 4.18 2.71 Less distributions from: Net investment income $ 0.01 0.01 -- 0.05 0.03 0.06 Net realized gain on investments $ 1.88 1.79 1.78 1.85 4.91 0.24 Total distributions $ 1.89 1.80 1.78 1.90 4.94 0.30 Net asset value, end of period $ 13.36 15.64 17.51 16.95 15.87 16.63 Total Return(2): % (3.21) (0.71) 15.41 20.00 30.26 19.26 Ratios/Supplemental Data: Net assets, end of period (000's) $ 17,440 13,050 16,351 14,675 6,748 1,961 Ratios to average net assets: Expenses(3) % 1.76 1.74 1.80 1.82 1.91 2.13 Net investment income (loss)(3) % (0.12) (0.04) (0.04) (0.16) 0.22 0.32 Portfolio turnover rate % 92 26 48 53 77 15
---------- (1) Commencement of offering shares. (2) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return for less than one year is not annualized. (3) Annualized for periods less than one year. (4) The Fund changed its fiscal year end to May 31. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim MagnaCap Fund 55 PILGRIM GROWTH AND INCOME FUND FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- The information in the table below has been audited by KPMG LLP, independent auditors.
Class A ---------------------------------------------------------------------------- Five Months Ended Year Ended December 31, May 31, ----------------------------------------------------------- 2001(5) 2000(4) 1999 1998 1997 1996 ------- ------- ---- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 18.10 22.38 21.91 20.27 18.56 15.71 Income from investment operations: Net investment income (loss) $ (0.03) (0.01) 0.05 -- 0.05 0.07 Net realized and unrealized gain (loss) on investments $ (0.93) (0.51) 3.33 4.30 5.46 4.08 Total from investment operations $ (0.96) (0.52) 3.38 4.30 5.51 4.15 Less distributions from: Net investment income $ -- -- 0.05 -- 0.07 0.13 Net realized gain from investments $ -- 3.76 2.86 2.66 3.73 1.17 Total distributions $ -- 3.76 2.91 2.66 3.80 1.30 Net asset value, end of period $ 17.14 18.10 22.38 21.91 20.27 18.56 Total Return(2) % (5.30) (3.13) 15.54 21.42 30.36 26.46 Ratios/Supplemental Data: Net assets, end of period (000s) $ 212,962 226,905 254,532 245,790 228,037 200,309 Ratios to average net assets: Expenses(3) % 1.48 1.09 0.95 1.16 1.17 1.13 Net investment income (loss(3)) % (0.32) (0.06) 0.21 0.06 0.21 0.43 Portfolio turnover rate % 54 85 86 63 88 101 Class B Class C ---------------------------- ----------------------------- Five Months August 22, Five Months September 26, Ended 2000(1) thru Ended 2000(1) thru May 31, December 31, May 31, December 31, 2001(5) 2000 2001(5) 2000 ------- ---- ------- ---- Per Share Operating Performance: Net asset value, beginning of period $ 18.09 24.16 18.05 23.40 Income from investment operations: Net investment loss $ (0.05) (0.02) (0.03) (0.02) Net realized and unrealized loss on investments $ (0.95) (2.73) (0.98) (2.01) Total from investment operations $ (1.00) (2.75) (1.01) (2.03) Less distributions from: Net investment income $ -- -- -- -- Net realized gain on investments $ -- 3.32 -- 3.32 Total distributions $ -- 3.32 -- 3.32 Net asset value, end of period $ 17.09 18.09 17.04 18.05 Total Return(2) % (5.53) (11.95) (5.60) (9.30) Ratios/Supplemental Data: Net assets, end of period (000s) $ 4,901 722 3,462 160 Ratios to average net assets: Expenses(3) % 2.23 1.84 2.23 1.64 Net investment loss(3) % (1.07) (0.81) (1.07) (0.81) Portfolio turnover rate % 54 85 54 85
---------- (1) Commencement of offerings of shares (2) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return information for less than one year is not annualized. (3) Annualized for periods less than one year. (4) Effective July 26, 2000, ING Pilgrim Investments, LLC. became the Investment Manager of the Fund. (5) The Fund changed its fiscal year end to May 31. 56 Pilgrim Growth and Income Fund FINANCIAL HIGHLIGHTS PILGRIM RESEARCH ENHANCED INDEX FUND -------------------------------------------------------------------------------- For the seven months ended May 31, 2001, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to May 31, 2001 the financial information was audited by other independent auditors.
Class A ------------------------------------- Seven Months Year Period Ended Ended Ended May 31, October 31, Oct. 31, 2001(5) 2000 1999(1) ------- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 11.17 11.14 10.00 Income from investment operations: Net investment income (loss) $ (0.01) -- 0.01 Net realized and unrealized gain (loss) on investments $ (1.29) 0.18 1.13 Total from investment operations $ (1.30) 0.18 1.14 Less distributions from: Net realized gain on investments $ -- 0.15 -- Total distributions $ -- 0.15 -- Net asset value, end of period $ 9.87 11.17 11.14 Total return(2) % (11.64) 1.55 11.40 Ratios and supplemental data: Net assets, end of period (000's) $ 12,748 23,571 27,091 Ratios to average net assets: Net expenses after expense reimbursement(3) % 1.45 1.37 1.29 (4) Gross expenses prior to expense reimbursement(3) % 1.45 1.37 1.56 Net investment income (loss) after expense reimbursement(3) % (0.13) 0.01 0.23 (4) Portfolio turnover rate % 26 57 26 Class B ------------------------------------- Seven Months Year Period Ended Ended Ended May 31, October 31, Oct. 31, 2001(5) 2000 1999(1) ------- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 11.04 11.09 10.00 Income from investment operations: Net investment income (loss) $ (0.05) (0.08) (0.02) Net realized and unrealized gain (loss) on investments $ (1.29) 0.18 1.11 Total from investment operations $ (1.34) 0.10 1.09 Less distributions from: Net realized gain on investments $ -- 0.15 -- Total distributions $ -- 0.15 -- Net asset value, end of period $ 9.70 11.04 11.09 Total return(2) % (12.14) 0.83 10.90 Ratios and supplemental data: Net assets, end of period (000's) $ 76,726 94,028 99,249 Ratios to average net assets: Net expenses after expense reimbursement(3) % 2.15 2.07 1.99 (4) Gross expenses prior to expense reimbursement(3) % 2.15 2.07 2.29 Net investment income (loss) after expense reimbursement(3) % (0.83) (0.70) (0.49)(4) Portfolio turnover rate % 26 57 26 Class C ------------------------------------- Seven Months Year Period Ended Ended Ended May 31, October 31, Oct. 31, 2001(5) 2000 1999(1) ------- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 11.05 11.09 10.00 Income from investment operations: Net investment income (loss) $ (0.05) (0.08) (0.02) Net realized and unrealized gain (loss) on investments $ (1.30) 0.19 1.11 Total from investment operations $ (1.35) 0.11 1.09 Less distributions from: Net realized gain on investments $ -- 0.15 -- Total distributions $ -- 0.15 -- Net asset value, end of period $ 9.70 11.05 11.09 Total return(2) % (12.22) 0.92 2.00 Ratios and supplemental data: Net assets, end of period (000's) $ 66,252 88,449 75,941 Ratios to average net assets: Net expenses after expense reimbursement(3) % 2.15 2.07 1.99 (4) Gross expenses prior to expense reimbursement(3) % 2.15 2.07 2.27 Net investment income (loss) after expense reimbursement(3) % (0.83) (0.70) (0.49)(4) Portfolio turnover rate % 26 57 26
---------- (1) The Fund commenced operations on December 30, 1998. (2) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return information for less than one year is not annualized. (3) Annualized for periods less than one year. (4) Expenses calculated net of taxes and advisor reimbursement. (5) The Fund changed its fiscal year end to May 31. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Research Enhanced Index Fund 57 PILGRIM TAX EFFICIENT EQUITY FUND FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- For the seven months ended May 31, 2001, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to May 31, 2001 the financial information was audited by other independent auditors.
Class A -------------------------------------- Seven Months Ended Year Ended October 31, May 31, ---------------------- 2001(4) 2000 1999(1) ------- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 12.37 11.99 10.00 Income from investment operations: Net investment income (loss) $ 0.02 0.05 0.04 Net realized and unrealized gain (loss) on investments $ (0.84) 0.38 1.95 Total from investment operations $ (0.82) 0.43 1.99 Less distributions from: Net investment income $ 0.03 0.05 -- Total distributions $ 0.03 0.05 -- Net asset value, end of period $ 11.52 12.37 11.99 Total Return(2) % (6.66) 3.62 19.90 Ratios and supplemental data: Net assets, end of period (000's) $ 42,640 47,647 45,714 Ratios to average net assets: Net expenses after expense reimbursement(3)(5) % 1.40 1.31 1.28 Gross expenses prior to expense reimbursement(3) % 1.78 2.22 2.40 Ratio of net investment income (loss) after expense reimbursement(3)(5) % 0.25 0.36 0.49 Portfolio turnover rate % 9 14 9 Class B -------------------------------------- Seven Months Ended Year Ended October 31, May 31, ---------------------- 2001(4) 2000 1999(1) ------- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 12.28 11.96 10.00 Income from investment operations: Net investment income (loss) $ (0.03) (0.04) (0.01) Net realized and unrealized gain (loss) on investments $ (0.83) 0.39 1.97 Total from investment operations $ (0.86) 0.35 1.96 Less distributions from: Net investment income $ 0.01 0.03 -- Total distributions $ 0.01 0.03 -- Net asset value, end of period $ 11.41 12.28 11.96 Total Return(2) % (6.97) 2.94 19.60 Ratios and supplemental data: Net assets, end of period (000's) $ 9,930 8,268 7,059 Ratios to average net assets: Net expenses after expense reimbursement(3)(5) % 2.05 1.96 1.95 Gross expenses prior to expense reimbursement(3) % 2.43 2.47 2.66 Ratio of net investment income (loss) after expense reimbursement(3)(5) % (0.40) (0.29) (0.14) Portfolio turnover rate % 9 14 9 Class C ------------------------------------- Seven Months Ended Year Ended October 31, May 31, ---------------------- 2001(4) 2000 1999(1) ------- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 12.20 11.92 10.00 Income from investment operations: Net investment income (loss) $ (0.01) (0.04) -- Net realized and unrealized gain (loss) on investments $ (0.85) 0.39 1.92 Total from investment operations $ (0.86) 0.35 1.92 Less distributions from: Net investment income $ 0.01 0.07 -- Total distributions $ 0.01 0.07 -- Net asset value, end of period $ 11.33 12.20 11.92 Total Return(2) % (7.01) 2.91 19.20 Ratios and supplemental data: Net assets, end of period (000's) $ 2,202 2,870 1,222 Ratios to average net assets: Net expenses after expense reimbursement(3)(5) % 2.05 1.95 1.97 Gross expenses prior to expense reimbursement(3) % 2.43 2.47 2.64 Ratio of net investment income (loss) after expense reimbursement(3)(5) % (0.40) (0.32) (0.14) Portfolio turnover rate % 9 14 9
---------- (1) The Fund commenced operations on December 15, 1998. (2) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return information for less than one year is not annualized. (3) Annualized for periods less than a year. (4) The Fund changed its fiscal year end to May 31. (5) The Investment Manager has agreed to limit expenses; excluding interest, taxes, brokerage and extraordinary expenses. 58 Pilgrim Tax Efficient Equity Fund FINANCIAL HIGHLIGHTS PILGRIM GROWTH OPPORTUNITIES FUND -------------------------------------------------------------------------------- For the five months ended May 31, 2001 and the year ended December 31, 2000, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to December 31, 2000, the financial information was audited by other independent auditors.
Class A ------------------------------------------------------------------------------ Five Months Ended Year Ended December 31, May 31, ----------------------------------------------------------- 2001(5) 2000 1999 1998 1997 1996 ------- ---- ---- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 25.45 33.17 26.06 21.26 17.92 15.53 Income from investment operations: Net investment income (loss) $ (0.11) (0.21) (0.15) (0.08) 0.03 0.02 Net realized and unrealized gain (loss) on investments $ (6.71) (6.02) 20.10 5.09 4.16 3.18 Total from investment operations $ (6.82) (6.23) 19.95 5.01 4.19 3.20 Less distributions from: Net realized gain on investments $ -- 1.49 12.84 0.21 0.85 0.81 Total distributions $ -- 1.49 12.84 0.21 0.85 0.81 Net asset value, end of period $ 18.63 25.45 33.17 26.06 21.26 17.92 Total Return(2) % (26.80) (19.11) 93.26 23.61 23.59 20.54 Ratios and supplemental data: Net assets, end of period (000s) $ 158,754 206,590 101,260 29,358 9,334 4,750 Ratios to average net assets: Net expenses after expense reimbursement(3) % 1.73 1.46 1.39 1.37 1.37 (4) 1.50 (4) Gross expenses prior to expense reimbursement(3) % 1.73 1.46 1.39 1.37 1.40 1.56 Net investment income (loss) after expense reimbursement(3) % (1.34) (0.86) (0.98) (0.47) 0.04 (4) 0.11 (4) Portfolio turnover rate % 217 326 286 98 32 62 Class B ------------------------------------------------------------------------ Five Months Ended Year Ended December 31, May 31, ------------------------------------------------------ 2001(5) 2000 1999 1998 1997 1996 ------- ---- ---- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 24.09 31.70 25.46 20.93 17.76 15.50 Income from investment operations: Net investment income (loss) $ (0.17) (0.35) (0.18) (0.23) (0.15) (0.06) Net realized and unrealized gain (loss) on investments $ (6.34) (5.77) 19.26 4.97 4.17 3.13 Total from investment operations $ (6.51) (6.12) 19.08 4.74 4.02 3.07 Less distributions from: Net realized gain on investments $ -- 1.49 12.84 0.21 0.85 0.81 Total distributions $ -- 1.49 12.84 0.21 0.85 0.81 Net asset value, end of period $ 17.58 24.09 31.70 25.46 20.93 17.76 Total Return(2) % (27.02) (19.66) 91.84 22.69 22.84 19.74 Ratios and supplemental data: Net assets, end of period (000s) $ 162,106 224,299 88,305 15,480 8,815 4,444 Ratios to average net assets: Net expenses after expense reimbursement(3) % 2.43 2.16 2.10 2.13 2.14 2.20 (4) Gross expenses prior to expense reimbursement(3) % 2.43 2.16 2.10 2.13 2.14 2.24 Net investment income (loss) after expense reimbursement(3) % (2.04) (1.56) (1.69) (1.26) (0.95) (0.55)(4) Portfolio turnover rate % 217 326 286 98 32 62 Class C ------------------------------------------------------------------------- Five Months Ended Year Ended December 31, May 31, ------------------------------------------------------- 2001(5) 2000 1999 1998 1997 1996 ------- ---- ---- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 24.13 31.75 25.48 20.91 17.76 15.50 Income from investment operations: Net investment income (loss) $ (0.17) (0.31) (0.10) (0.27) (0.13) (0.05) Net realized and unrealized gain (loss) on investments $ (6.34) (5.82) 19.21 5.05 4.13 3.12 Total from investment operations $ (6.51) (6.13) 19.11 4.78 4.00 3.07 Less distributions from: Net realized gain on investments $ -- 1.49 12.84 0.21 0.85 0.81 Total distributions $ -- 1.49 12.84 0.21 0.85 0.81 Net asset value, end of period $ 17.62 24.13 31.75 25.48 20.91 17.76 Total Return(2) % (26.98) (19.65) 91.90 22.90 22.73 19.74 Ratios and supplemental data: Net assets, end of period (000s) $ 93,537 130,389 21,006 1,625 1,152 365 Ratios to average net assets: Net expenses after expense reimbursement(3) % 2.43 2.16 2.10 2.13 2.17 2.20 (4) Gross expenses prior to expense reimbursement(3) % 2.43 2.16 2.10 2.13 2.17 2.35 Net investment income (loss) after expense reimbursement(3) % (2.04) (1.56) (1.69) (1.24) (1.00) (0.57)(4) Portfolio turnover rate % 217 326 286 98 32 62 Class T -------------------------------------------------------------------------- Five Months Ended Year Ended December 31, May 31, -------------------------------------------------------- 2001(5) 2000 1999 1998 1997 1996 ------- ---- ---- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 24.29 31.93 25.59 21.02 17.82 15.53 Income from investment operations: Net investment income (loss) $ (0.17) (0.50) (0.39) (0.36) (0.17) (0.06) Net realized and unrealized gain (loss) on investments $ (6.39) (5.65) 19.57 5.14 4.22 3.16 Total from investment operations $ (6.56) (6.15) 19.18 4.78 4.05 3.10 Less distributions from: Net realized gain on investments $ -- 1.49 12.84 0.21 0.85 0.81 Total distributions $ -- 1.49 12.84 0.21 0.85 0.81 Net asset value, end of period $ 17.73 24.29 31.93 25.59 21.02 17.82 Total Return(2) % (27.01) (19.60) 91.72 22.79 22.94 19.90 Ratios and supplemental data: Net assets, end of period (000s) $ 29,666 48,095 83,772 52,023 73,674 70,406 Ratios to average net assets: Net expenses after expense reimbursement(3) % 2.38 2.11 2.03 2.05 2.03 2.00 (4) Gross expenses prior to expense reimbursement(3) % 2.38 2.11 2.03 2.05 2.03 2.04 Net investment income (loss) after expense reimbursement(3) % (1.99) (1.51) (1.62) (1.19) (0.81) (3.05)(4) Portfolio turnover rate % 217 326 286 98 32 62
---------- (1) Class I commenced offering of shares on March 31, 1997. (2) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return information for less than one year is not annualized. (3) Annualized for periods less than a year. (4) Expenses calculated net of taxes and advisor reimbursement. (5) The Fund changed its fiscal year end to May 31. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Growth Opportunities Fund 59 PILGRIM LARGECAP GROWTH FUND FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- For the eleven months ended May 31, 2001, the year ended June 30, 2000, and the three months ended June 30, 1999, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to June 30, 1999 the financial information was audited by other independent auditors.
Class A ------------------------------------------------------------------- Eleven Months Year Three Months Year July 21, Ended Ended Ended Ended 1997(1) to May 31, June 30, June 30, March 31, March 31, 2001(6) 2000 1999(2) 1999 1998 ------- ---- ------- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 43.12 28.09 24.94 15.73 12.50 Income from investment operations: Net investment loss $ (0.20) (0.22) (0.02) (0.08) (0.03) Net realized and unrealized gain (loss) on investments $ (18.05) 15.63 3.17 9.77 3.29 Total from investment operations $ (18.25) 15.41 3.15 9.69 3.26 Less distributions from: Net investment income $ -- -- -- -- -- Net realized gain on investments $ 0.47 0.38 -- 0.48 0.03 Total distributions 0.47 0.38 -- 0.48 0.03 Net asset value, end of period $ 24.40 43.12 28.09 24.94 15.73 Total Return(3): % (42.67) 55.35 12.63 63.06 62.35 Ratios/Supplemental Data: Net assets, end of period (000's) $ 161,824 186,261 30,108 12,445 4,742 Ratios to average net assets: Net expenses after expense reimbursement (recoupment)(4)(5) % 1.47 1.36 1.43 1.59 1.60 Gross expenses prior to expense reimbursement (recoupment)(4) % 1.47 1.36 1.45 2.24 4.70 Net investment loss after expense reimbursement (recoupment)(4)(5) % (0.78) (0.87) (0.56) (0.65) (0.87) Portfolio turnover rate % 331 139 27 253 306 Class B ----------------------------------------------------------------- Eleven Months Year Three Months Year July 21, Ended Ended Ended Ended 1997(1) to May 31, June 30, June 30, March 31, March 31, 2001(6) 2000 1999(2) 1999 1998 ------- ---- ------- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 42.94 28.15 25.04 15.64 12.50 Income from investment operations: Net investment loss $ (0.41) (0.39) (0.05) (0.08) (0.07) Net realized and unrealized gain (loss) on investments $ (17.92) 15.56 3.16 9.71 3.24 Total from investment operations $ (18.33) 15.17 3.11 9.63 3.17 Less distributions from: Net investment income $ -- -- -- -- -- Net realized gain on investments $ 0.47 0.38 -- 0.23 0.03 Total distributions 0.47 0.38 -- 0.23 0.03 Net asset value, end of period $ 24.14 42.94 28.15 25.04 15.64 Total Return(3): % (43.04) 55.37 12.42 62.28 61.08 Ratios/Supplemental Data: Net assets, end of period (000's) $ 224,572 333,256 49,057 20,039 3,187 Ratios to average net assets: Net expenses after expense reimbursement (recoupment)(4)(5) % 2.12 2.01 2.08 2.24 2.25 Gross expenses prior to expense reimbursement (recoupment)(4) % 2.12 2.01 2.10 2.89 4.78 Net investment loss after expense reimbursement (recoupment)(4)(5) % (1.43) (1.52) (1.21) (1.28) (1.36) Portfolio turnover rate % 331 139 27 253 306 Class C -------------------------------------------------------------------- Eleven Months Year Three Months Year July 21, Ended Ended Ended Ended 1997(1) to May 31, June 30, June 30, March 31, March 31, 2001(6) 2000 1999(2) 1999 1998 ------- ---- ------- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 42.82 28.07 24.97 15.63 12.50 Income from investment operations: Net investment loss $ (0.39) (0.35) (0.06) (0.07) (0.05) Net realized and unrealized gain (loss) on investments $ (17.89) 15.48 3.16 9.65 3.24 Total from investment operations $ (18.28) 15.13 3.10 9.58 3.19 Less distributions from: Net investment income $ -- -- -- -- -- Net realized gain on investments $ 0.47 0.38 -- 0.24 0.06 Total distributions 0.47 0.38 -- 0.24 0.66 Net asset value, end of period $ 24.07 42.82 28.07 24.97 15.63 Total Return(3): % (43.04) 54.38 12.41 61.97 61.38 Ratios/Supplemental Data: Net assets, end of period (000's) $ 117,222 152,682 17,755 8,004 960 Ratios to average net assets: Net expenses after expense reimbursement (recoupment)(4)(5) % 2.12 2.01 2.08 2.25 2.25 Gross expenses prior to expense reimbursement (recoupment)(4) % 2.12 2.01 2.10 2.90 7.79 Net investment loss after expense reimbursement (recoupment)(4)(5) % (1.43) (1.52) (1.21) (1.26) (1.49) Portfolio turnover rate % 331 139 27 253 306
---------- (1) The Fund commenced operations on July 21, 1997. (2) Effective May 24, 1999, Pilgrim Investment LLC, became the Investment Manager of the Fund, concurrently Nicholas-Applegate Capital Management was appointed as sub-advisor and the Fund changed its year end to June 30. (3) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return for less than one year is not annualized. (4) Annualized for periods less than one year. (5) The Investment Manager has agreed to limit expenses, excluding, interest, taxes, brokerage and extraordinary expenses. (6) The Fund changed its fiscal year end to May 31. 60 Pilgrim LargeCap Growth Fund FINANCIAL HIGHLIGHTS PILGRIM MIDCAP OPPORTUNITIES FUND -------------------------------------------------------------------------------- For the five months ended May 31, 2001 and the year ended December 31, 2000, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to December 31, 2000, the financial information was audited by other independent auditors.
Class A ------------------------------------------------ Five Months Year Ended Ended December 31, May 31, ------------------------------ 2001(5) 2000 1999 1998(1) ------- ---- ---- ------- Per Share Operating Performance Net asset value, beginning of period $ 19.12 21.29 12.96 10.00 Income from investment operations: Net investment loss $ (0.11) (0.15) (0.09) (0.03) Net realized and unrealized gain (loss) on investments $ (4.43) 0.16 12.01 2.99 Total from investment operations $ (4.54) 0.01 11.92 2.96 Less distributions from: Net realized loss on investments $ -- (2.18) (3.59) -- Total distributions $ -- (2.18) (3.59) -- Net asset value, end of period $ 14.58 19.12 21.29 12.96 Total Return(2): % (23.74) (0.35) 103.24 29.60 Ratios and supplemental data: Net assets, end of period (000s) $ 24,265 25,742 6,291 610 Ratios to average net assets: Net expenses after expense reimbursement(3) % 2.06 1.66 1.74 1.80(4) Gross expenses prior to expense reimbursement(3) % 2.06 1.66 1.74 2.42 Net investment loss after expense reimbursement(3) % (1.52) (0.96) (1.34) (1.10)(4) Portfolio turnover rate % 182 188 201 61 Class B ------------------------------------------------ Five Months Year Ended Ended December 31, May 31, ------------------------------ 2001(5) 2000 1999 1998(1) ------- ---- ---- ------- Per Share Operating Performance Net asset value, beginning of period $ 18.79 21.12 12.97 10.00 Income from investment operations: Net investment loss $ (0.14) (0.24) (0.07) (0.03) Net realized and unrealized gain (loss) on investments $ (4.35) 0.09 11.81 3.00 Total from investment operations $ (4.49) (0.15) 11.74 2.97 Less distributions from: Net realized loss on investments $ -- (2.18) (3.59) -- Total distributions $ -- (2.18) (3.59) -- Net asset value, end of period $ 14.30 18.79 21.12 12.97 Total Return(2): % (23.90) (1.13) 101.73 29.70 Ratios and supplemental data: Net assets, end of period (000s) $ 28,448 35,551 8,252 140 Ratios to average net assets: Net expenses after expense reimbursement(3) % 2.76 2.36 2.40 2.50 (4) Gross expenses prior to expense reimbursement(3) % 2.76 2.36 2.40 3.27 Net investment loss after expense reimbursement(3) % (2.22) (1.66) (2.00) (2.05)(4) Portfolio turnover rate % 182 188 201 61 Class C ------------------------------------------------ Five Months Year Ended Ended December 31, May 31, ------------------------------ 2001(5) 2000 1999 1998(1) ------- ---- ---- ------- Per Share Operating Performance Net asset value, beginning of period $ 18.72 21.03 12.96 10.00 Income from investment operations: Net investment loss $ (0.14) (0.24) (0.07) (0.04) Net realized and unrealized gain (loss) on investments $ (4.34) 0.11 11.73 3.00 Total from investment operations $ (4.48) (0.13) 11.66 2.96 Less distributions from: Net realized loss on investments $ -- (2.18) (3.59) -- Total distributions $ -- (2.18) (3.59) -- Net asset value, end of period $ 14.24 18.72 21.03 12.96 Total Return(2): % (23.93) (1.03) 101.16 29.60 Ratios and supplemental data: Net assets, end of period (000s) $ 18,901 25,939 4,560 87 Ratios to average net assets: Net expenses after expense reimbursement(3) % 2.76 2.36 2.36 2.50 (4) Gross expenses prior to expense reimbursement(3) % 2.76 2.36 2.36 3.22 Net investment loss after expense reimbursement(3) % (2.22) (1.66) (1.98) (2.04)(4) Portfolio turnover rate % 182 188 201 61
---------- (1) Fund commenced operations on August 20, 1998. (2) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return for less than one year is not annualized. (3) Annualized for periods less than one year. (4) Expenses calculated net of taxes and adviser reimbursement. (5) The Fund changed its fiscal year end to May 31. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim MidCap Opportunities Fund 61 PILGRIM MIDCAP GROWTH FUND FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- For the eleven months ended May 31, 2001, the year ended June 30, 2000 and the three months ended June 30, 1999, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to June 30, 1999 the financial information was audited by other independent auditors.
Class A ------------------------------------------------------------------------- Eleven Three Months Year Months Ended Ended Ended Year Ended March 31, May 31, June 30, June 30, ------------------------------ 2001(5) 2000 1999(1) 1999 1998 1997 ------- ---- ------- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 28.17 21.34 19.93 18.63 16.80 18.37 Income from investment operations: Net investment loss $ (0.16) (0.22) (0.06) (0.50) (0.14) (0.17) Net realized and unrealized gain (loss) on investments $ (7.96) 14.08 1.47 3.17 6.50 0.57 Total from investment operations $ (8.12) 13.86 1.41 2.67 6.36 0.40 Less distributions from: Net investment income $ -- -- -- -- -- -- Net realized gain on investments $ 4.70 7.03 -- 1.37 4.53 1.97 Total distributions 4.70 7.03 -- 1.37 4.53 1.97 Net asset value, end of period $ 15.35 28.17 21.34 19.93 18.63 16.80 Total Return(2): % (33.32) 77.33 7.07 15.36 41.81 1.09 Ratios/Supplemental Data: Net assets, end of period (000's) $ 98,530 155,976 66,586 67,550 90,619 76,108 Ratios to average net assets: Net expenses after expense reimbursement (recoupment)(3)(4) % 1.45 1.36 1.49 1.56 1.57 1.60 Gross expenses prior to expense reimbursement (recoupment)(3) % 1.44 1.36 1.50 1.64 1.66 1.56 Net investment loss after expense reimbursement (recoupment)(3)(4) % (0.84) (1.10) (1.20) (1.04) (1.33) (1.05) Portfolio turnover rate % 262 148 55 154 200 153 Class B ------------------------------------------------------------------------- Eleven Three Months Year Months Ended Ended Ended Year Ended March 31, May 31, June 30, June 30, ------------------------------ 2001(5) 2000 1999(1) 1999 1998 1997 ------- ---- ------- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 33.04 25.18 23.54 21.55 16.33 16.25 Income from investment operations: Net investment loss $ (0.31) (0.41) (0.11) (0.42) (0.25) (0.17) Net realized and unrealized gain (loss) on investments $ (9.33) 16.55 1.75 3.42 6.74 0.25 Total from investment operations $ (9.64) 16.14 1.64 3.00 6.49 0.08 Less distributions from: Net investment income $ -- -- -- -- -- -- Net realized gain on investments $ 5.50 8.28 -- 1.01 1.27 -- Total distributions 5.50 8.28 -- 1.01 1.27 -- Net asset value, end of period $ 17.90 33.04 25.18 23.54 21.55 16.33 Total Return(2): % (33.71) 76.28 6.97 14.59 40.84 (0.49) Ratios/Supplemental Data: Net assets, end of period (000's) $ 85,111 116,334 49,335 45,876 46,806 29,002 Ratios to average net assets: Net expenses after expense reimbursement (recoupment)(3)(4) % 2.10 2.01 2.14 2.22 2.22 2.25 Gross expenses prior to expense reimbursement (recoupment)(3) % 2.09 2.01 2.14 2.29 2.21 2.66 Net investment loss after expense reimbursement (recoupment)(3)(4) % (1.49) (1.75) (1.85) (1.69) (1.99) (1.69) Portfolio turnover rate % 262 148 55 154 200 153 Class C ----------------------------------------------------------------------------- Eleven Three Months Year Months Ended Ended Ended Year Ended March 31, May 31, June 30, June 30, -------------------------------- 2001(5) 2000 1999(1) 1999 1998 1997 ------- ---- ------- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 25.94 19.78 18.49 17.15 16.48 18.06 Income from investment operations: Net investment loss $ (0.26) (0.38) (0.09) (0.61) (0.28) (0.32) Net realized and unrealized gain (loss) on investments $ (7.31) 13.04 1.38 2.97 6.26 0.62 Total from investment operations $ (7.57) 12.66 1.29 2.36 5.98 0.30 Less distributions from: Net investment income $ -- -- -- -- -- -- Net realized gain on investments $ 4.32 6.50 -- 1.02 5.31 1.88 Total distributions 4.32 6.50 -- 1.02 5.31 1.88 Net asset value, end of period $ 14.05 25.94 19.78 18.49 17.15 16.48 Total Return(2): % (33.72) 76.18 6.98 14.60 40.95 0.56 Ratios/Supplemental Data: Net assets, end of period (000's) $ 156,528 249,255 144,832 141,685 166,849 157,501 Ratios to average net assets: Net expenses after expense reimbursement (recoupment)(3)(4) % 2.10 2.01 2.14 2.23 2.27 2.14 Gross expenses prior to expense reimbursement (recoupment)(3) % 2.09 2.01 2.14 2.30 2.33 2.17 Net investment loss after expense reimbursement (recoupment)(3)(4) % (1.49) (1.75) (1.85) (1.70) (2.01) (1.59) Portfolio turnover rate % 262 148 55 154 200 153
---------- (1) Effective May 24, 1999, Pilgrim Investment LLC became the Investment Manager of the Fund, concurrently Nicholas-Applegate Capital Management was appointed as sub-advisor and the Fund changed its year end to June 30. (2) Total return is calculated assuming reinvestment of dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return for less than one year is not annualized. (3) Annualized for periods less than one year. (4) The Investment Manager has agreed to limit expenses, excluding, interest, taxes, brokerage and extraordinary expenses. (5) The Fund changed its fiscal year end to May 31. 62 Pilgrim MidCap Growth Fund FINANCIAL HIGHLIGHTS PILGRIM GROWTH + VALUE FUND -------------------------------------------------------------------------------- For the seven months ended May 31, 2001, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to May 31, 2001 the financial information was audited by other independent auditors.
Class A ----------------------------------------------------------------- Seven Months Ended Year Ended October 31, May 31, --------------------------------------------- 2001(5) 2000 1999 1998 1997(1) ------- ---- ---- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 24.91 19.76 10.44 12.15 10.00 Income from investment operations: Net investment loss $ (0.13) (0.20) (0.17) (0.11) (0.05) Net realized and unrealized gain (loss) on investments $ (8.68) 7.81 9.49 (1.42) 2.20 Total from investment operations $ (8.81) 7.61 9.32 (1.53) 2.15 Less distributions from: Net realized gain on investments $ 2.16 2.46 -- 0.18 -- Tax return of capital $ 0.06 -- -- -- -- Total distributions $ 2.22 2.46 -- 0.18 -- Net asset value, end of period $ 13.88 24.91 19.76 10.44 12.15 Total Return(2) % (38.02) 40.18 89.27 (12.63) 21.50 Ratios and supplemental data: Net assets, end of period (000's) $ 160,251 257,601 81,225 33,425 34,346 Ratios to average net assets: Net expenses after expense reimbursement(3) % 1.77 1.57 1.69 1.72 1.84 (4) Gross expenses prior to expense reimbursement(3) % 1.77 1.57 1.69 1.72 1.86 Net investment loss after expense reimbursement(3) % (1.52) (1.22) (1.30) (0.92) (0.94)(4) Portfolio turnover rate % 95 163 197 162 144 Class B ------------------------------------------------------------------- Seven Months Ended Year Ended October 31, May 31, ----------------------------------------------- 2001(5) 2000 1999 1998 1997(1) ------- ---- ---- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 24.17 19.34 10.29 12.08 10.00 Income from investment operations: Net investment loss $ (0.19) (0.36) (0.27) (0.16) (0.08) Net realized and unrealized gain (loss) on investments $ (8.40) 7.65 9.32 (1.45) 2.16 Total from investment operations $ (8.59) 7.29 9.05 (1.61) 2.08 Less distributions from: Net realized gain on investments $ 2.16 2.46 -- 0.18 -- Tax return of capital $ 0.06 -- -- -- -- Total distributions $ 2.22 2.46 -- 0.18 -- Net asset value, end of period $ 13.36 24.17 19.34 10.29 12.08 Total Return(2) % (38.31) 39.33 87.95 (13.38) 20.80 Ratios and supplemental data: Net assets, end of period (000's) $ 326,139 507,282 227,227 105,991 76,608 Ratios to average net assets: Net expenses after expense reimbursement(3) % 2.47 2.27 2.39 2.45 2.55 (4) Gross expenses prior to expense reimbursement(3) % 2.47 2.27 2.39 2.45 2.57 Net investment loss after expense reimbursement(3) % (2.22) (1.92) (2.00) (1.67) (1.68)(4) Portfolio turnover rate % 95 163 197 162 144 Class C ----------------------------------------------------------------- Seven Months Ended Year Ended October 31, May 31, --------------------------------------------- 2001(5) 2000 1999 1998 1997(1) ------- ---- ---- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 24.16 19.33 10.29 12.08 10.00 Income from investment operations: Net investment loss $ (0.19) (0.33) (0.26) (0.16) (0.08) Net realized and unrealized gain (loss) on investments $ (8.40) 7.62 9.30 (1.45) 2.16 Total from investment operations $ (8.59) 7.29 9.04 (1.61) 2.08 Less distributions from: Net realized gain on investments $ 2.16 2.46 -- 0.18 -- Tax return of capital $ 0.06 -- -- -- -- Total distributions $ 2.22 2.46 -- 0.18 -- Net asset value, end of period $ 13.35 24.16 19.33 10.29 12.08 Total Return(2) % (38.33) 39.35 87.85 (13.38) 20.80 Ratios and supplemental data: Net assets, end of period (000's) $ 183,037 280,484 84,391 37,456 26,962 Ratios to average net assets: Net expenses after expense reimbursement(3) % 2.47 2.27 2.40 2.46 2.56 (4) Gross expenses prior to expense reimbursement(3) % 2.47 2.27 2.40 2.46 2.58 Net investment loss after expense reimbursement(3) % (2.22) (1.92) (2.01) (1.69) (1.70)(4) Portfolio turnover rate % 95 163 197 162 144
---------- (1) The Fund commenced operations on November 18, 1996. (2) Total return is calculated assuming reinvestment of dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return for less than one year is not annualized. (3) Annualized for periods less than one year. (4) Expenses calculated net of advisor reimbursement. (5) The fund changed its fiscal year end to May 31. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Growth + Value Fund 63 PILGRIM SMALLCAP OPPORTUNITIES FUND FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- For the five months ended May 31, 2001 and the year ended December 31, 2000, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to December 31, 2000, the financial information was audited by other independent auditors.
Class A ----------------------------------------------------------------------------- Five Months Ended Year Ended December 31, May 31, ---------------------------------------------------------- 2001(4) 2000 1999 1998 1997 1996 ------- ---- ---- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 47.17 59.35 29.00 27.77 24.72 20.92 Income from investment operations: Net investment loss $ (0.23) (0.54) (0.32) (0.27) (0.02) (0.04) Net realized and unrealized gain (loss) on investments $ (8.16) (2.74) 38.23 2.23 3.68 3.84 Total from investment operations $ (8.39) (3.28) 37.91 1.96 3.66 3.80 Less distributions from: Net realized gain on investments $ -- 8.90 7.56 0.73 0.61 -- Total distributions $ -- 8.90 7.56 0.73 0.61 -- Net asset value, end of period $ 38.78 47.17 59.35 29.00 27.77 24.72 Total Return(1) % (17.79) (6.04) 146.94 7.59 14.92 18.16 Ratios and supplemental data: Net assets, end of period (000s) $ 159,641 177,286 123,377 45,461 78,160 65,660 Ratios to average net assets: Net expenses after expense reimbursement(2) % 1.69 1.45 1.43 1.47 1.43 1.46 (3) Gross expenses prior to expense reimbursement(2) % 1.69 1.45 1.43 1.47 1.43 1.47 Net investment loss after expense reimbursement(2) % (1.41) (1.05) (1.21) (0.70) (0.07) (0.30)(3) Portfolio turnover rate % 104 134 223 257 175 140 Class B ------------------------------------------------------------------------------- Five Months Ended Year Ended December 31, May 31, ------------------------------------------------------------ 2001(4) 2000 1999 1998 1997 1996 ------- ---- ---- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 44.64 57.06 28.26 27.27 24.46 20.84 Income from investment operations: Net investment loss $ (0.33) (0.96) (0.60) (0.48) (0.19) (0.12) Net realized and unrealized gain (loss) on investments $ (7.71) (2.56) 36.96 2.20 3.61 3.74 Total from investment operations $ (8.04) (3.52) 36.36 1.72 3.42 3.62 Less distributions from: Net realized gain on investments $ -- 8.90 7.56 0.73 0.61 -- Total distributions $ -- 8.90 7.56 0.73 0.61 -- Net asset value, end of period $ 36.60 44.64 57.06 28.26 27.27 24.46 Total Return(1) % (18.01) (6.71) 145.24 6.84 14.10 17.37 Ratios and supplemental data: Net assets, end of period (000s) $ 206,968 266,348 264,677 124,065 169,516 126,859 Ratios to average net assets: Net expenses after expense reimbursement(2) % 2.39 2.15 2.15 2.18 2.15 2.17 (3) Gross expenses prior to expense reimbursement(2) % 2.39 2.15 2.15 2.18 2.15 2.18 Net investment loss after expense reimbursement(2) % (2.11) (1.75) (1.93) (1.43) (0.78) (1.01)(3) Portfolio turnover rate % 104 134 223 257 175 140 Class C --------------------------------------------------------------------------- Five Months Ended Year Ended December 31, May 31, --------------------------------------------------------- 2001(4) 2000 1999 1998 1997 1996 ------- ---- ---- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 44.54 56.98 28.24 27.26 24.46 20.84 Income from investment operations: Net investment loss $ (0.33) (0.97) (0.53) (0.55) (0.20) (0.13) Net realized and unrealized gain (loss) on investments $ (7.68) (2.57) 36.83 2.26 3.61 3.75 Total from investment operations $ (8.01) (3.54) 36.30 1.71 3.41 3.62 Less distributions from: Net realized gain on investments $ -- 8,90 7.56 0.73 0.61 -- Total distributions $ -- 8.90 7.56 0.73 0.61 -- Net asset value, end of period $ 36.53 44.54 56.98 28.24 27.26 24.46 Total Return(1) % (17.98) (6.76) 145.12 6.81 14.06 17.37 Ratios and supplemental data: Net assets, end of period (000s) $ 78,658 104,094 72,581 29,746 51,460 37,342 Ratios to average net assets: Net expenses after expense reimbursement(2) % 2.39 2.15 2.18 2.22 2.18 2.20 (3) Gross expenses prior to expense reimbursement(2) % 2.39 2.15 2.18 2.22 2.18 2.21 Net investment loss after expense reimbursement(2) % (2.11) (1.75) (1.96) (1.45) (0.82) (1.03)(3) Portfolio turnover rate % 104 134 223 257 175 140 Class T --------------------------------------------------------------------------- Five Months Ended Year Ended December 31, May 31, -------------------------------------------------------- 2001(4) 2000 1999 1998 1997 1996 ------- ---- ---- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 45.04 57.39 28.36 27.34 24.48 20.84 Income from investment operations: Net investment loss $ (0.34) (0.90) (0.65) (0.51) (0.18) (0.21) Net realized and unrealized gain (loss) on investments $ (7.76) (2.55) 37.24 2.26 3.65 3.85 Total from investment operations $ (8.10) (3.45) 36.59 1.75 3.47 3.64 Less distributions from: Net realized gain on investments $ -- 8.90 7.56 0.73 0.61 -- Total distributions $ -- 8.90 7.56 0.73 0.61 -- Net asset value, end of period $ 36.94 45.04 57.39 28.36 27.34 24.48 Total Return(1) % (17.99) (6.52) 145.51 6.94 14.29 17.47 Ratios and supplemental data: Net assets, end of period (000s) $ 16,316 23,441 33,634 18,203 32,800 35,670 Ratios to average net assets: Net expenses after expense reimbursement(2) % 2.34 2.10 2.06 2.10 1.99 2.07 (3) Gross expenses prior to expense reimbursement(2) % 2.34 2.10 2.06 2.10 1.99 2.11 Net investment loss after expense reimbursement(2) % (2.06) (1.70) (1.85) (1.33) (0.62) (0.89)(3) Portfolio turnover rate % 104 134 223 257 175 140
---------- (1) Total return is calculated assuming reinvestment of dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return for less than one year is not annualized. (2) Annualized for periods less than one year. (3) Expenses calculated net of taxes and adviser reimbursement. (4) The Fund changed its fiscal year end to May 31. 64 Pilgrim SmallCap Opportunities Fund FINANCIAL HIGHLIGHTS PILGRIM SMALLCAP GROWTH FUND -------------------------------------------------------------------------------- For the eleven months ended May 31, 2001, the year ended June 30, 2000 and the three months ended June 30, 1999, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to June 30, 1999 the financial information was audited by other independent auditors.
Class A ---------------------------------------------------------------------------- Eleven Three Months Year Months Ended Ended Ended Year Ended March 31, May 31, June 30, June 30, ------------------------------- 2001(5) 2000 1999(1) 1999 1998 1997 ------- ---- ------- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 18.39 19.08 16.72 19.75 15.15 17.93 Income from investment operations: Net investment loss $ (0.17) (0.20) (0.06) (0.85) (0.08) (0.22) Net realized and unrealized gain (loss) on investments $ (4.17) 9.24 2.42 0.69 6.91 (0.66) Total from investment operations $ (4.34) 9.04 2.36 (0.16) 6.83 (0.88) Less distributions from: Net investment income $ -- -- -- -- -- -- Net realized gain on investments $ 2.01 9.73 -- 2.87 2.23 1.90 Total distributions $ 2.01 9.73 -- 2.87 2.23 1.90 Net asset value, end of period $ 12.04 18.39 19.08 16.72 19.75 15.15 Total Return(2): % (25.78) 60.66 14.11 0.37 46.32 (6.26) Ratios/Supplemental Data: Net assets, end of period (000's) $ 119,136 168,239 102,641 94,428 201,943 121,742 Ratios to average net assets: Net expenses after expense reimbursement (recoupment)(3)(4) % 1.73 1.62 1.70 1.85 1.89 1.72 Gross expenses prior to expense reimbursement (recoupment)(3) % 1.72 1.67 1.74 1.95 1.90 1.72 Net investment loss after expense reimbursement (recoupment)(3)(4) % (1.24) (1.31) (1.46) (1.32) (1.85) (1.26) Portfolio turnover rate % 170 127 32 90 92 113 Class B ------------------------------------------------------------------------ Eleven Three Months Year Months Ended Ended Ended Year Ended March 31, May 31, June 30, June 30, ------------------------------ 2001(5) 2000 1999(1) 1999 1998 1997 ------- ---- ------- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 23.03 24.05 21.12 22.53 15.51 16.69 Income from investment operations: Net investment loss $ (0.31) (0.34) (0.12) (0.53) (0.27) (0.21) Net realized and unrealized gain (loss) on investments $ (5.20) 11.56 3.05 0.33 7.29 (0.97) Total from investment operations $ (5.51) 11.22 2.93 (0.20) 7.02 (1.18) Less distributions from: Net investment income $ -- -- -- -- -- -- Net realized gain on investments $ 2.52 12.24 -- 1.21 -- -- Total distributions $ 2.52 12.24 -- 1.21 -- -- Net asset value, end of period $ 15.00 23.03 24.05 21.12 22.53 15.51 Total Return(2): % (26.16) 59.68 13.87 (0.29) 45.26 (7.07) Ratios/Supplemental Data: Net assets, end of period (000's) $ 75,304 97,239 49,448 45,140 55,215 28,030 Ratios to average net assets: Net expenses after expense reimbursement (recoupment)(3)(4) % 2.38 2.27 2.35 2.57 2.62 2.61 Gross expenses prior to expense reimbursement (recoupment)(3) % 2.37 2.32 2.39 2.66 2.63 2.73 Net investment loss after expense reimbursement (recoupment)(3)(4) % (1.89) (1.96) (2.11) (2.03) (2.59) (2.13) Portfolio turnover rate % 170 127 32 90 92 113 Class C ---------------------------------------------------------------------------- Eleven Three Months Year Months Ended Ended Ended Year Ended March 31, May 31, June 30, June 30, -------------------------------- 2001(5) 2000 1999(1) 1999 1998 1997 ------- ---- ------- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 18.01 18.81 16.51 18.62 14.69 17.62 Income from investment operations: Net investment loss $ (0.25) (0.30) (0.09) (0.84) (0.38) (0.31) Net realized and unrealized gain (loss) on investments $ (4.05) 9.07 2.39 0.61 6.84 (0.63) Total from investment operations $ (4.30) 8.77 2.30 (0.23) 6.46 (0.94) Less distributions from: Net investment income $ -- -- -- -- -- -- Net realized gain on investments $ 1.97 9.57 -- 1.88 2.53 1.99 Total distributions $ 1.97 9.57 -- 1.88 2.53 1.99 Net asset value, end of period $ 11.74 18.01 18.81 16.51 18.62 14.69 Total Return(2): % (26.10) 59.67 13.93 (0.24) 45.40 (6.81) Ratios/Supplemental Data: Net assets, end of period (000's) $ 159,910 229,473 153,471 144,597 225,025 182,907 Ratios to average net assets: Net expenses after expense reimbursement (recoupment)(3)(4) % 2.38 2.27 2.35 2.51 2.57 2.35 Gross expenses prior to expense reimbursement (recoupment)(3) % 2.37 2.32 2.39 2.60 2.59 2.35 Net investment loss after expense reimbursement (recoupment)(3)(4) % (1.89) (1.96) (2.11) (1.97) (2.53) (1.89) Portfolio turnover rate % 170 127 32 90 92 113
---------- (1) Effective May 24, 1999, Pilgrim Investments LLC, became the Investment Manager of the Fund, concurrently Nicholas-Applegate Capital Management was appointed as sub-advisor and the Fund changed its year end to June 30. (2) Total return is calculated assuming reinvestment of dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return for less than one year is not annualized. (3) Annualized for less periods than one year. (4) The Investment Manager has agreed to limit expenses, excluding, interest, taxes, brokerage and extraordinary expenses. (5) The Fund changed its fiscal year end to May 31. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim SmallCap Growth Fund 65 PILGRIM FINANCIAL SERVICES FUND FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- The information in the table below, with the exception of the information in the row labeled "Total Investment Return at Net Asset Value" for periods prior to January 1, 1997, has been audited by KPMG LLP, independent auditors. Prior to October 17, 1997, the Class A shares were designated as Common Stock and the Fund operated as a closed-end investment company.
Class A ------------------------------------------------------------- Eleven Six Months Year Year Months Year Ended Ended Ended Ended Ended December 31, May 31, June 30, June 30, June 30, -------------- 2001(6) 2000 1999 1998(2) 1997 1996 ------- ---- ---- ------- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 16.42 24.38 27.52 25.87 17.84 14.83 Income from investment operations: Net investment income $ 0.31 0.32 0.29 0.11 0.34 0.32 Net realized and unrealized gain (loss) on investments $ 7.11 (5.30) (2.70) 1.54 10.83 5.18 Total from investment operations $ 7.42 (4.98) (2.41) 1.65 11.17 5.50 Less distributions from: Net investment income $ 0.33 0.25 0.18 -- 0.31 0.35 Net realized gain on investments $ 0.15 2.73 0.55 -- 2.65 2.14 Tax return of capital $ -- -- -- -- 0.18 -- Total distributions $ 0.48 2.98 0.73 -- 3.14 2.49 Net asset value, end of period $ 23.36 16.42 24.38 27.52 25.87 17.84 Closing market price, end of period -- -- -- -- -- 15.75 Total Investment Return At Market Value(3) % -- -- -- -- -- 43.48 Total Investment Return At Net Asset Value(4) % 46.01 (22.44) (8.61) 6.38 64.86 41.10 Ratios/Supplemental Data: Net assets, end of year ($millions) $ 252 210 403 549 383 252 Ratio to average net assets: Expenses(5) % 1.42 1.41 1.39 1.20 1.10 1.01 Net investment income(5) % 1.48 1.46 1.09 0.94 1.39 1.94 Portfolio turnover rate % 39 10 29 2 22 21 Class B --------------------------------------------------------- Eleven Six Months Year Year Months Oct. 20, Ended Ended Ended Ended 1997(1) to May 31, June 30, June 30, June 30, Dec. 31, 2001(6) 2000 1999 1998(2) 1997 ------- ---- ---- ------- ---- Per Share Operating Performance: Net asset value, beginning of period $ 16.35 24.21 27.40 25.85 25.25 Income from investment operations: Net investment income $ 0.15 0.22 0.08 0.01 0.04 Net realized and unrealized gain (loss) on investments $ 7.12 (5.32) (2.66) 1.54 2.92 Total from investment operations $ 7.27 (5.10) (2.58) 1.55 2.96 Less distributions from: Net investment income $ 0.19 0.03 0.06 -- 0.04 Net realized gain on investments $ 0.15 2.73 0.55 -- 2.04 Tax return of capital $ -- -- -- -- 0.28 Total distributions $ 0.34 2.76 0.61 -- 2.36 Net asset value, end of period $ 23.28 16.35 24.21 27.40 25.85 Closing market price, end of period -- -- -- -- -- Total Investment Return At Market Value(3) % -- -- -- -- -- Total Investment Return At Net Asset Value(4) % 45.01 (23.00) (9.31) 6.00 11.88 Ratios/Supplemental Data: Net assets, end of year ($millions) $ 183 148 343 360 76 Ratio to average net assets: Expenses(5) % 2.17 2.16 2.14 1.95 1.89 Net investment income(5) % 0.73 0.71 0.34 0.19 0.99 Portfolio turnover rate % 39 10 29 2 22
---------- (1) Commencement of offering shares. (2) Effective June 30, 1998, the Financial Services Fund changed its year end to June 30. (3) Total return was calculated at market value without deduction of sales commissions and assuming reinvestment of all dividends and distributions during the period. (4) Total return is calculated at net asset value without deduction of sales commissions and assumes reinvestment of all dividends and distributions during the period. Total investment returns based on net asset value, which can be higher or lower than market value, may result in substantially different returns than total return based on market value. For all periods prior to January 1, 1997, the total returns presented are unaudited. (5) Annualized for periods less than one year. (6) The Fund changed its fiscal year end to May 31. 66 Pilgrim Financial Services Fund FINANCIAL HIGHLIGHTS PILGRIM INTERNET FUND -------------------------------------------------------------------------------- For the seven months ended May 31, 2001, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to May 31, 2001 the financial information was audited by other independent auditors.
Class A Class B ------------------------------------- ------------------------------------ Seven Months Year Ended Seven Months Year Ended Ended October 31, Ended October 31, May 31, ------------------ May 31, ------------------ 2001(5) 2000 1999(1) 2001(5) 2000 1999(1) ------- ---- ------- ------- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 12.03 12.67 10.00 11.91 12.63 10.00 Income from investment operations: Net investment loss $ (0.06) (0.24) (0.03) (0.07) (0.32) (0.03) Net realized and unrealized gain (loss) on investments $ (6.28) (0.17) 2.70 (6.20) (0.17) 2.66 Total from investment operations $ (6.34) 0.41 2.67 (6.27) 0.49 2.63 Less distributions from: $ Net realized gain on investments $ 1.85 0.23 -- 1.85 0.23 -- Total distributions $ 1.85 0.23 -- 1.85 0.23 -- Net asset value, end of period $ 3.84 12.03 12.67 3.79 11.91 12.63 Total Return(2) $ (60.56) (3.98) 26.70 (60.58) (4.63) 26.30 Ratios/Supplemental Data: Net assets, end of period (000's) $ 17,725 59,155 35,798 13,903 38,726 14,869 Ratios to average net assets: Net expenses after expense reimbursement(3)(4) % 1.62 1.47 1.54 2.32 2.12 2.17 Gross expenses prior to expense reimbursment(3) % 2.63 2.76 3.35 3.28 3.01 3.75 Net investment loss after expense reimbursement(3)(4) % (1.59) (1.36) (1.15) (2.24) (2.01) (1.88) Portfolio turnover rate % 69 112 22 69 112 22 Class C ------------------------------------ Seven Months Year Ended Ended October 31, May 31, ------------------ 2001(5) 2000 1999(1) ------- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 11.92 12.63 10.00 Income from investment operations: Net investment loss $ (0.07) (0.34) (0.03) Net realized and unrealized gain (loss) on investments $ (6.22) (0.14) 2.66 Total from investment operations $ (6.29) 0.48 2.63 Less distributions from: Net realized gain on investments $ 1.85 0.23 -- Total distributions $ 1.85 0.23 -- Net asset value, end of period $ 3.78 11.92 12.63 Total Return(2) $ (60.72) (4.55) 26.30 Ratios/Supplemental Data: Net assets, end of period (000's) $ 5,561 17,709 5,290 Ratios to average net assets: Net expenses after expense reimbursement(3)(4) % 2.32 2.12 2.18 Gross expenses prior to expense reimbursment(3) % 3.28 3.01 3.79 Net investment loss after expense reimbursement(3)(4) % (2.24) (2.01) (1.88) Portfolio turnover rate % 69 112 22
---------- (1) The Fund commenced operations on July 1, 1999. (2) Total return is calculated assuming reinvestment of all dividend and capital gain distributions at net asset value end excluding the deduction of the sales charges Total return for less than one year is not annualized. (3) Annualized for periods less than one year. (4) The Investment Manager has agreed to limit expenses, excluding, interest, taxes, brokerage and extraordinary expenses. (5) The Fund changed its fiscal year end to May 31. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Internet Fund 67 PILGRIM BALANCED FUND FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- For the eleven months ended May 31, 2001, the year ended June 30, 2000 and the three months ended June 30, 1999, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to June 30, 1999 the financial information was audited by other independent auditors.
Class A --------------------------------------------------------------------- Eleven Three Months Year Months Ended Ended Ended Year Ended March 31, May 31, June 30, June 30, -------------------------- 2001(6) 2000 1999(2) 1999 1998 1997 ------- ---- ------- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 15.04 19.23 19.03 19.53 15.54 16.16 Income from investment operations: Net investment income (loss) $ 0.93 0.51 0.10 0.36 0.26 0.32 Net realized and unrealized gain (loss) on investments $ (1.01) (0.60) 0.17 2.58 5.70 0.84 Total from investment operations $ (0.08) (0.09) 0.27 2.94 5.96 1.16 Less distributions from: Net investment $ 0.51 0.39 0.07 0.43 0.27 0.32 Net realized gain on investments $ 1.15 3.71 -- 3.01 1.70 1.46 Total distributions $ 1.66 4.10 0.07 3.44 1.97 1.78 Net asset value, end of period $ 13.30 15.04 19.23 19.03 19.53 15.54 Total Return(3): % (0.61) (1.01) 1.42 17.10 39.34 6.74 Ratio/Supplemental Data: Net assets, end of period (000's) $ 61,477 63,592 9,619 9,519 6,675 4,898 Ratio to average net assets: Net expenses after expense reimbursement(4)(5) % 1.32 1.40 1.49 1.59 1.61 1.60 Gross expenses prior to expense reimbursement(4) % 1.53 1.61 1.75 1.97 2.56 3.00 Net investment income after expense reimbursement(4)(5) % 3.54 3.26 2.06 2.08 3.58 1.87 Portfolio turnover rate % 76 173 63 165 260 213 Class B ----------------------------------------------------------------- Eleven Three Months Year Months Ended Ended Ended Year Ended March 31, May 31, June 30, June 30, -------------------------- 2001(6) 2000 1999(2) 1999 1998 1997 ------- ---- ------- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 16.09 20.59 20.38 20.07 14.88 14.18 Income from investment operations: Net investment income (loss) $ 0.80 0.44 0.07 0.28 0.15 0.17 Net realized and unrealized gain (loss) on investments $ (0.98) (0.64) 0.18 2.74 5.58 0.70 Total from investment operations $ (0.18) (0.20) 0.25 3.02 5.73 0.87 Less distributions from: Net investment $ 0.39 0.33 0.04 0.31 0.15 0.17 Net realized gain on investments $ 1.24 3.97 -- 2.40 0.39 -- Total distributions $ 1.63 4.30 0.04 2.71 0.54 0.17 Net asset value, end of period $ 14.28 16.09 20.59 20.38 20.07 14.88 Total Return(3): % (1.21) (1.58) 1.24 16.49 38.79 6.10 Ratio/Supplemental Data: Net assets, end of period (000's) $ 35,828 41,026 7,157 6,048 4,254 2,133 Ratio to average net assets: Net expenses after expense reimbursement(4)(5) % 1.97 2.05 2.14 2.24 2.26 2.25 Gross expenses prior to expense reimbursement(4) % 2.18 2.26 2.40 2.62 2.71 6.44 Net investment income after expense reimbursement(4)(5) % 2.89 2.61 1.41 1.43 2.99 1.25 Portfolio turnover rate % 76 173 63 165 260 213 Class C ----------------------------------------------------------------------- Eleven Three Months Year Months Ended Ended Ended Year Ended March 31, May 31, June 30, June 30, ---------------------------- 2001(6) 2000 1999(2) 1999 1998 1997 ------- ---- ------- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 14.45 18.53 18.35 19.90 15.59 16.20 Income from investment operations: Net investment income $ 0.74 0.45 0.06 0.26 0.15 0.21 Net realized and unrealized gain (loss) on investments $ (0.91) (0.62) 0.16 2.52 5.71 0.85 Total from investment operations $ (0.17) (0.17) 0.22 2.78 5.86 1.06 Less distributions from: Net investment $ 0.39 0.34 0.04 0.28 0.15 0.21 Net realized gain on investments $ 1.11 3.57 -- 4.05 1.40 1.46 Total distributions $ 1.50 3.91 0.04 4.33 1.55 1.67 Net asset value, end of period $ 12.78 14.45 18.53 18.35 19.90 15.59 Total Return(3): % (1.28) (1.53) 1.21 16.34 38.35 6.05 Ratio/Supplemental Data: Net assets, end of period (000's) $ 22,679 25,838 21,331 21,655 20,784 16,990 Ratio to average net assets: Net expenses after expense reimbursement(4)(5) % 1.97 2.05 2.14 2.23 2.26 2.25 Gross expenses prior to expense reimbursement(4) % 2.18 2.26 2.40 2.61 2.68 2.83 Net investment income after expense reimbursement(4)(5) % 2.89 2.61 1.41 1.43 2.93 1.23 Portfolio turnover rate % 76 173 63 165 260 213 Class T ---------------------- Eleven Months March 31, Ended 2000(1) to May 31, June 30, 2001(6) 2000 ------- ---- Per Share Operating Performance: Net asset value, beginning of period $ 16.10 16.83 Income from investment operations: Net investment income $ 1.00 0.09 Net realized and unrealized gain (loss) on investments $ (1.16) (0.82) Total from investment operations $ (0.16) (0.73) Less distributions from: Net investment $ 0.48 -- Net realized gain on investments $ 1.23 -- Total distributions $ 1.71 -- Net asset value, end of period $ 14.23 16.10 Total Return(3): % (1.06) (4.34) Ratio/Supplemental Data: Net assets, end of period (000's) $ 7,725 10,953 Ratio to average net assets: Net expenses after expense reimbursement(4)(5) % 1.72 1.70 Gross expenses prior to expense reimbursement(4) % 1.93 1.91 Net investment income after expense reimbursement(4)(5) % 3.14 2.96 Portfolio turnover rate % 76 173
---------- (1) Commencement of offering of shares. (2) Effective May 24, 1999, Pilgrim Investment LLC, became the Investment Manager of the Fund and the Fund changed its year end to June 30. (3) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return for less than one year is not annualized. (4) Annualized for periods less than one year. (5) The Investment Manager has agreed to limit expenses, excluding, interest, taxes, brokerage and extraordinary expenses. (6) The Fund changed its fiscal year end to May 31. 68 Pilgrim Balanced Fund FINANCIAL HIGHLIGHTS PILGRIM CONVERTIBLE FUND -------------------------------------------------------------------------------- For the eleven months ended May 31, 2001, the year ended June 30, 2000 and the three months ended June 30, 1999, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to June 30, 1999 the financial information was audited by other independent auditors.
Class A --------------------------------------------------------------------- Eleven Three Months Year Months Ended Ended Ended Year Ended March 31, May 31, June 30, June 30, ---------------------------- 2001(5) 2000 1999(1) 1999 1998 1997 ------- ---- ------- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 27.70 23.27 21.92 19.12 16.59 15.68 Income from investment operations: Net investment income $ 0.85 0.42 0.10 0.40 0.44 0.47 Net realized and unrealized gain (loss) on investments $ (5.29) 8.02 1.35 3.17 4.49 1.64 Total from investment operations $ (4.44) 8.44 1.45 3.57 4.93 2.11 Less distributions from: Net investment $ 0.51 0.32 0.10 0.41 0.44 0.48 Net realized gain on investments $ 4.86 3.69 -- 0.36 1.96 0.72 Total distributions $ 5.37 4.01 0.10 0.77 2.40 1.20 Net asset value, end of period $ 17.89 27.70 23.27 21.92 19.12 16.59 Total Return(2): % (17.78) 39.88 6.62 19.17 31.04 13.73 Ratios/Supplemental Data: Net assets, end of period (000's) $ 98,896 131,218 73,133 65,742 47,290 32,082 Ratio to average net assets: Net expenses after expense reimbursement (recoupment)(3)(4) % 1.42 1.35 1.45 1.53 1.57 1.60 Gross expenses prior to expense reimbursement (recoupment)(3) % 1.41 1.35 2.10 1.65 1.74 1.75 Net investment income after expense reimbursement (recoupment)(3)(4) % 2.20 1.78 1.82 2.08 5.64 2.83 Portfolio turnover rate % 145 129 28 138 160 167 Class B --------------------------------------------------------------------- Eleven Three Months Year Months Ended Ended Ended Year Ended March 31, May 31, June 30, June 30, ---------------------------- 2001(5) 2000 1999(1) 1999 1998 1997 ------- ---- ------- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 30.20 25.34 23.86 20.56 16.60 14.96 Income from investment operations: Net investment income $ 0.49 0.29 0.07 0.29 0.32 0.31 Net realized and unrealized gain (loss) on investments $ (5.49) 8.77 1.47 3.47 4.65 1.64 Total from investment operations $ (5.00) 9.06 1.54 3.76 4.97 1.95 Less distributions from: Net investment $ 0.34 0.19 0.06 0.27 0.32 0.31 Net realized gain on investments $ 5.30 4.01 -- 0.19 0.69 -- Total distributions $ 5.64 4.20 0.06 0.46 1.01 0.31 Net asset value, end of period $ 19.56 30.20 25.34 23.86 20.56 16.60 Total Return(2): % (18.26) 39.21 6.47 18.52 30.51 13.01 Ratios/Supplemental Data: Net assets, end of period (000's) $ 125,366 139,704 68,091 58,736 36,725 12,740 Ratio to average net assets: Net expenses after expense reimbursement (recoupment)(3)(4) % 2.07 2.00 2.10 2.18 2.22 2.25 Gross expenses prior to expense reimbursement (recoupment)(3) % 2.06 2.00 2.10 2.30 2.33 3.19 Net investment income after expense reimbursement (recoupment)(3)(4) % 1.55 1.13 1.17 1.44 5.04 2.29 Portfolio turnover rate % 145 129 28 138 160 167 Class C -------------------------------- Eleven Three Months Year Months Ended Ended Ended May 31, June 30, June 30, 2001(5) 2000 1999(1) ------- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 28.33 23.78 22.40 Income from investment operations: Net investment income $ 0.58 0.28 0.07 Net realized and unrealized gains (loss) on investments $ (5.26) 8.22 1.37 Total from investment operations $ (4.68) 8.50 1.44 Less distributions from: Net investment $ 0.35 0.19 0.06 Net realized gain on investments $ 4.97 3.76 -- Total distributions $ 5.32 3.95 0.06 Net asset value, end of period $ 18.33 28.33 23.78 Total Return(2): % (18.25) 39.24 6.45 Ratios/Supplemental Data: Net assets, end of period (000's) $ 118,363 156,592 100,276 Ratio to average net assets: Net expenses after expense reimbursement (recoupment)(3)(4) % 2.07 2.00 2.10 Gross expenses prior to expense reimbursement (recoupment)(3) % 2.06 2.00 2.10 Net investment income after expense reimbursement (recoupment)(3)(4) % 1.55 1.13 1.17 Portfolio turnover rate % 145 129 28 Class C ----------------------------- Year Ended March 31, ----------------------------- 1999 1998 1997 ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 19.55 17.05 15.89 Income from investment operations: Net investment income $ 0.28 0.34 0.37 Net realized and unrealized gains (loss) on investments $ 3.25 4.60 1.66 Total from investment operations $ 3.53 4.94 2.03 Less distributions from: Net investment $ 0.25 0.34 0.37 Net realized gain on investments $ 0.43 2.10 0.50 Total distributions $ 0.68 2.44 0.87 Net asset value, end of period $ 22.40 19.55 17.05 Total Return(2): % 18.45 30.22 12.91 Ratios/Supplemental Data: Net assets, end of period (000's) $ 95,998 81,561 62,143 Ratio to average net assets: Net expenses after expense reimbursement (recoupment)(3)(4) % 2.18 2.22 2.25 Gross expenses prior to expense reimbursement (recoupment)(3) % 2.30 2.31 2.29 Net investment income after expense reimbursement (recoupment)(3)(4) % 1.44 4.99 2.18 Portfolio turnover rate % 138 160 167
---------- (1) Effective May 24, 1999, Pilgrim Investment LLC, became the Investment Manager of the Fund, concurrently Nicholas-Applegate Capital Management was appointed as sub-advisor and the Fund changed its year end to June 30. (2) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return for less than one year is not annualized. (3) Annualized for periods less than one year. (4) The Investment Manager has agreed to limit expenses, excluding, interest, taxes, brokerage and extraordinary expenses. (5) The Fund changed its fiscal year end to May 31. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Convertible Fund 69 WHERE TO GO FOR MORE INFORMATION YOU'LL FIND MORE INFORMATION ABOUT THE PILGRIM FUNDS IN OUR: ANNUAL/SEMI-ANNUAL REPORTS Includes a discussion of recent market conditions and investment strategies that significantly affected performance, the financial statements and the auditors' reports (in annual report only). STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI contains more detailed information about the Pilgrim Funds. The SAI is legally part of this prospectus (it is incorporated by reference). A copy has been filed with the U.S. 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 7337 East Doubletree Ranch Road Scottsdale, AZ 85258-2034 1-800-992-0180 Or visit our website at WWW.PILGRIMFUNDS.COM This information may also be reviewed or obtained from the SEC. In order to review the information in person, you will need to visit the SEC's Public Reference Room in Washington, D.C. or call 202-942-8090. Otherwise, you may obtain the information for a fee by contacting the SEC at: U.S. Securities and Exchange Commission Public Reference Section 450 Fifth Street, NW Washington, D.C. 20549-0102 or at the e-mail address: publicinfo@sec.gov Or obtain the information at no cost by visiting the SEC's Internet website at http://www.sec.gov When contacting the SEC, you will want to refer to the Fund's SEC file number. The file numbers are as follows: Pilgrim Growth Opportunities Fund 811-4431 Pilgrim Mutual Funds 811-7428 Pilgrim Equity Trust 811-8817 Pilgrim LargeCap Growth Fund Pilgrim MidCap Opportunities Fund Pilgrim MidCap Growth Fund Pilgrim Mayflower Trust 811-7978 Pilgrim SmallCap Growth Fund Pilgrim Research Enhanced Index Fund Pilgrim Balanced Fund Pilgrim Growth + Value Fund Pilgrim Convertible Fund Pilgrim SmallCap Opportunities Fund 811-4434 Pilgrim Financial Services Fund, Inc. 811-4504 Pilgrim Growth and Income Fund, Inc. 811-0865 Pilgrim Funds Trust 811-8895 Pilgrim Investment Funds, Inc. 811-1939 Pilgrim Tax Efficient Equity Fund Pilgrim MagnaCap Fund Pilgrim Internet Fund
[LOGO] ING PILGRIM USEQPROS100101-100101 PROSPECTUS U.S. EQUITY FUNDS October 1, 2001 Pilgrim MagnaCap Pilgrim Growth and Income CLASS Q Pilgrim Research Enhanced Index Pilgrim Growth Opportunities Pilgrim LargeCap Growth Pilgrim MidCap Opportunities Pilgrim MidCap Growth Pilgrim Growth + Value Pilgrim SmallCap Opportunities Pilgrim SmallCap Growth EQUITY & INCOME FUNDS Pilgrim Balanced Pilgrim Convertible [GRAPHIC] THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT INVESTING IN THE CLASS Q SHARES OF THE PILGRIM FUNDS. YOU SHOULD READ IT CAREFULLY BEFORE YOU INVEST, AND KEEP IT FOR FUTURE REFERENCE. PLEASE NOTE THAT YOUR INVESTMENT: IS NOT A BANK DEPOSIT, IS NOT INSURED OR GUARANTEED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY AND IS AFFECTED BY MARKET FLUCTUATIONS. THERE IS NO GUARANTEE THAT THE FUNDS WILL ACHIEVE THEIR OBJECTIVES. AS WITH ALL MUTUAL FUNDS, THE U.S. 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. [LOGO] ING PILGRIM WHAT'S INSIDE -------------------------------------------------------------------------------- [GRAPHIC] OBJECTIVE These pages contain a description of each of our Funds included in this prospectus, including each Fund's objective, investment strategy and risks. [GRAPHIC] INVESTMENT STRATEGY You'll also find: [GRAPHIC] RISKS How the Fund has performed. A chart that shows the Fund's financial performance for the past ten years (or since inception, if shorter). [GRAPHIC] HOW THE FUND HAS PERFORMED What you pay to invest. A list of the fees and expenses you pay -- both directly and indirectly -- when you invest in a Fund. Introduction to the Pilgrim Funds 1 Funds At A Glance 2 U.S. EQUITY FUNDS Pilgrim MagnaCap 4 Pilgrim Growth and Income 6 Pilgrim Research Enhanced Index 8 Pilgrim Growth Opportunities 10 Pilgrim LargeCap Growth 12 Pilgrim MidCap Opportunities 14 Pilgrim MidCap Growth 16 Pilgrim Growth + Value 18 Pilgrim SmallCap Opportunities 20 Pilgrim SmallCap Growth 22 EQUITY & INCOME FUNDS Pilgrim Balanced 24 Pilgrim Convertible 26 What You Pay to Invest 28 Shareholder Guide 30 Management of the Funds 34 Dividends, Distributions and Taxes 37 More Information About Risks 38 Financial Highlights 41 Where To Go For More Information Back cover INTRODUCTION TO THE PILGRIM FUNDS -------------------------------------------------------------------------------- Risk is the potential that your investment will lose money or not earn as much as you hope. All mutual funds have varying degrees of risk, depending on the securities they invest in. Please read this prospectus carefully to be sure you understand the principal risks and strategies associated with each of our Funds. You should consult the Statement of Additional Information (SAI) for a complete list of the risks and strategies. [GRAPHIC] If you have any questions about the Pilgrim Funds, please call your financial consultant or us at 1-800-992-0180. This prospectus is designed to help you make informed decisions about your investments. U.S. EQUITY FUNDS ING Pilgrim's U.S. Equity Funds focus on long-term growth by investing primarily in domestic equities. They may suit you if you: * are investing for the long-term -- at least several years. * are willing to accept higher risk in exchange for long-term growth. EQUITY AND INCOME FUNDS ING Pilgrim's Equity and Income Funds seek income and growth of capital. They may suit you if you: * want both regular income and capital appreciation. * are looking for growth potential but don't feel comfortable with the level of risk associated with the Equity Funds. [GRAPHIC] If you have any questions, please call 1-800-992-0180. 1 FUNDS AT A GLANCE -------------------------------------------------------------------------------- This table is a summary of the objectives, main investments and risks of each Pilgrim Fund. It is designed to help you understand the differences between the Funds, the main risks associated with each, and how risk and investment objectives relate. This table is only a summary. You should read the complete descriptions of each Fund's investment objectives, strategies and risks, which begin on page 4.
FUND INVESTMENT OBJECTIVE -------------------------------------------------------------------------------- U.S. Equity MagnaCap Fund Growth of capital, with dividend income Funds Adviser: ING Pilgrim Investments, LLC as a secondary consideration Growth and Income Fund Long-term capital appreciation with Adviser: ING Pilgrim Investments, LLC income as a secondary objective Research Enhanced Index Fund Capital appreciation Adviser: ING Pilgrim Investments, LLC Sub-Adviser: Aeltus Investment Management, Inc. Growth Opportunities Fund Long-term growth of capital Adviser: ING Pilgrim Investments, LLC LargeCap Growth Fund Long-term capital appreciation Adviser: ING Pilgrim Investments, LLC MidCap Opportunities Fund Long-term capital appreciation Adviser: ING Pilgrim Investments, LLC MidCap Growth Fund Maximum long-term capital appreciation Adviser: ING Pilgrim Investments, LLC Growth + Value Fund Capital appreciation Adviser: ING Pilgrim Investments, LLC Sub-Adviser: Navellier Fund Management, Inc. SmallCap Opportunities Fund Capital appreciation Adviser: ING Pilgrim Investments, LLC SmallCap Growth Fund Maximum long-term capital appreciation Adviser: ING Pilgrim Investments, LLC Equity & Balanced Fund Long-term capital appreciation and Income Funds Adviser: ING Pilgrim Investments, LLC current income Convertible Fund Total return, consisting of capital Adviser: ING Pilgrim Investments, LLC appreciation and current income
2 FUNDS AT A GLANCE --------------------------------------------------------------------------------
MAIN INVESTMENTS MAIN RISKS ------------------------------------------------------------------------------------------------------- Equity securities that meet disciplined Price volatility and other risks that accompany an selection criteria designed to identify investment in equity securities. companies capable of paying rising dividends. Equity securities of large, ably Price volatility and other risks that accompany an managed, and well-financed U.S. investment in equity securities. companies. Equity securities of large U.S. Price volatility and other risks that accompany an companies that make up the S&P 500 investment in equity securities. Index. Equity securities of large, medium, and Price volatility and other risks that accompany an small U.S. companies believed to have investment in growth-oriented equity securities. growth potential. Equity securities of large U.S. Price volatility and other risks that accompany an companies believed to have growth investment in growth-oriented equity securities. potential. Equity securities of medium-sized U.S. Price volatility and other risks that accompany an companies believed to have growth investment in equity securities of growth-oriented and potential. medium-sized companies. Particularly sensitive to price swings during periods of economic uncertainty. Equity securities of medium-sized U.S. Price volatility and other risks that accompany an companies believed to have growth investment in equity securities of medium-sized companies. potential. Particularly sensitive to price swings during periods of economic uncertainty. Equity securities of small-sized U.S. Price volatility and other risks that accompany an companies. investment in equity securities of growth-oriented and small-sized companies. Particularly sensitive to price swings during periods of economic uncertainty. Equity securities of small-sized U.S. Price volatility and other risks that accompany an companies believed to have growth investment in equity securities of growth-oriented and potential. small-sized companies. Particularly sensitive to price swings during periods of economic uncertainty. Equity securities of small-sized U.S. Price volatility and other risks that accompany an companies believed to have growth investment in equity securities of growth-oriented and potential. small-sized companies. Particularly sensitive to price swings during periods of economic uncertainty. A mix of equity and debt securities. Price volatility and other risks that accompany an investment in equity securities. Credit, interest rate and other risks that accompany an investment in debt securities. Convertible securities of companies of Price volatility and other risks that accompany an various sizes, as well as equities, and investment in equity securities. Credit, interest rate, high-yield debt. liquidity and other risks that accompany an investment in debt securities,and lower quality debt securities.
3 Adviser PILGRIM MAGNACAP FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks growth of capital, with dividend income as a secondary consideration. INVESTMENT STRATEGY [GRAPHIC] The Fund is managed with the philosophy that companies that can best meet the Fund's objectives have paid increasing dividends or have had the capability to pay rising dividends from their operations. The Fund normally invests at least 65% of its assets in equity securities of companies that meet the following disciplined criteria: Consistent Dividends -- A company must have paid or had the financial capability from its operations to pay a dividend in eight out of the last ten years. Substantial Dividend Increases -- A company must have increased its dividends or had the financial capability from its operations to have increased its dividends at least 100% over the past 10 years. Reinvested Earnings -- Dividend payout must be less than 65% of current earnings. Strong Balance Sheet -- Long term debt should be no more than 25% of the company's total capitalization or a company's bonds must be rated at least A- or A-3. Attractive Price -- A company's current share price should be in the lower half of the stock's price/earnings ratio range for the past ten years, or the ratio of the share price to its anticipated future earnings must be an attractive value in relation to the average for its industry peer group or that of the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index). The equity securities in which the Fund may invest include common stocks, convertible securities, and rights or warrants. Normally the Fund's investments are primarily in larger companies that are included in the largest 500 U.S. companies. The remainder of the Fund's assets may be invested in equity securities that the adviser believes have growth potential because they represent an attractive value. In selecting securities for the Fund, preservation of capital is also an important consideration. Although the Fund normally will be invested as fully as practicable in equity securities, assets that are not invested in equity securities may be invested in high quality debt securities. The Fund may invest up to 5% of its assets, measured at the time of investment, in foreign securities. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. Market Trends -- from time to time, the stock market may not favor the value securities that meet the Fund's disciplined investment criteria. Rather, the market could favor growth-oriented stocks or small company stocks, or may not favor equities at all. Debt Securities -- the value of debt securities may fall when interest rates rise. Debt securities with longer maturities tend to be more sensitive to changes in interest rates, usually making them more volatile than debt securities with shorter maturities. Credit Risk -- the Fund could lose money if the issuer of a debt security is unable to meet its financial obligations or goes bankrupt. This is especially true during periods of ecomonic uncertainty or economic downturns. Risks of Foreign Investing -- foreign investments may be riskier than U.S. investments for many reasons, including changes in currency exchange rates, unstable political and economic conditions; a lack of adequate company information; differences in the way securities markets operate; less secure foreign banks or securities depositories than those in the U.S.; and foreign controls on investment. 4 Pilgrim MagnaCap Fund PILGRIM MAGNACAP FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class Q shares from year to year. Year by Year Total Returns (%)(1) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 1.33 ---------- (1) These figures are for the year ended December 31 of each year. Best and worst quarterly performance during this period: 3rd quarter 2000: 4.32% 1st quarter 2000: -1.48% The Fund's year-to-date total return as of June 30, 2001: -9.54% The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the S&P 500 Index. Average Annual Total Returns S&P 500 Class Q Index(2) ------- -------- One year, ended December 31, 2000 % 1.33 -9.11 Since inception (3) % 1.19 -5.24 ---------- (2) The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization companies whose securities are traded on major U.S. stock markets. (3) Class Q commenced operations on November 22, 1999. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim MagnaCap Fund 5 Adviser PILGRIM GROWTH AND INCOME FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund's principal investment objective is long-term capital appreciation. Income is a secondary objective. INVESTMENT STRATEGY [GRAPHIC] The Fund will invest at least 65% of its total assets in common stocks of U.S. companies, which may include dividend paying securities and securities convertible into shares of common stock. The Fund seeks to invest in large, ably managed and well financed companies. The investment approach is to identify high quality companies with good earnings and price momentum which sell at attractive valuations. The Fund may invest the remaining 35% of its assets in foreign securities and smaller capitalization companies. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The Fund invests primarily in equity securities of larger companies, which sometimes have more stable prices than smaller companies. The Fund also may invest in small and medium-sized companies, which may be more susceptible to price swings because they have fewer financial resources, more limited product and market diversification, and many are dependent on a few key managers. Market Trends -- from time to time, the stock market may not favor the large company value securities in which the Fund invests. Rather, the market could favor growth-oriented stocks or small company stocks, or may not favor equities at all. Inability to Sell Securities -- securities of smaller companies trade in lower volume and may be less liquid than securities of larger, more established companies. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. Risks of Foreign Investing -- foreign investments may be riskier than U.S. investments for many reasons, including changes in currency exchange rates, unstable political and economic conditions, a lack of adequate company information, differences in the way securities markets operate, less secure foreign banks or securities depositories than those in the U.S., and foreign controls on investment. 6 Pilgrim Growth and Income Fund PILGRIM GROWTH AND INCOME FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. Year by Year Total Returns (%)(1)(2) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 24.87 12.36 13.22 -3.11 22.57 26.46 30.36 21.42 15.54 -3.13 ---------- (1) These figures are for the year ended December 31 of each year. (2) Prior to July 26, 2000, Lexington Management Corporation served as the adviser to the Fund and the Fund's shares were sold on a no-load basis. Effective July 26, 2000, the Fund's outstanding shares were classified as Class A shares. Because Class Q shares were first offered in 2001, the returns in the bar chart are based upon the performance of Class A shares of the Fund. Class A shares are not offered in this prospectus. Class A shares would have substantially similar annual returns as the Class Q shares because the classes are invested in the same portfolio of securities. Annual returns would differ only to the extent Class Q and Class A shares have different expenses. Best and worst quarterly performance during this period: 4th quarter 1998: 21.91% 3rd quarter 1998: -12.33% The Fund's year-to-date total return as of June 30, 2001: -7.35% The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the S&P 500 Index. Average Annual Total Returns S&P 500 Class A(3) Index(4) ---------- -------- One year, ended December 31, 2000 % -8.70 -9.11 Five years, ended December 31, 2000 % 16.12 18.33 Ten years, ended December 31, 2000 % 14.82 17.44 ---------- (3) This table shows performance of the Class A shares of the Fund because Class Q shares of the Fund did not have a full year's performance during the year ended December 31, 2000. Reflects deduction of Class A sales charge of 5.75%. See footnote (2) to the bar chart above. (4) The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization companies whose securities are traded on major U.S. stock markets. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Growth and Income Fund 7 Adviser ING Pilgrim Investments, LLC Sub-Adviser PILGRIM RESEARCH ENHANCED INDEX FUND Aeltus Investment Management, Inc. -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks capital appreciation. INVESTMENT STRATEGY [GRAPHIC] The Fund invests at least 80% of its net assets in stocks included in the Standard & Poor's Composite Stock Price Index (S&P 500 Index). The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization companies whose securities are traded on major U.S. stock markets. In managing the Fund, the portfolio managers attempt to achieve the investment objective by overweighting those stocks in the S&P 500 Index that the portfolio managers believe will outperform the index, and underweighting (or avoiding althogether) those stocks that the portfolio managers believe will underperform the index. In determining stock weightings, the portfolio managers use internally developed quantitative computer models to evaluate various criteria such as the financial strength of each company and its potential for strong, sustained earnings growth. At any one time, the portfolio managers generally include in the Fund approximately 400 of the stocks included in the S&P 500 Index. Although the Fund will not hold all the stocks in the S&P 500 Index, the portfolio managers expect that there will be a close correlation between the performance of the Fund and that of the S&P 500 Index in both rising and falling markets, as the Fund is designed to have risk characteristics (e.g. price-to-earnings ratio, dividend yield, volatility) which approximate those of the S&P 500 Index. The Fund may also invest in certain higher-risk investments, including derivatives (generally, these investments will be limited to S&P 500 Index options and futures on the S&P 500 Index). -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The portfolio managers try to remain fully invested in companies included in the S&P 500 Index, and generally do not change this strategy even temporarily, which could make the Fund more susceptible to poor market conditions. Market Trends -- from time to time, the stock market may not favor the large company securities that are ranked as undervalued or fairly valued in which the Fund invests. Rather, the market could favor small company stocks, growth- oriented stocks, or may not favor equities at all. Risks of Using Derivatives -- derivatives are subject to the risk of changes in the market price of the security and the risk of loss due to changes in interest rates. The use of certain derivatives may also have a leveraging effect, which may increase the volatility of the Fund. The use of derivatives may reduce returns for the Fund. 8 Pilgrim Research Enhanced Index Fund PILGRIM RESEARCH ENHANCED INDEX FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. Year by Year Total Returns (%)(1)(2)(3) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 18.59 -12.79 ---------- (1) These figures are for the year ended December 31 of each year. (2) Because Class Q shares were first offered in 2000, the returns in the bar chart are based upon the performance of Class A shares of the Fund. Class A shares are not offered in this prospectus. Class A shares would have substantially similar annual returns as the Class Q shares because the classes are invested in the same portfolio of securities. Annual returns would differ only to the extent Class Q and Class A shares have different expenses. (3) Prior to August 1, 2001, the Fund was managed by a different sub-adviser. Best and worst quarterly performance during this period: 4th quarter 1999: 12.41% 4th quarter 2000: -8.54% The Fund's year-to-date total return as of June 30, 2001: -6.52% The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the S&P 500 Index. Average Annual Total Returns S&P 500 Class A(4) Index(5) ---------- -------- One year, ended December 31, 2000 % -17.23 -9.11 Since inception(6) % -0.94 4.89 ---------- (4) This table shows performance of the Class A shares of the Fund because Class Q shares of the Fund did not have a full year's performance during the year ended December 31, 2000. Reflects deduction of Class A sales charge of 5.75%. See footnote (2) to the bar chart above. (5) The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization companies whose securities are traded on major U.S. stock markets. (6) Class A commenced operations on December 30, 1998. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Research Enhanced Index Fund 9 Adviser PILGRIM GROWTH OPPORTUNITIES FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] This Fund seeks long-term growth of capital. INVESTMENT STRATEGY [GRAPHIC] The Fund invests primarily in common stock of U.S. companies that the portfolio manager feels have above average prospects for growth. Under normal market conditions, the Fund invests at least 65% of its total assets in securities purchased on the basis of the potential for capital appreciation. These securities may be from large-cap, mid-cap, or small-cap companies. The portfolio manager uses a "top-down" disciplined investment process, which includes extensive database screening, frequent fundamental research, identification and implementation of a trend-oriented approach in structuring the portfolio and a sell discipline. The portfolio managers seek to invest in companies expected to benefit most from major social, economic and technological trends that are likely to shape the future of business and commerce over the next three to five years, and attempt to provide a framework for identifying the industries and companies expected to benefit most. This "top-down" approach is combined with rigorous fundamental research (a "bottom-up" approach) to guide stock selection and portfolio structure. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. This Fund invests in companies that the portfolio manager feels have the potential for rapid growth, which may give the Fund a higher risk of price volatility than a fund that emphasizes other styles, such as a value-oriented style. The Fund may invest in small and medium-sized companies, which may be more susceptible to price swings than larger companies because they have fewer financial resources, more limited product and market diversification and many are dependent on a few key managers. Market Trends -- from time to time, the stock market may not favor the growth securities in which the Fund invests. Rather, the market could favor value-oriented stocks, or may not favor equities at all. Inability to Sell Securities -- securities of smaller companies trade in lower volume and may be less liquid than securities of larger, more established companies. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. 10 Pilgrim Growth Opportunities Fund PILGRIM GROWTH OPPORTUNITIES FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. Year by Year Total Returns (%)(1)(2) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 20.54 23.59 23.61 93.26 -19.11 ---------- (1) These figures are for the year ended December 31 of each year. (2) Because Class Q shares were first offered in 2000, the returns in the bar chart are based upon the performance of Class A shares of the Fund. Class A shares are not offered in this prospectus. Class A shares would have substantially similar annual returns as the Class Q shares because the classes are invested in the same portfolio of securities. Annual returns would differ only to the extent Class Q and Class A shares have different expenses. Best and worst quarterly performance during this period: 4th quarter 1999: 39.10% 4th quarter 2000: -24.38% The Fund's year-to-date total return as of June 30, 2001: -28.53% The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index). Average Annual Total Returns S&P 500 Class A(3) Index(4) ---------- -------- One year, ended December 31, 2000 % -23.75 -9.11 Five years, ended December 31, 2000 % 22.09 18.33 Since Inception(5) % 21.95 19.52 ---------- (3) This table shows performance of the Class A shares of the Fund, because Class Q shares of the Fund did not have a full year's performance during the year ended December 31, 2000. Reflects deduction of Class A sales charge of 5.75%. See footnote (2) to the bar chart above. (4) The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization companies whose securities are traded on major U.S. stock markets. (5) Class A commenced operations on June 5, 1995. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Growth Opportunities Fund 11 Adviser PILGRIM LARGECAP GROWTH FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks long-term capital appreciation. INVESTMENT STRATEGY [GRAPHIC] The Fund normally invests at least 65% of its net assets in equity securities of large U.S. companies that the portfolio managers believe have above-average prospects for growth. The equity securities in which the Fund may invest include common and preferred stock and warrants. The Fund considers a company to be large if its market capitalization corresponds at the time of purchase to the upper 90% of the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index). As of June 30, 2001, this meant market capitalizations in the range of $8.4 billion to $484 billion. Capitalization of companies in the S&P 500 Index will change with market conditions. The portfolio managers emphasize a growth approach by searching for companies that they believe are managing change advantageously and may be poised to exceed growth expectations. The portfolio managers focus on both a "bottom-up" analysis that evaluates the financial condition and competitiveness of individual companies and a "top-down" thematic approach and a sell discipline. The portfolio managers seek to identify themes that reflect the major social, economic and technological trends that they believe are likely to shape the future of business and commerce over the next three to five years, and seek to provide a framework for identifying the industries and companies they believe may benefit most. This "top-down" approach is combined with rigorous fundamental research (a "bottom-up" approach) to guide stock selection and portfolio structure. The Fund may also lend portfolio securities on a short-term or long-term basis, up to 30% of its total assets. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. This Fund invests in companies that the Adviser believes have the potential for rapid growth, which may give the Fund a higher risk of price volatility than a fund that emphasizes other styles, such as a value-oriented style. The Fund invests primarily in equity securities of larger companies, which sometimes have more stable prices than smaller companies. Market Trends -- from time to time, the stock market may not favor the large company, growth-oriented securities in which the Fund invests. Rather, the market could favor value stocks or small company stocks, or may not favor equities at all. Securities Lending -- there is the risk that when lending portfolio securities, the securities may not be available to the Fund on a timely basis and the Fund may, therefore, lose the opportunity to sell the securities at a desirable price. 12 Pilgrim LargeCap Growth Fund PILGRIM LARGECAP GROWTH FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class Q shares from year to year. Year by Year Total Returns (%)(1)(2) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 60.02 96.93 -19.12 ---------- (1) These figures are for the year ended December 31 of each year. (2) ING Pilgrim Investments, LLC has been the Fund's investment adviser since May 24, 1999; however, prior to October 1, 2000, the Fund was advised by a sub-adviser. Best and worst quarterly performance during this period: 4th quarter 1999: 45.16% 4th quarter 2000: -23.25% The Fund's year-to-date total return as of June 30, 2001: -27.01% The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of two broad measures of market performance -- the Russell 1000 Growth Index and the S&P 500 Index. Average Annual Total Returns Russell 1000 Growth S&P 500 Class Q Index(3) Index(4) ------- -------- -------- One year, ended December 31, 2000 % -19.12 -22.42 -9.11 Since inception(5) % 33.90 11.19 11.46 ---------- (3) The Russell 1000 Growth Index is an unmanaged index that measures the performance of securities of companies among the Russell 1000 Index with higher than average price to book ratios and forcasted growth. (4) The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large- capitalization companies whose securities are traded on major U.S. stock markets. (5) Class Q commenced operations on July 21, 1997. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim LargeCap Growth Fund 13 Adviser PILGRIM MIDCAP OPPORTUNITIES FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] This Fund seeks long-term capital appreciation. INVESTMENT STRATEGY [GRAPHIC] The Fund normally invests at least 65% of its total assets in the common stocks of mid-sized U.S. companies that the portfolio managers feel have above average prospects for growth. For this Fund, mid-sized companies are companies with market capitalizations that fall within the range of companies in the Standard & Poor's MidCap 400 Index (S&P MidCap 400 Index). As of June 30, 2001, the market capitalization of companies in the S&P MidCap 400 Index ranged from $312 million to $11.8 billion. The market capitalization range will change as the range of the companies included in the S&P MidCap 400 Index changes. The portfolio managers use a "top-down" disciplined investment process, which includes extensive database screening, frequent fundamental research, identification and implementation of a trend-oriented approach in structuring the portfolio and a sell discipline. The portfolio managers seek to invest in companies expected to benefit most from major social, economic and technological trends that are likely to shape the future of business and commerce over the next three to five years, and attempt to provide a framework for identifying the industries and companies expected to benefit most. This "top-down" approach is combined with rigorous fundamental research (a "bottom-up" approach) to guide stock selection and portfolio structure. The Fund may invest in initial public offerings. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. This Fund invests in companies that the portfolio managers feel have the potential for growth, which may give the Fund a higher risk of price volatility than a fund that emphasizes other styles, such as a value-oriented style. The Fund invests in medium-sized companies, which may be more susceptible to price swings than larger companies because they have fewer financial resources, more limited product and market diversification and may be dependent on a few key managers. Market Trends -- from time to time, the stock market may not favor the mid-cap growth securities in which the Fund invests. Rather, the market could favor value-oriented stocks or large or small company stocks, or may not favor equities at all. The Fund's investment in technology sectors of the stock market and in initial public offerings has had a significant impact on performance in 1999 and other periods. There can be no assurance that these factors will continue to have a positive effect on the Fund. Inability to Sell Securities -- securities of mid-size companies trade in lower volume and may be less liquid than securities of larger, more established companies. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. Initial Public Offerings -- a significant portion of the Fund's return may be attributable to its investment in initial public offerings. When the Fund's asset base is small, the impact of such investments on the Fund's return will be magnified. As the Fund's assets grow, it is probable that the effect of the Fund's investment in initial public offerings on the Fund's total return will decline. 14 Pilgrim MidCap Opportunities Fund PILGRIM MIDCAP OPPORTUNITIES FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. Year by Year Total Returns (%)(1)(2) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 103.24 -0.35 ---------- (1) These figures are for the year ended December 31 of each year. (2) Because Class Q shares were first offered in 2000, the returns in the bar chart are based upon the performance of Class A shares of the Fund. Class A shares are not offered in this prospectus. Class A shares would have substantially similar annual returns as the Class Q shares because the classes are invested in the same portfolio of securities. Annual returns would differ only to the extent Class Q and Class A shares have different expenses. Best and worst quarterly performance during this period: 4th quarter 1999: 44.90% 4th quarter 2000: -19.33% The Fund's year-to-date total return as of June 30, 2001: -26.94% The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the S&P MidCap 400 Index. Average Annual Total Returns S&P MidCap 400 Class A(3) Index(4) ---------- -------- One year, ended December 31, 2000 % -6.08 17.51 Since Inception(5) % 46.55 30.86 ---------- (3) This table shows performance of the Class A shares of the Fund because Class Q shares of the Fund did not have a full year's performance during the year ended December 31, 2000. Reflects deduction of Class A sales charge of 5.75%. See footnote (2) to the bar chart above. (4) The S&P MidCap 400 Index is an unmanaged index that measures the performance of the mid-size company segment of the U.S. market. (5) Class A commenced operations on August 20, 1998. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim MidCap Opportunities Fund 15 Adviser PILGRIM MIDCAP GROWTH FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks maximum long-term capital appreciation. INVESTMENT STRATEGY [GRAPHIC] Under normal conditions, the Fund invests at least 65% of its total assets in equity securities of medium-sized U.S. companies, and at least 75% of its total assets in common stocks that the portfolio managers feel have above average prospects for growth. For this Fund, mid-sized companies are companies with market capitalizations between $1.6 billion and $10.7 billion. The market capitalization range will change as the range of the companies included in the Standard and Poor's MidCap 400 Index (S&P MidCap 400 Index) changes and with market conditions. The portfolio managers emphasize a growth approach by searching for successful, growing companies that are managing change advantageously and may be poised to exceed growth expectations. The portfolio managers use both a "bottom-up" analysis that evaluates the financial condition and competitiveness of individual companies and a thematic approach in structuring the portfolio and a sell discipline. Themes attempt to articulate the major social, economic and technological trends that are likely to shape the future of business and commerce over the next three to five years, and provide a framework for identifying the industries and companies expected to benefit most. This top down approach is combined with rigorous fundamental research (a "bottom up" approach) to guide stock selection and portfolio structure. The Fund may invest in initial public offerings. 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. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. This Fund invests in companies that the portfolio manager feels have the potential for growth, which may give the Fund a higher risk of price volatility than a Fund that emphasizes other styles, such as a value-oriented style. The Fund invests in medium-sized companies, which may be more susceptible to price swings than larger companies because they have fewer financial resources, more limited product and market diversification, and may be dependent on a few key managers. Market Trends -- from time to time, the stock market may not favor the mid-cap growth securities in which the Fund invests. Rather, the market could favor value-oriented stocks or large or small company stocks, or may not favor equities at all. The Fund's investment in technology sectors of the stock market and in initial public offerings has had a significant impact on performance in 1999 and other periods. There can be no assurance that these factors will continue to have a positive effect on the Fund. Inability to Sell Securities -- securities of mid-size companies usually trade in lower volume and may be less liquid than securities of larger, more established companies. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. Initial Public Offerings -- a significant portion of the Fund's return may be attributable to its investment in initial public offerings. When the Fund's asset base is small, the impact of such investments on the Fund's return will be magnified. As the Fund's assets grow, it is probable that the effect of the Fund's investment in initial public offerings on the Fund's total return will decline. 16 Pilgrim MidCap Growth Fund PILGRIM MIDCAP GROWTH FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class Q shares from year to year. Year by Year Total Returns (%)(1)(2) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 38.24 16.06 16.20 14.32 98.50 -4.47 ---------- (1) These figures are for the year ended December 31 of each year. (2) ING Pilgrim Investments, LLC has been the Fund's investment adviser since May 24, 1999; however, prior to April 1, 2000, the Fund was managed by a sub-adviser. Best and worst quarterly performance during this period: 4th quarter 1999: 62.82% 4th quarter 2000: -21.08% The Fund's year-to-date total return as of June 30, 2001: -26.56% The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of two broad measures of market performance -- the S&P MidCap 400 Index and the Russell MidCap Growth Index. Average Annual Total Returns S&P Russell MidCap MidCap 400 Growth Class Q Index(3) Index(4) ------- -------- -------- One year, ended December 31, 2000 % -4.47 17.51 -11.75 Five years, ended December 31, 2000 % 23.93 20.41 17.77 Since inception(5) % 24.28 20.98 19.63 ---------- (3) The S&P MidCap 400 Index is an unmanaged index that measures the performance of the mid-size company segment of the U.S. market. (4) The Russell MidCap Growth Index is an unmanaged index that measures the performance of the 800 smallest companies in the Russell 1000 Index. (5) Class Q shares commenced operations on June 30, 1994. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim MidCap Growth Fund 17 Adviser ING Pilgrim Investments, LLC Sub-Adviser PILGRIM GROWTH + VALUE FUND Navellier Fund Management, Inc. -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] This Fund seeks capital appreciation. INVESTMENT STRATEGY [GRAPHIC] The Fund invests primarily in a diversified portfolio of equity securities, including common and preferred stock, warrants and convertible securities. The Fund invests in common stock of companies the portfolio manager believes are poised to rise in price. The Sub-Adviser uses a "bottom-up" quantitative screening process designed to identify and select inefficiently priced stocks that achieved superior returns compared to their risk characteristics. The Sub-Adviser first uses a proprietary computer model designed to identify stocks with above average market returns and risk levels which are reasonable for higher return rates. The Sub-Adviser then applies a quantitative analysis, which focuses on growth and value fundamental characteristics, such as earnings growth, earnings momentum, price to earnings (P/E) ratios, and internal reinvestment rates. The Sub-Adviser then allocates stocks according to how they complement other portfolio holdings. Under normal market conditions, the Fund invests at least 65% of its total assets in securities purchased on the basis of the potential for capital appreciation. These securities may be from large-cap, mid-cap, or small-cap companies. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The Fund's performance will be affected if the Sub-Adviser makes an inaccurate assessment of economic conditions and investment opportunities, and chooses growth companies that do not grow as quickly as hoped, or value companies that continue to be undervalued by the market. Although the Sub-Adviser invests in value companies to decrease volatility, these investments may also lower the Fund's performance. The Fund's investments in smaller and mid-sized companies may be more susceptible to price swings than investments in larger companies because they have fewer financial resources, more limited product and market diversification and many are dependent on a few key managers. Market Trends -- from time to time, the stock market may not favor the mix of growth and value securities in which the Fund invests. Rather, the market could favor growth stocks to the exclusion of value stocks, or favor value stocks to the exclusion of growth stocks, or may not favor equities at all. Inability to Sell Securities -- securities of smaller and mid-sized companies usually trade in lower volume and may be less liquid than securities of larger, more established companies. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. Changes in Interest Rates -- the value of the Fund's convertible securities may fall when interest rates rise. Convertible securities with longer durations tend to be more sensitive to changes in interest rates, usually making them more volatile than debt securities with shorter durations. Credit Risk -- the Fund could lose money if the issuer of a convertible security is unable to meet its financial obligations or goes bankrupt. 18 Pilgrim Growth + Value Fund PILGRIM GROWTH + VALUE FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. Year by Year Total Returns (%)(1)(2) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 18.10 17.72 88.10 -13.02 ---------- (1) These figures are for the year ended December 31 of each year. (2) Because Class Q shares were first offered in 2000, the returns in the bar chart are based upon the performance of Class A shares of the Fund. Class A shares are not offered in this prospectus. Class A shares would have substantially similar annual returns as the Class Q shares because the classes are invested in the same portfolio of securities. Annual returns would differ only to the extent Class Q and Class A shares have different expenses. Best and worst quarterly performance during this period: 4th quarter 1999: 43.50% 4th quarter 2000: -27.69% The Fund's year-to-date total return as of June 30, 2001: -23.44% The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the Russell 2000 Index. Average Annual Total Returns Russell Russell 2000 3000 Class A(3) Index(4) Index(5) ---------- -------- -------- One year, ended December 31, 2000 % -18.02 -3.02 -7.46 Since inception(6) % 19.51 9.32(7) 15.61(7) ---------- (3) This table shows performance of the Class A shares of the Fund, because Class Q shares of the Fund did not have a full year's performance during the year ended December 31, 2000. Reflects deduction of Class A sales charge of 5.75%. See footnote (2) to the bar chart above. (4) The Russell 2000 Index is an unmanaged index that measures the performance of securities of smaller U.S. companies. (5) The Russell 3000 Index is an unmanaged index that measures the performance of 3000 large U.S. companies based on total market capitalization. (6) Class A commenced operations on November 18, 1996. (7) Index return is for the period beginning December 1, 1996. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Growth + Value Fund 19 Adviser PILGRIM SMALLCAP OPPORTUNITIES FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] This Fund seeks capital appreciation. INVESTMENT STRATEGY [GRAPHIC] The Fund invests at least 65% of its total assets in the common stock of smaller, lesser-known U.S. companies that the portfolio manager believes have above average prospects for growth. For this Fund, smaller companies are those with market capitalizations that fall within the range of companies in the Russell 2000 Index, which is an index that measures the performance of small companies. The market capitalization range will change as the range of the companies included in the Russell 2000 Index changes. The market capitalization of companies held by the Fund as of June 30, 2001 ranged from $133 million to $8.9 billion. The portfolio manager uses a "top-down" disciplined investment process, which includes extensive database screening, frequent fundamental research, identification and implementation of a trend-oriented approach in structuring the portfolio and a sell discipline. The portfolio manager seeks to invest in companies expected to benefit most from major social, economic and technological trends that are likely to shape the future of business and commerce over the next three to five years, and attemps to provide a framework for identifying the industries and companies expected to benefit most. This "top-down" approach is combined with rigorous fundamental research (a "bottom-up" approach) to guide stock selection and portfolio structure. The Fund may invest in initial public offerings. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. This Fund invests in companies that the portfolio manager feels have above average prospects for growth, which may give the Fund a higher risk of price volatility than a fund that emphasizes other styles, such as a value-oriented style. The Fund invests in smaller companies, which may be more susceptible to price swings than larger companies because they have fewer financial resources, more limited product and market diversification and many are dependent on a few key managers. Market Trends -- from time to time, the stock market may not favor the small sized growth securities in which the Fund invests. Rather, the market could favor value-oriented stocks or large company stocks, or may not favor equities at all. The Fund's investment in technology sectors of the stock market and in initial public offerings has had a significant impact on performance in 1999 and other periods. There can be no assurance that these factors will continue to have a positive effect on the Fund. Inability to Sell Securities -- securities of smaller companies trade in lower volume and may be less liquid than securities of larger, more established companies. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. Initial Public Offerings -- a significant portion of the Fund's return may be attributable to its investment in initial public offerings. When the Fund's asset base is small, the impact of such investments on the Fund's return will be magnified. As the Fund's assets grow, it is probable that the effect of the Fund's investment in initial public offerings on the Fund's total return will decline. 20 Pilgrim SmallCap Opportunities Fund PILGRIM SMALLCAP OPPORTUNITIES FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. Year by Year Total Returns (%)(1)(2) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 18.16 14.92 7.59 146.94 -6.04 ---------- (1) These figures are for the year ended December 31 of each year. (2) Because Class Q shares were first offered in 2000, the returns in the bar chart are based upon the performance of Class A shares of the Fund. Class A shares are not offered in this prospectus. Class A shares would have substantially similar annual returns as the Class Q shares because the classes are invested in the same portfolio of securities. Annual returns would differ only to the extent Class Q and Class A shares have different expenses. Best and worst quarterly performance during this period: 4th quarter 1999: 68.12% 3rd quarter 1998: -24.07% The Fund's year-to-date total return as of June 30, 2001: -18.59% The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the Russell 2000 Index. Average Annual Total Returns Russell 2000 Class A(3) Index(4) ---------- -------- One year, ended December 31, 2000 % -11.44 -3.02 Five years, ended December 31, 2000 % 26.15 10.31 Since inception(5) % 25.73 12.49 (3) This table shows performance of the Class A shares of the Fund, because Class Q shares of the Fund did not have a full year's performance during the year ended December 31, 2000. Reflects deduction of Class A sales charge of 5.75%. See footnote (2) to the bar chart above. (4) The Russell 2000 Index is an unmanaged index that measures the performance of securities of small companies. (5) Class A commenced operations on June 5, 1995. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim SmallCap Opportunities Fund 21 Adviser PILGRIM SMALLCAP GROWTH FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks maximum long-term capital appreciation. INVESTMENT STRATEGY [GRAPHIC] Under normal conditions, the Fund invests at least 65% of its total assets in equity securities of small U.S. companies, and at least 75% of its total assets in common stocks that the portfolio manager feels have above average prospects for growth. Smaller companies are companies with market capitalizations that fall within the range of companies in the Russell 2000 Growth Index. As of June 30, 2001, the market capitalization of companies held by the Fund ranged from $133 million to $9.2 billion. The market capitalization range will change as the range of the companies included in the Russell 2000 Index changes. The Fund emphasizes a growth approach by searching for successful, growing companies that are managing change advantageously and may be poised to exceed growth expectations. It focuses on both a "bottom-up" analysis that evaluates the financial condition and competitiveness of individual companies and a thematic approach in structuring the portfolio and a sell discipline. Themes attempt to articulate the major social, economic and technological trends that are likely to shape the future of business and commerce over the next three to five years, and provide a framework for identifying the industries and companies expected to benefit most. This "top-down" approach is combined with rigorous fundamental research (a "bottom up" approach) to guide stock selection and portfolio structure. The Fund may invest in initial public offerings. 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. The Fund considers a company to be small if it has a market capitalization corresponding at the time of purchase to the middle 90% of the Russell 2000 Growth Index. In the adviser's opinion, the middle 90% includes companies with capitalizations between $255 million and $1.4 billion. Capitalization of companies in the Index will change with market conditions. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. This Fund invests in companies that the portfolio manager feels have above average prospects for growth, which may give the Fund a higher risk of price volatility than a Fund that emphasizes other styles, such as a value-oriented style. The Fund invests in small-cap companies, which may be more susceptible to price swings than larger companies because they have fewer financial resources, more limited product and market diversification and many are dependent on a few key managers. Market Trends -- from time to time, the stock market may not favor the small-cap growth securities in which the Fund invests. Rather, the market could favor value-oriented stocks or large company stocks, or may not favor equities at all. The Fund's investment in technology sectors of the stock market and in initial public offerings has had a significant impact on performance in 1999 and other periods. There can be no assurance that these factors will continue to have a positive effect on the Fund. Initial Public Offerings -- a significant portion of the Fund's return may be attributable to its investment in initial public offerings. When the Fund's asset base is small, the impact of such investments on the Fund's return will be magnified. As the Fund's assets grow, it is probable that the effect of the Fund's investment in initial public offerings on the Fund's total return will decline. 22 Pilgrim SmallCap Growth Fund PILGRIM SMALLCAP GROWTH FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class Q shares from year to year. Year by Year Total Returns (%)(1)(2) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 19.44 11.56 4.26 90.58 -5.40 ---------- (1) These figures are for the year ended December 31 of each year. (2) ING Pilgrim Investments, LLC has been the Fund's investment adviser since May 24, 1999; however, prior to April 1, 2000, the Fund was managed by a sub-adviser. Best and worst quarterly performance during this period: 4th quarter 1999: 50.68% 3rd quarter 1998: -23.41% The Fund's year-to-date total return as of June 30, 2001: -17.51% The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the Russell 2000 Growth Index. Average Annual Total Returns Russell 2000 Growth Class Q Index(3) ------- -------- One year, ended December 31, 2000 % -5.40 -22.43 Five years, ended December 31, 2000 % 20.16 7.14 Since inception(4) % 19.77 7.39 ---------- (3) The Russell 2000 Growth Index is an unmanaged index that measures the performance of securities of smaller U.S. companies with greater-than-average growth orientation. (4) Class Q commenced operations on August 31, 1995. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim SmallCap Growth Fund 23 Adviser PILGRIM BALANCED FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks a balance of long-term capital appreciation and current income. INVESTMENT STRATEGY [GRAPHIC] The Fund's Adviser actively manages a blended portfolio of equity and debt securities with an emphasis on overall total return. The Fund normally maintains 40% to 60% of its assets in debt securities of any maturity issued by corporations or other business entities and the U.S. Government and its agencies and instrumentalities, and government sponsored enterprises, and normally seeks a target allocation of 50%, although this may vary with market conditions. The remainder of the Fund's assets are normally invested in equity securities of large companies that the Adviser believes are leaders in their industries. The Adviser considers whether these companies have a sustainable competitive edge. The portfolio managers emphasize a value approach in equity selection and seek securities whose prices in relation to projected earnings are believed to be reasonable in comparison to the market. For this Fund, a company with a market capitalization of over $5 billion is considered to be a large company, although the Fund may also invest to a limited degree in companies that have a market capitalization between $1 billion and $5 billion. A portion of the Fund's net assets (up to 35%) may be invested in high yield debt securities (commonly known as "junk bonds") rated below investment grade (i.e., lower than the four highest rating categories) by a nationally recognized statistical rating agency, or of comparable quality if unrated. There is no minimum credit quality for the high yield debt securities in which the Fund may invest. The Fund may invest up to 10% of its assets in other investment companies that invest in secured floating rate loans, including up to 5% of its assets in Pilgrim Prime Rate Trust, a closed-end investment company. The Fund may invest up to 20% of its total assets in foreign securities. The Fund may use options on securities, securities indices, interest rates and foreign currencies as a hedging technique or in furtherance of this investment objective. The Fund may invest up to 35% of its net assets in zero coupon securities. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The Fund also may invest in smaller companies, which may be more susceptible to price swings than larger companies. Market Trends -- from time to time, the stock market may not favor the large company value securities in which the Fund invests. Rather, the market could favor growth-oriented stocks or small company stocks, or may not favor equities at all. Changes in Interest Rates -- the value of debt and equity securities can change in response to changes in interest rates. The value of the debt securities held by the Fund may fall when interest rates rise. The Fund may be sensitive to changes in interest rates because it may invest in debt securities with intermediate and long terms to maturity. Debt securities with longer maturities tend to be more sensitive to changes in interest rates, usually making them more volatile than debt securities with shorter maturities. Zero coupon securities are particularly sensitive to changes in interest rates. Credit Risk -- the Fund could lose money if the issuer of a debt security is unable to meet its financial obligations or goes bankrupt. This Fund may be subject to more credit risk than the other income mutual funds, because it may invest in high yield debt securities, which are considered predominantly speculative with respect to the issuer's continuing ability to meet interest and principal payments. This is especially true during periods of economic uncertainty or economic downturns. Inability to Sell Securities -- high yield securities and securities of smaller companies may be less liquid than other investments. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. Risks of Foreign Investing -- foreign investments may be riskier than U.S. investments for many reasons, including changes in currency exchange rates, unstable political and economic conditions, a lack of adequate company information, differences in the way securities markets operate, less secure foreign banks or securities depositories than those in the U.S., and foreign controls on investment. Risks of Using Derivatives -- derivatives are subject to the risk of changes in the market price of the security, credit risk with respect to the counterparty to the derivatives instrument, and the risk of loss due to changes in interest rates. The use of certain derivatives may also have a leveraging effect, which may increase the volatility of the Fund. The use of derivatives may reduce returns for the Fund. 24 Pilgrim Balanced Fund PILGRIM BALANCED FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class Q shares from year to year. Year by Year Total Returns (%)(1)(2) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 16.88 21.46 23.52 8.69 -3.06 ---------- (1) These figures are for the year ended December 31 of each year. (2) Prior to May 24, 1999, a different adviser managed the Fund. Best and worst quarterly performance during this period: 4th quarter 1998: 14.47% 1st quarter 1997: -5.00% The Fund's year-to-date total return as of June 30, 2001: -3.06% The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of four broad measures of market performance -- the Standard and Poor's Barra Value Index (S&P Barra Value Index), the Lehman Aggregate Bond Index, the Lipper Balanced Fund Index and a composite index consisting of 60% S&P 500 composite stock Index and 40% Lehman Brothers Government/Corporate Bond Index (Composite Index). Average Annual Total Returns
Lehman Lipper S&P Barra Aggregate Balanced Class Value Bond Fund Composite Q Index(3) Index(4) Index(5) Index(6) ----- -------- -------- -------- -------- One year, ended December 31, 2000 % -3.06 27.84 11.63 2.39 1.50 Five years, ended December 31, 2000 % 13.06 17.04 6.46 11.80 11.38 Since inception(7) % 12.10 17.80 7.07 N/A 14.58
---------- (3) The S&P Barra Value Index is a capitalization-weighted index of all stocks in the S&P 500 Index that have low price-to-book ratios. It is designed so that approximately 50% of the market capitalization of the S&P 500 Index is in the Standard and Poor's Barra Value Index. (4) The Lehman Aggregate Bond Index is an unmanaged index that measures the performance of the U.S. investment grade fixed rate bond market, including government and corporate securities, mortgage pass-through securities, and asset-backed securities. (5) The Lipper Balanced Fund Index is an unmanaged index that measures the performance of balanced funds (funds that seek current income balanced with capital appreciation). (6) The Composite Index consists of 60% of the S&P 500 Index and 40% of the Lehman Brothers Government/Corporate Bond Index. The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization companies whose securities are traded on major U.S. stock markets. The Lehman Brothers Government/Corporate Bond Index is a widely recognized, unmanaged index of publicly issued fixed rate U.S. Government, investment grade, mortgage-backed and corporate debt securities. (7) Class Q commenced operations on August 31, 1995. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Balanced Fund 25 Adviser PILGRIM CONVERTIBLE FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks maximum total return, consisting of capital appreciation and current income. INVESTMENT STRATEGY [GRAPHIC] Under normal conditions, the Fund invests at least 65% of its total assets in convertible securities. Convertible securities are generally preferred stock or other securities, including debt securities, that are convertible into common stock. The Fund emphasizes companies with market capitalizations above $500 million. The convertible debt securities in which the Fund invests may be rated below investment grade (high risk instruments), or, if not rated, may be of comparable quality. There is no minimum credit rating for securities in which the Fund may invest. Through investments in convertible securities, the Fund seeks to capture the upside potential of the underlying equities with less downside exposure. The Fund may also invest up to 35% of its total assets in common and nonconvertible preferred stocks, and in debt securities, which may include high yield debt (commonly known as "junk bonds") rated below investment grade, or of comparable quality if unrated. The Fund may also invest in securities issued by the U.S. government and its agencies and instrumentalities. Most but not all of the bonds in which the Fund invests have a remaining maturity of 10 years or less, or, in the case of convertible debt securities, have a remaining maturity or may be put back to the issuer in 10 years or less. In evaluating convertibles the Fund's Adviser evaluates each security's investment characteristics as a fixed income instrument as well as its potential for capital appreciation. In analyzing specific companies for possible investment, the Adviser ordinarily looks for several of the following characteristics: above-average per share earnings growth; high return on invested capital; a healthy balance sheet; sound financial and accounting policies and overall financial strength; strong competitive advantages; effective research and product development and marketing; development of new technologies; efficient service; pricing flexibility; strong management; and general operating characteristics that will enable the companies to compete successfully in their respective markets. The Adviser usually considers whether to sell a particular security when any of those factors materially changes. The Fund may also lend portfolio securities on a short-term or long-term basis, up to 30% of its total assets. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Convertible securities have investment characteristics of both equity and debt securities. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The Fund may invest in small and medium-sized companies, which may be more susceptible to greater price swings than larger companies because they may have fewer financial resources, more limited product and market diversification and many are dependent on a few key managers. Changes in Interest Rates -- the value of the convertible and debt securities held by the Fund may fall when interest rates rise. The Fund may be sensitive to changes in interest rates because it may invest in securities with intermediate and long terms to maturity. Securities with longer durations tend to be more sensitive to changes in interest rates, usually making them more volatile than securities with shorter durations. Due to their hybrid nature, convertible securities are typically more sensitive to changes in interest rates than the underlying common stock, but less sensitive to interest rate changes than a fixed rate corporate bond. Credit Risk -- the Fund could lose money if the issuer of a security is unable to meet its financial obligations or goes bankrupt. This is especially true during periods of economic uncertainty or economic downturns. This Fund may be subject to more credit risk than many bond funds, because the convertible securities and debt securities in which it invests may be lower-rated securities. Inability to Sell Securities -- convertible securities and lower rated debt securities may be less liquid than other investments. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. Securities Lending -- There is the risk that when lending portfolio securities, the securities may not be available to the Fund on a timely basis and the Fund may, therefore, lose the opportunity to sell the securities at a desirable price. 26 Pilgrim Convertible Fund PILGRIM CONVERTIBLE FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class Q shares from year to year. Year by Year Total Returns (%)(1)(2) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 20.74 23.04 21.40 50.44 -8.74 ---------- (1) These figures are for the year ended December 31 of each year. (2) ING Pilgrim Investments, LLC has been the Fund's investment adviser since May 24, 1999; however, prior to October 1, 2000, the Fund was advised by a sub-adviser. Best and worst quarterly performance during this period: 4th quarter 1999: 34.68% 4th quarter 2000: -16.00% The Fund's year-to-date total return as of June 30, 2001: -6.15% The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the First Boston Convertible Index. Average Annual Total Returns First Boston Convertible Class Q Index(3) ------- -------- One year, ended December 31, 2000 % -8.74 -7.83 Five years, ended December 31, 2000 % 19.88 13.21 Since inception(4) % 19.29 12.83 ---------- (3) The First Boston Convertible Index is an unmanaged index that measures the performance of a universe of convertible securities that are similar, but not identical, to those in the Fund's portfolio. (4) Class Q commenced operations on August 31, 1995. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Convertible Fund 27 WHAT YOU PAY TO INVEST -------------------------------------------------------------------------------- There are two types of fees and expenses when you invest in mutual funds: fees, including sales charges, you pay directly when you buy or sell shares, and operating expenses paid each year by the fund. The table below shows the fees and expenses for Class Q shares of the Funds. Fees You Pay Directly Class Q ------- Maximum sales charge on your investment (as a % of offering price) none Maximum deferred sales charge (as a % of purchase or sales price, whichever is less) none Operating Expenses Paid Each Year by the Funds(1) (as a % of average net assets)
Total Fund Waivers Management Service Other Operating and Net Fund Fee Fees Expenses Expenses Reimbursements(2) Expenses ---- --- ---- -------- -------- ----------------- -------- MagnaCap(3) % 0.72 0.25 0.13(4) 1.10(4) -- 1.10(4) Growth and Income(3) % 0.63 0.25 0.54(5)(6)(7) 1.42(5) -- 1.42(5) Research Enhanced Index % 0.70 0.25 0.34(7) 1.29 -- 1.29 Growth Opportunities % 0.95 0.25 0.36(7) 1.56 -- 1.56 LargeCap Growth(3) % 0.73 0.25 0.18(8) 1.16(8) -- 1.16(8) MidCap Opportunities(3) % 1.00 0.25 0.48(7)(9) 1.73(9) -- 1.73(9) MidCap Growth % 0.75 0.25 0.18 1.18 0.01(10) 1.19 Growth + Value % 1.00 0.25 0.44(7) 1.69 -- 1.69 SmallCap Opportunities(3) % 1.00 0.25 0.28(7) 1.53(11) -- 1.53(11) SmallCap Growth % 1.00 0.25 0.24 1.49 0.01(10) 1.50 Balanced % 0.75 0.25 0.46 1.46 -0.21 1.25 Convertible % 0.75 0.25 0.14 1.14 0.01(10) 1.15
---------- (1) This table shows the estimated operating expenses for Class Q shares of each Fund as a ratio of expenses to average daily net assets. These estimated expenses, unless otherwise noted, are based on each Fund's actual operating expenses for its most recent complete fiscal year, as adjusted for contractual changes, and fee waivers to which the Adviser has agreed for each fund. (2) ING Pilgrim Investments, LLC has entered into written expense limitation agreements with each Fund, except MagnaCap Fund, Research Enhanced Index Fund, Growth Opportunities Fund, MidCap Opportunities Fund, Growth + Value Fund and SmallCap Opportunities Fund under which it will limit expenses of the Fund, excluding interest, taxes, brokerage and extraordinary expenses, subject to possible reimbursement to ING Pilgrim Investments, LLC within three years. The amount of each Fund's expenses waived or reimbursed during the last fiscal year by ING Pilgrim Investments, LLC is shown under the heading "Waivers and Reimbursements." For each Fund, the expense limit will continue through at least October 31, 2002. The expense limitation agreements are contractual and shall renew automatically for one-year terms unless the Adviser provides written notice of the termination of the expense limitation agreement at least 30 days prior to the end of the then current term or upon termination of the investment management agreement. (3) Effective February 23, 2001 and March 23, 2001, certain funds merged with MagnaCap, Growth and Income, LargeCap Growth, MidCap Opportunities and SmallCap Opportunities Funds. It is expected that as a result of the mergers, operating expenses will be lower than the operating expenses prior to the mergers. (4) Excludes one-time merger fees of 0.01% incurred in connection with the mergers of other investment companies into Pilgrim MagnaCap Fund. (5) Excludes one-time merger fees of 0.06% incurred in connection with the merger of another investment company into Pilgrim Growth and Income Fund. (6) Because Class Q shares are new for Growth and Income Fund the expenses are estimated based on Class A expenses of the Fund. (7) ING Pilgrim Group, LLC receives an annual adminstration fee equal to 0.10% of average daily net assets. (8) Excludes one-time merger fees of 0.03% incurred in connection with the mergers of other investment companies into Pilgrim LargeCap Growth Fund. (9) Excludes one-time merger fees of 0.09% incurred in connection with the merger of another investment company into Pilgrim MidCap Opportunities Fund. (10) Amount recouped by ING Pilgrim Investments, LLC pursuant to the Expense Limitation Agreement between the Fund and ING Pilgrim Investments, LLC. (11) Excludes one-time merger fees of 0.03% incurred in connection with the merger of another investment company into Pilgrim SmallCap Opportunities Fund. 28 What You Pay to Invest WHAT YOU PAY TO INVEST -------------------------------------------------------------------------------- Examples The examples that follow are intended to help you compare the cost of investing in the Pilgrim Funds with the cost of investing in other mutual funds. Each example assumes that you invested $10,000, reinvested all your dividends, the Fund earned an average annual return of 5%, and annual operating expenses remained at the current level. Keep in mind that this is only an estimate -- actual expenses and performance may vary. Class Q Fund 1 year 3 years 5 years 10 years ---- ------ ------- ------- -------- MagnaCap $ 112 350 606 1,340 Growth and Income $ 145 449 776 1,702 Research Enhanced Index $ 131 409 708 1,556 Growth Opportunities $ 159 493 850 1,856 LargeCap Growth $ 118 368 638 1,409 MidCap Opportunities $ 176 545 939 2,041 MidCap Growth $ 120 375 649 1,432 Growth + Value $ 172 533 918 1,998 SmallCap Opportunities $ 156 483 834 1,824 SmallCap Growth $ 152 471 813 1,779 Balanced $ 149 462 797 1,746 Convertible $ 116 362 628 1,386 [GRAPHIC] If you have any questions, please call 1-800-992-0180. What You Pay to Invest 29 SHAREHOLDER GUIDE HOW TO PURCHASE SHARES -------------------------------------------------------------------------------- Purchase of Shares Class Q Shares are offered at net asset value without a sales charge to qualified retirement plans, financial and other institutions and "wrap accounts." The minimum initial investment is $250,000, and the minimum subsequent investment is $10,000. The Distributor may waive these minimums from time to time. Certain Funds also offer Class A, B, C, M and T shares, which have different sales charges and other expenses that may affect their performance. You can obtain more information about these other share classes by calling (800) 992-0180. The Funds and the Distributor reserve the right to reject any purchase order. Please note that cash, travelers checks, third party checks, money orders and checks drawn on non-U.S. banks (even if payment may be effected through a U.S. bank) will not be accepted. ING Pilgrim reserves the right to waive minimum investment amounts. The Funds reserve the right to liquidate sufficient shares to recover annual transfer agent fees or to close your account and redeem your shares should you fail to maintain your account value at a minimum of $250,000. If you are a participant in a qualified retirement plan, you should make purchases through your plan administrator or sponsor, who is responsible for transmitting orders. All other purchasers may purchase shares by the methods outlined in the table on the right. Distribution and Shareholder Service Fees To pay for the cost of servicing your shareholder account, each Fund has adopted a Rule 12b-1 plan for Class Q shares which requires fees to be paid out of the assets of the class. Each Fund pays a service fee at an annual rate of 0.25% of the average daily net assets of the Class Q shares of the Fund. Retirement Plans You may invest in each Fund through various retirement plans, including IRAs, Simplified Employee Plan (SEP) IRAs, Roth IRAs, 403(b) plans, 457 plans, and all qualified retirement plans. For further information about any of the plans, agreements, applications and annual fees, contact the Distributor, your financial consultant or plan sponsor. To determine which retirement plan is appropriate for you, consult your tax adviser. For further information, contact the Shareholder Servicing Agent at (800) 992-0180. Initial Additional Method Investment Investment ------ ---------- ---------- By Contacting A financial consultant Visit or consult a Your Financial with an authorized financial consultant. Consultant firm can help you establish and maintain your account. By Mail Visit or speak with a Fill out the Account financial consultant. Additions form Make your check included on the payable to the bottom of your Pilgrim Funds and account statement mail it, along with a along with your completed check payable to the Application. Please Fund and mail them indicate your to the address on the investment account statement. professional on the Remember to write New Account your account number Application. on the check. By Wire Call the ING Pilgrim Wire the funds in the Operations same manner Department at (800) described under 336-3436 to obtain "Initial Investment." an account number and indicate your investment professional on the account. Instruct your bank to wire funds to the Fund in the care of: State Street Bank and Trust Kansas City ABA #101003621 Kansas City, MO credit to: ___________ (the Fund) A/C #751-8315; for further credit to: __________________ Shareholder A/C #_________________ (A/C # you received over the telephone) Shareholder Name: _______________________ (Your Name Here) After wiring funds you must complete the Account Application and send it to: Pilgrim Funds P.O. Box 219368 Kansas City, MO 64121-9368 30 Shareholder Guide HOW TO REDEEM SHARES SHAREHOLDER GUIDE -------------------------------------------------------------------------------- If you are a participant in a qualified retirement plan, you should make redemptions through your plan administrator or sponsor, who is responsible for transmitting orders. All other shareholders may redeem shares by the methods outlined in the table on the right. Under unusual circumstances, a Fund may suspend the right of redemption as allowed by federal securities laws. Systematic Withdrawal Plan You may elect to make periodic withdrawals from your account on a regular basis. * Your account must have a current value of at least $250,000. * Minimum withdrawal amount is $1,000. * You may choose from monthly, quarterly, semi-annual or annual payments. For additional information, contact the Shareholder Servicing Agent, see the Account Application or the SAI. Payments Normally, payment for shares redeemed will be made within three days after receipt by the Transfer Agent of a written request in good order. The Fund has the right to take up to seven days to pay your redemption proceeds, and may postpone payment longer in the event of an economic emergency as determined by the U.S. Securities and Exchange Commission. When you place a request to redeem shares for which the purchase money has not yet been collected, the request will be executed at the next determined net asset value, but the Fund will not release the proceeds until your purchase payment clears. This may take up to 15 days or more. To reduce such delay, purchases should be made by bank wire or federal funds. Each Fund normally intends to pay in cash for all shares redeemed, but under abnormal conditions that make payment in cash unwise, a Fund may make payment wholly or partly in securities at their then current market value equal to the redemption price. In such case, a Fund could elect to make payment in securities for redemptions in excess of $250,000 or 1% of its net assets during any 90-day period for any one shareholder. An investor may incur brokerage costs in converting such securities to cash. Method Procedures ------ ---------- By Contacting Your You may redeem by contacting your Financial Consultant financial consultant who may charge for their services in connection with your redemption request, but neither the Fund nor the Distributor imposes any such charge. By Mail Send a written request specifying the Fund name and share class, your account number, the name(s) in which the account is registered, and the dollar value or number of shares you wish to redeem to: Pilgrim Funds P.O. Box 219368 Kansas City, MO 64121-9368 If certificated shares have been issued, the certificate must accompany the written request. Corporate investors and other associations must have an appropriate certification on file authorizing redemptions. A suggested form of such certification is provided on the Account Application. A signature guarantee may be required. By Telephone -- You may redeem shares by telephone on Expedited Redemption all accounts other than retirement accounts, unless you check the box on the Account Application which signifies that you do not wish to use telephone redemptions. To redeem by telephone, call the Shareholder Servicing Agent at (800) 992-0180. Receiving Proceeds By Check: You may have redemption proceeds (up to a maximum of $100,000) mailed to an address which has been on record with Pilgrim Funds for at least 30 days. Receiving Proceeds By Wire: You may have redemption proceeds (subject to a minimum of $5,000) wired to your pre-designated bank account. You will not be able to receive redemption proceeds by wire unless you check the box on the Account Application which signifies that you wish to receive redemption proceeds by wire and attach a voided check. Under normal circumstances, proceeds will be transmitted to your bank on the business day following receipt of your instructions, provided redemptions may be made. In the event that share certificates have been issued, you may not request a wire redemption by telephone. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Shareholder Guide 31 SHAREHOLDER GUIDE TRANSACTION POLICIES -------------------------------------------------------------------------------- Net Asset Value The net asset value (NAV) per share for Class Q shares of each Fund is determined each business day as of the close of regular trading on the New York Stock Exchange (usually at 4:00 p.m. Eastern Time). The NAV per share of Class Q shares of each Fund is calculated by taking the value of the Fund's assets attributable to Class Q shares, subtracting the Fund's liabilities attributable to Class Q shares, and dividing by the number of Class Q shares that are outstanding. Because foreign securities may trade on days when the Funds do not price shares, the NAV of a Fund that invests in foreign securities may change on days when shareholders will not be able to purchase or redeem the Fund's shares. In general, assets are valued based on actual or estimated market value, with special provisions for assets not having readily available market quotations, short-term debt securities, and for situations where market quotations are deemed unreliable. Short-term debt securities having a maturity of 60 days or less are valued at amortized cost, unless the amortized cost does not approximate market value. Securities prices may be obtained from automated pricing services. When market quotations are not readily available or are deemed unreliable, securities are valued at their fair value as determined in good faith under the supervision of the Board of Directors or Trustees, although the actual calculations will be made by persons acting under the supervision of the Board. Valuing securities at fair value involves greater reliance on judgment than securities that have readily available market quotations. Price of Shares When you buy shares, you pay the NAV. When you sell shares, you receive the NAV. Exchange orders are effected at NAV. Execution of Requests Purchase and sale requests are executed at the next NAV determined after the order is received in proper form by the Transfer Agent or Distributor. A purchase order will be deemed to be in proper form when all of the required steps set forth above under "How to Purchase Shares" have been completed. If you purchase by wire, however, the order will be deemed to be in proper form after the telephone notification and the federal funds wire have been received. If you purchase by wire, you must submit an application form in a timely fashion. If an order or payment by wire is received after the close of regular trading on the New York Stock Exchange (normally 4:00 p.m. Eastern Time), the shares will not be credited until the next business day. You will receive a confirmation of each new transaction in your account, which also will show you the number of Fund shares you own including the number of shares being held in safekeeping by the Transfer Agent for your account. You may rely on these confirmations in lieu of certificates as evidence of your ownership. Certificates representing shares of the Funds will not be issued unless you request them in writing. Telephone Orders The Pilgrim Funds and their transfer agent will not be responsible for the authenticity of phone instructions or losses, if any, resulting from unauthorized shareholder transactions if they reasonably believe that such instructions were genuine. The Funds and their transfer agent have established reasonable procedures to confirm that instructions communicated by telephone are genuine. These procedures include recording telephone instructions for exchanges and expedited redemptions, requiring the caller to give certain specific identifying information, and providing written confirmation to shareholders of record not later than five days following any such telephone transactions. If the Funds and their transfer agent do not employ these procedures, they may be liable for any losses due to unauthorized or fraudulent telephone instructions. Exchanges You may exchange Class Q shares for Class Q shares of any other Pilgrim Fund that offers Class Q shares. The total value of shares being exchanged must at least equal the minimum investment requirement for Class Q shares of the Fund into which they are being exchanged. Exchanges of shares are sales and may result in a gain or loss for federal and state income tax purposes. There is no specific limit on exchange frequency; however, the Funds are intended for long-term investment and not as a trading vehicle. The Adviser may prohibit excessive exchanges (more than four per year). The Adviser also may, on 60 days' prior notice, restrict the frequency of, otherwise modify, or impose charges of up to $5.00 upon exchanges. You should review the prospectus of the Pilgrim Fund you intend to exchange into before exchanging your shares. If you exchange into Pilgrim Senior Income Fund, your ability to sell or liquidate your investment will be limited. Pilgrim Senior Income Fund is a closed-end interval fund and does not redeem its shares on a daily basis, and it is not expected that a secondary market for the fund's share will develop, so you will not be able to sell them through a broker or other investment professional. To provide a measure of liquidity, the fund will normally make quarterly repurchase offers for 5% of its outstanding common shares. If more than 5% of the fund's common shares are tendered, you may not be able to completely liquidate your holdings in any one quarter. You also would not have liquidity between these quarterly repurchase dates. Investors exercising the exchange privilege with Pilgrim Senior Income Fund should carefully review the prospectus of that fund. Investors may obtain a copy of the Pilgrim Senior Income Fund prospectus or any other Pilgrim Fund prospectus by calling (800) 992-0180. You will automatically have the ability to request an exchange by calling the Shareholder Service Agent unless you mark the box on the Account Application that indicates that you do not wish to have the telephone exchange privilege. 32 Shareholder Guide TRANSACTION POLICIES SHAREHOLDER GUIDE -------------------------------------------------------------------------------- Systematic Exchange Privilege You may elect to have a specified dollar amount of Class Q shares systematically exchanged, monthly, quarterly, semi-annually or annually (on or about the 10th of the applicable month), from your account to an identically registered account in Class Q shares of any other open-end Pilgrim Fund. This exchange privilege may be modified at any time or terminated upon 60 days' written notice to shareholders. Small Accounts (Non-Retirement Only) If you draw down a non-retirement account so that its total value is less than the Fund minimum, you may be asked to purchase more shares within 60 days. If you do not take action, the Fund may close out your account and mail you the proceeds. Your account will not be closed if its drop in value is due to Fund performance. Account Access Unless your Pilgrim shares are held through a third-party fiduciary or in an omnibus registration at your bank or brokerage firm, you may be able to access your account information over the internet at www.pilgrimfunds.com, or via a touch tone telephone by calling (800) 992-0180 and selecting Option 1. Should you wish to speak with a Shareholder Service Representative you may call the toll-free number listed above and select Option 2. Privacy Policy You may review the Funds' policy concerning investor privacy over the Internet at www.pilgrimfunds.com, or you may obtain a copy of the policy by calling (800) 992-0180 and selecting Option 1. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Shareholder Guide 33 MANAGEMENT OF THE FUNDS ADVISER -------------------------------------------------------------------------------- ING Pilgrim Investments, LLC (ING Pilgrim), a Delaware limited liability company, serves as the investment adviser to each of the Funds. ING Pilgrim has overall responsibility for the management of the Funds. ING Pilgrim provides or oversees all investment advisory and portfolio management services for each Fund, and assists in managing and supervising all aspects of the general day-to-day business activities and operations of the Funds, including custodial, transfer agency, dividend disbursing, accounting, auditing, compliance and related services. Organized in December 1994, ING Pilgrim is registered as an investment adviser with the SEC. ING Pilgrim is an indirect wholly-owned subsidiary of ING Groep N.V. (NYSE: ING) (ING Group). ING Group is a global financial institution active in the field of insurance, banking, and asset management in more than 65 countries, with almost 100,000 employees. As of June 30, 2001, ING Pilgrim managed over $18.4 billion in assets. ING Pilgrim's principal address is 7337 East Doubletree Ranch Road, Scottsdale, Arizona 85258. ING Pilgrim receives a monthly fee for its services based on the average daily net assets of each of the Funds. The following table shows the aggregate annual management fee paid by each Fund for the most recent fiscal year as a percentage of that Fund's average daily net assets: Fund Management Fee ---- -------------- MagnaCap 0.72% Growth and Income 0.63 Research Enhanced Index 0.70 Growth Opportunities 0.95 LargeCap Growth 0.73 MidCap Opportunities 1.00 MidCap Growth 0.75 Growth + Value 1.00 SmallCap Opportunities 1.00 SmallCap Growth 1.00 Balanced 0.75 Convertible 0.75 ING Pilgrim Directly Manages the Portfolios of the Following Funds: Growth Opportunities Fund LargeCap Growth Fund MidCap Opportunities Fund MidCap Growth Fund The following individuals share responsibility for the day-to-day management of the Growth Opportunities Fund, the LargeCap Growth Fund, the MidCap Opportunities Fund and MidCap Growth Fund: Mary Lisanti, Executive Vice President and Chief Investment Officer -- Domestic Equities of ING Pilgrim, has served as a Senior Portfolio Manager of MidCap Opportunities Fund since the Fund was formed in August 1998, LargeCap Growth Fund since October 1, 2000, Growth Opportunities Fund since November 1998, and Pilgrim MidCap Growth Fund since April 2000. Prior to joining ING Pilgrim in October 1999, Ms. Lisanti was Executive Vice President and Chief Investment Officer -- Domestic Equities with Northstar Investment Management Corp., which subsequently merged into ING Pilgrim. From 1996 to 1998, Ms. Lisanti was a Portfolio Manager at Strong Capital Management. From 1993 to1996, Ms. Lisanti was a Managing Director and Head of Small- and Mid-Capitalization Equity Strategies at Bankers Trust Corp. Jeffrey Bernstein, Senior Vice President of ING Pilgrim, has served as a Senior Portfolio Manager of MidCap Opportunities Fund since the Fund was formed in August 1998, Growth Opportunities Fund since November 1998, Pilgrim MidCap Growth Fund since April 2000 and Co-Portfolio Manager of LargeCap Growth Fund since January 2001. Prior to joining Pilgrim in October 1999, Mr. Bernstein was a portfolio manager at Northstar Investment Management Corp., which subsequently merged into ING Pilgrim. Prior to May 1998, Mr. Bernstein was a Portfolio Manager at Strong Capital Management. From 1995 to 1997, Mr. Berstein was a Portfolio Manager at Berkeley Capital. SmallCap Opportunities Fund and SmallCap Growth Fund Mary Lisanti, whose background is described above, has served as manager of the SmallCap Opportunities Fund since July 1998 and SmallCap Growth Fund since April 2000. 34 Management of the Funds ADVISER MANAGEMENT OF THE FUNDS -------------------------------------------------------------------------------- Growth and Income Fund Thomas Jackson, Senior Vice President and Senior Portfolio Manager for value equity strategies at ING Pilgrim, has served as Portfolio Manager of Growth and Income Fund since June 2001. Prior to joining ING Pilgrim in June 2001, Mr. Jackson was a Managing Director at Prudential Investments (April 1990 through December 2000). Prior to April 1990, Mr. Jackson was Co-Chief Investment Officer and Managing Director at Century Capital Associates and Red Oak Advisors Inc. MagnaCap Fund Thomas Jackson, whose background is described above has served as Portfolio Manager of MagnaCap Fund since June 2001. Howard Kornblue, Senior Vice President and Senior Portfolio Manager for ING Pilgrim, has served as auxiliary Portfolio Manager of MagnaCap Fund since June 2001. From January 2001 to the present, Mr. Kornblue has served as Director of Value Strategies at ING Pilgrim. Mr. Kornblue served as Portfolio Manager of MagnaCap Fund from 1989 until January 2001. Balanced Fund The following individuals share responsibility for the day-to-day management of the Balanced Fund: Thomas Jackson, whose background is described above has served as Portfolio Manager of the equity portion of Balanced Fund since June 2001. Robert K. Kinsey, Vice President of ING Pilgrim, has served as a Portfolio Manager of the portion of Balanced Fund's assets that are invested in fixed-income assets other than high yield securities since May 24, 1999. Prior to joining ING Pilgrim, Mr. Kinsey was a Vice President and Fixed Income Portfolio Manager for Federated Investors from January 1995 to March 1999. From July 1992 to January 1995, Mr. Kinsey was a Principal and Portfolio Manager for Harris Investment Management. Edwin Schriver, Senior Vice President of ING Pilgrim, has served as Senior Portfolio Manager of the high yield portion of the Balanced Fund's fixed-income assets since October 2000. Prior to joining ING Pilgrim, Mr. Schriver was a Senior High Yield Analyst for Dreyfus Corporation since 1998. From 1996 to 1997, Mr. Schriver was the President of Crescent City Research, an investment research and software firm. Prior to 1996, Mr. Schriver was president of an SEC registered investment adviser and held various senior portfolio management positions. Convertible Fund Andrew Chow, Vice President of ING Pilgrim, has served as a Portfolio Manager of Convertible Fund since October 1, 2000. Prior to joining ING Pilgrim, Mr. Chow was the portfolio manager of the Conseco Convertible Securities Fund since 1998. He joined Conseco, where he was also responsible for managing convertible securities accounts, in 1991. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Management of the Funds 35 MANAGEMENT OF THE FUNDS SUB-ADVISERS -------------------------------------------------------------------------------- SUB-ADVISERS For the following Funds, ING Pilgrim has engaged a Sub-Adviser to provide the day-to-day management of the Fund's portfolio. Research Enhanced Index Fund Aeltus Investment Management, Inc. Aeltus Investment Management, Inc., (Aeltus), serves as Sub-Adviser to the Pilgrim Research Enhanced Index Fund. Founded in 1972, Aeltus is registered as an investment adviser. Aeltus is an indirect wholly-owned subsidiary of ING Group, and is an affiliate of ING Pilgrim. Aeltus has acted as adviser or sub-adviser to mutual funds since 1994 and has managed institutional accounts since 1972. As of June 30, 2001, Aeltus managed over $41 billion in assets. Its principal office is located at 10 State House Square, Hartford, Connecticut 06103-3602. Hugh T. M. Whelan and Douglas E. Cote share the responsibility for the day-to-day management of the Pilgrim Research Enhanced Index Fund. Mr. Whelan has served as co-manager of the Pilgrim Research Enhanced Index Fund since August 1, 2001. At Aeltus, he has served as a quantitative equity analyst since 1999. Previously, Mr. Whelan served as an analyst in Aeltus' fixed income group specializing in corporate securities since 1994. Mr. Cote, has served as co-manager of the Pilgrim Research Enhanced Index Fund since August 1, 2001. At Aeltus, Mr. Cote has been serving as a quantitative equity analyst since 1996. Previously, Mr. Cote was responsible for developing quantitative applications for Aeltus' equity department. Growth + Value Fund Navellier Fund Management, Inc. A registered investment adviser, Navellier Fund Management, Inc. (Navellier) serves as Sub-Adviser to the Pilgrim Growth + Value Fund. Navellier and its affiliate, Navellier & Associates, Inc., manage over $5 billion for institutions, pension funds and high net worth individuals. Navellier's principal address is 1 East Liberty, Third Floor, Reno, Nevada 89501. Louis Navellier has managed the Pilgrim Growth + Value Fund since the Fund was formed in November 1996. Mr. Navellier has over 19 years of investment management experience and is the principal owner of Navellier & Associates, Inc. Mr. Navellier's investment newsletter, MPT Review, has been published for over 19 years and is widely renowned throughout the investment community. 36 Management of the Funds DIVIDENDS, DISTRIBUTIONS AND TAXES -------------------------------------------------------------------------------- Dividends The Funds generally distribute most or all of their net earnings in the form of dividends. Each Fund pays dividends, if any, as follows: Annually(1) Semi-Annually(1) Quarterly(2) ----------- ---------------- ------------ Research Enhanced Index MagnaCap Balanced Growth Opportunities Growth and Income Convertible LargeCap Growth MidCap Opportunities MidCap Growth Growth + Value SmallCap Opportunities SmallCap Growth ---------- (1) Distributions normally expected to consist primarily of capital gains. (2) Distributions normally expected to consist, on an annual basis, of a variable combination of capital gains and ordinary income. Each Fund distributes capital gains, if any, annually. Dividend Reinvestment Unless you instruct a Fund to pay you dividends in cash, dividends and distributions paid by a Fund will be reinvested in additional shares of the Fund. You may, upon written request or by completing the appropriate section of the Account Application, elect to have all dividends and other distributions paid on Class Q shares of a Fund invested in another Pilgrim Fund which offers Class Q shares. Taxes The following information is meant as a general summary for U.S. shareholders. Please see the Statement of Additional Information (SAI) for additional information. You should rely on your own tax adviser for advice about the particular federal, state and local tax consequences to you of investing in a Fund. Each Fund will distribute all or substantially all of its net investment income and net capital gains to its shareholders each year. Although the Funds will not be taxed on amounts they distribute, most shareholders will be taxed on amounts they receive. A particular distribution generally will be taxable as either ordinary income or long-term capital gains. It does not matter how long you have held your Fund shares or whether you elect to receive your distributions in cash or reinvest them in additional Fund shares. For example, if a Fund designates a particular distribution as a long-term capital gains distribution, it will be taxable to you at your long-term capital gains rate. Dividends declared by a Fund in October, November or December and paid during the following January may be treated as having been received by shareholders in the year the distributions were declared. You will receive an annual statement summarizing your dividend and capital gains distributions. If you invest through a tax-deferred account, such as a retirement plan, you generally will not have to pay tax on dividends until they are distributed from the account. These accounts are subject to complex tax rules, and you should consult your tax adviser about investment through a tax-deferred account. There may be tax consequences to you if you sell or redeem Fund shares. You will generally have a capital gain or loss, which will be long-term or short-term, generally depending on how long you hold those shares. If you exchange shares, you may be treated as if you sold them. You are responsible for any tax liabilities generated by your transactions. As with all mutual funds, a Fund may be required to withhold U.S. federal income tax at the rate of 31% of all taxable distributions payable to you if you fail to provide the Fund with your correct taxpayer identification number or to make required certifications, or if you have been notified by the IRS that you are subject to backup withholding. Backup withholding is not an additional tax; rather, it is a way in which the IRS ensures it will collect taxes otherwise due. Any amounts withheld may be credited against your U.S. federal income tax liability. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Dividends, Distributions and Taxes 37 MORE INFORMATION ABOUT RISKS -------------------------------------------------------------------------------- All mutual funds involve risk -- some more than others -- and there is always the chance that you could lose money or not earn as much as you hope. A Fund's risk profile is largely a factor of the principal securities in which it invests and investment techniques that it uses. The following pages discuss the risks associated with certain of the types of securities in which the Funds may invest and certain of the investment practices that the Funds may use. For more information about these and other types of securities and investment techniques that may be used by the Funds, see the SAI. Many of the investment techniques and strategies discussed in this prospectus and in the SAI are discretionary, which means that the adviser can decide whether to use them or not. The Funds named below invest in these securities or use these techniques as part of the Fund's principal investment strategy. However, the adviser of any Fund may also use these investment techniques or make investments in securities that are not a part of the Fund's principal investment strategy. PRINCIPAL RISKS Investments in Foreign Securities (MagnaCap, Balanced and Growth and Income Funds). There are certain risks in owning foreign securities, including those resulting from: fluctuations in currency exchange rates; devaluation of currencies; political or economic developments and the possible imposition of currency exchange blockages or other foreign governmental laws or restrictions; reduced availability of public information concerning issuers; accounting, auditing and financial reporting standards or other regulatory practices and requirements that are not uniform when compared to those applicable to domestic companies; settlement and clearance procedures in some countries that may not be reliable and can result in delays in settlement; higher transaction and custody expenses than for domestic securities; and limitations on foreign ownership of equity securities. Also, securities of many foreign companies may be less liquid and the prices more volatile than those of domestic companies. With certain foreign countries, there is the possibility of expropriation, nationalization, confiscatory taxation and limitations on the use or removal of funds or other assets of the Funds, including the withholding of dividends. Each Fund that invests in foreign securities may enter into foreign currency transactions either on a spot or cash basis at prevailing rates or through forward foreign currency exchange contracts to have the necessary currencies to settle transactions, or to help protect Fund assets against adverse changes in foreign currency exchange rates, or to provide exposure to a foreign currency commensurate with the exposure of securities from that country. Such efforts could limit potential gains that might result from a relative increase in the value of such currencies, and might, in certain cases, result in losses to the Fund. Inability to Sell Securities (All Funds except MagnaCap, Research Enhanced Index and LargeCap Growth Funds). Some securities usually trade in lower volume and may be less liquid than securities of large, established companies. These less liquid securities could include securities of small and mid-size U.S. companies, high-yield securities, convertible securities, unrated debt and convertible securities, securities that originate from small offerings, and foreign securities, particularly those from companies in emerging markets. A Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. High Yield Securities (Balanced and Convertible Funds). Investments in high yield securities generally provide greater income and increased opportunity for capital appreciation than investments in higher quality debt securities, but they also typically entail greater potential price volatility and principal and income risk. High yield securities are not considered investment grade, and are regarded as predominantly speculative with respect to the issuing company's continuing ability to meet principal and interest payments. The prices of high yield securities have been found to be less sensitive to interest rate changes than higher-rated investments, but more sensitive to adverse economic downturns or individual corporate developments. High yield securities structured as zero-coupon or pay-in-kind securities tend to be more volatile. The secondary market in which high yield securities are traded is generally less liquid than the market for higher grade bonds. At times of less liquidity, it may be more difficult to value high yield securities. Corporate Debt Securities (Balanced and Convertible Funds). Corporate debt securities are subject to the risk of the issuer's inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to such factors as interest rate sensitivity, market perception of the credit-worthiness of the issuer and general market liquidity. When interest rates decline, the value of the Fund's debt securities can be expected to rise, and when interest rates rise, the value of those securities can be expected to decline. Debt securities with longer maturities tend to be more sensitive to interest rate movements than those with shorter maturities. One measure of risk for fixed income securities is duration. Duration is one of the tools used by a portfolio manager in selection of fixed income securities. Historically, the maturity of a bond was used as a proxy for the sensitivity of a bond's price to changes in interest rates, otherwise known as a bond's "interest rate risk" or "volatility." According to this measure, the longer the maturity of a bond, the more its price will change for a given change in market interest rates. However, this method ignores the amount and timing of all cash flows from the bond prior to final maturity. Duration is a measure of average life of a bond on a present value basis, which was developed to incorporate a bond's yield, coupons, final maturity and call features into one measure. For point of reference, the duration of a noncallable 7% coupon bond with a remaining maturity of 5 years is approximately 4.5 38 More Information About Risks MORE INFORMATION ABOUT RISKS -------------------------------------------------------------------------------- years, and the duration of a noncallable 7% coupon bond with a remaining maturity of 10 years is approximately 8 years. Material changes in interest rates may impact the duration calculation. Convertible Securities (All Funds except Research Enhanced Index, and Growth Opportunities Funds). The price of a convertible security will normally fluctuate in some proportion to changes in the price of the underlying equity security, and as such is subject to risks relating to the activities of the issuer and general market and economic conditions. The income component of convertible securities causes fluctuations based upon changes in interest rates and the credit quality of the issuer. Convertible securities are often lower rated securities. A Fund may be required to redeem or convert a convertible security before the holder would otherwise choose. Other Investment Companies (Balanced Fund). The Fund may invest up to 10% of its assets in other investment companies. When the a Fund invests in other investment companies, you indirectly pay a proportionate share of the expenses of that other investment company (including management fees, administration fees, and custodial fees) in addition to the expenses of the Fund. Interests in Loans (Balanced Fund). The Fund may invest in participation interests or assignments in secured variable or floating rate loans, which include participation interests in lease financings. Loans are subject to the credit risk of nonpayment of principal or interest. Substantial increases in interest rates may cause an increase in loan defaults. Although the loans will generally be fully collateralized at the time of acquisition, the collateral may decline in value, be relatively illiquid, or lose all or substantially all of its value subsequent to the Fund's investment. Many loans are relatively illiquid, and may be difficult to value. Derivatives (Research Enhanced Index and Balanced Funds). Generally, derivatives can be characterized as financial instruments whose performance is derived, at least in part, from the performance of an underlying asset or assets. Some derivatives are sophisticated instruments that typically involve a small investment of cash relative to the magnitude of risks assumed. These may include swap agreements, options, forwards and futures. Derivative securities are subject to market risk, which could be significant for those that have a leveraging effect. Many of the Funds do not invest in these types of derivatives, and some do, so please check the description of the Fund's policies. Derivatives are also subject to credit risks related to the counterparty's ability to perform, and any deterioration in the counterparty's creditworthiness could adversely affect the instrument. A risk of using derivatives is that the Adviser or Sub-Adviser might imperfectly judge the market's direction. For instance, if a derivative is used as a hedge to offset investment risk in another security, the hedge might not correlate to the market's movements and may have unexpected or undesired results, such as a loss or a reduction in gains. Investments in Small- and Mid-Capitalization Companies (MidCap Opportunities, MidCap Growth, SmallCap Opportunities and SmallCap Growth Funds). The Funds may invest in small and mid- capitalization companies. Investments in small- and mid-capitalization companies involve greater risk than is customarily associated with larger, more established companies due to the greater business risks of small size, limited markets and financial resouces, narrow product lines and the frequent lack of depth of management. The securities of smaller companies are often traded over-the-counter and may not be traded in volume typical on a national securities exchange. Consequently, the securities of smaller companies may have limited market stability and may be subject to more abrupt or erractic market movements than securities of larger, more established growth companies or the market averages in general. Portfolio Turnover. Each Fund (except MagnaCap Fund) is generally expected to engage in frequent and active trading of portfolio securities to achieve its investment objective. A high portfolio turnover rate involves greater expenses to a Fund, including brokerage commissions and other transaction costs, and is likely to generate more taxable short-term gains for shareholders, which may have an adverse effect on the performance of the Fund. Lending Portfolio Securities. (LargeCap Growth and Convertible Funds) In order to generate additional income, certain Funds may lend portfolio securities in an amount up to 33 1|M/3% of total Fund assets to broker-dealers, major banks, or other recognized domestic institutional borrowers of securities. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the collateral should the borrower default or fail financially. OTHER RISKS Restricted and Illiquid Securities. Each Fund may invest in restricted and illiquid securities (except MagnaCap Fund may not invest in restricted securities). If a security is illiquid, the Fund might be unable to sell the security at a time when the adviser might wish to sell, and the security could have the effect of decreasing the overall level of the Fund's liquidity. Further, the lack of an established secondary market may make it more difficult to value illiquid securities, which could vary from the amount the Fund could realize upon disposition. Restricted securities, i.e., securities subject to legal or contractual restrictions on resale, may be illiquid. However, some restricted securities may be treated as liquid, although they may be less liquid than registered securities traded on established secondary markets. Temporary Defensive Strategies. When the Adviser or Sub-Adviser to a Fund anticipates unusual market or other conditions, the Fund may temporarily depart from its principal investment strategies as a defensive measure. To the extent that a Fund invests defensively, it likely will not achieve capital appreciation. Repurchase Agreements. Each Fund may enter into repurchase agreements, which involve the purchase by a Fund of a security that the seller has agreed to buy back. If the seller defaults and the collateral value declines, the Fund might incur a loss. If the seller declares bankruptcy, the Fund may not be able to sell the collateral at the desired time. [GRAPHIC] If you have any questions, please call 1-800-992-0180. More Information About Risks 39 MORE INFORMATION ABOUT RISKS -------------------------------------------------------------------------------- Borrowing. Certain Funds may borrow for certain types of temporary or emergency purposes subject to certain limits. Borrowing may exaggerate the effect of any increase or decrease in the value of portfolio securities or the net asset value of a Fund, and money borrowed will be subject to interest costs. Interest costs on borrowings may fluctuate with changing market rates of interest and may partially offset or exceed the return earned on borrowed funds. Under adverse market conditions, a Fund might have to sell portfolio securities to meet interest or principal payments at a time when fundamental investment considerations would not favor such sales. Reverse Repurchase Agreements and Dollar Rolls. A reverse repurchase agreement involves the sale of a security, with an agreement to repurchase the same securities at an agreed upon price and date. Whether such a transaction produces a gain for a Fund depends upon the costs of the agreements and the income and gains of the securities purchased with the proceeds received from the sale of the security. If the income and gains on the securities purchased fail to exceed the costs, net asset value will decline faster than otherwise would be the case. Reverse repurchase agreements, as leveraging techniques, may increase a Fund's yield; however, such transactions also increase a Fund's risk to capital and may result in a shareholder's loss of principal. Short Sales. Certain Funds may make short sales. A "short sale" is the sale by a Fund of a security which has been borrowed from a third party on the expectation that the market price will drop. If the price of the security rises, the Fund may have to cover its short position at a higher price than the short sale price, resulting in a loss. Pairing Off Transactions. A pairing-off transaction occurs when a Fund commits to purchase a security at a future date, and then the Fund "pairs-off" the purchase with a sale of the same security prior to or on the original settlement date. Whether a pairing-off transaction on a debt security produces a gain depends on the movement of interest rates. If interest rates increase, then the money received upon the sale of the same security will be less than the anticipated amount needed at the time the commitment to purchase the security at the future date was entered and the Fund will experience a loss. Percentage and Rating Limitations. Unless otherwise stated, the percentage limitations in this prospectus apply at the time of investment. 40 More Information About Risks FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- The financial highlights tables on the following pages are intended to help you understand each Fund's financial performance for the past five years or, if shorter, the period of the Fund's operations. Certain information reflects financial results for a single share. The total returns in the tables represent the rate that an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends and distributions). A report of each Fund's independent auditors, along with the Fund's financial statements, is included in the Fund's annual report, which is available upon request. Due to Class Q being recently offered, Financial Highlights are not included for Growth and Income Fund. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Financial Highlights 41 PILGRIM MAGNACAP FUND FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- The information in the table below has been audited by KPMG LLP, independent auditors.
Eleven Months Period Ended Ended May 31, 2001 June 30, 2000(1) ------------ ---------------- Per Share Operating Performance: Net asset value, beginning of period $ 15.84 16.26 Income from investment operations: Net investment income $ 0.07 0.05 Net realized and unrealized loss on investments $ (0.38) (0.47) Total from investment operations $ (0.31) (0.42) Less distributions from: Net investment income $ 0.10 -- Net realized gain on investments $ 1.88 -- Total distributions $ 1.98 -- Net asset value, end of period $ 13.55 15.84 Total Return(2): % (2.60) (2.58) Ratios/Supplemental Data: Net assets, end of period (000's) $ 11,184 9,928 Ratios to average net assets: Expenses(3) % 1.11 1.24 Net investment income (3) % 0.53 0.46 Portfolio turnover % 92 26
---------- (1) Class Q commenced offering of shares on November 19, 1999. (2) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value. Total return for less than one year is not annualized. (3) Annualized for periods less than one year. 42 Pilgrim MagnaCap Fund FINANCIAL HIGHLIGHTS PILGRIM RESEARCH ENHANCED INDEX FUND -------------------------------------------------------------------------------- For the seven months ended May 31, 2001, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to May 31, 2001, the financial information was audited by other independent auditors.
Seven Months Period Ended Ended May 31, October 31, 2001 2000(1) ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 11.17 11.98 Income from investment operations: Net investment income $ -- -- Net realized and unrealized loss on investments $ (1.32) (0.81) Total from investment operations $ (1.32) (0.81) Net asset value, end of period $ 9.85 11.17 Total return(2) % (11.82) (6.76) Ratios/Supplemental Data: Net assets, end of period (000's) $ 456 273 Ratios to average net assets: Expenses(3) % 1.29 1.32 Net investment income (loss)(3) % 0.03 (0.05) Portfolio turnover % 26 57
---------- (1) Class Q commenced offering of shares on April 4, 2000. (2) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value. Total return for less than one year is not annualized. (3) Annualized for periods less than one year. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Research Enhanced Index Fund 43 PILGRIM GROWTH OPPORTUNITIES FUND FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- The information in the table below has been audited by KPMG LLP, independent auditors.
Period Five Months Ended Ended December 31, May 31, 2001 2000(1) ------------ ------- Per Share Operating Performance: Net asset value, beginning of period $ 25.48 32.58 Income from investment operations: Net investment loss $ (0.10) (0.15) Net realized and unrealized loss on investments $ (6.68) (5.46) Total from investment operations $ (6.78) (5.61) Less distributions from: Net realized gain on investments $ -- 1.49 Total distributions $ -- 1.49 Net asset value, end of period $ 18.70 25.48 Total return(2) % (26.61) (17.55) Ratios/Supplemental Data: Net assets, end of period (000s) $ 7,947 10,274 Ratios to average net assets: Expenses(3) % 1.56 1.41 Net investment loss(3) % (1.17) (0.81) Portfolio turnover % 217 326
---------- (1) Class Q commenced offering of shares on June 1, 2000. (2) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value. Total return for less than one year is not annualized. (3) Annualized for periods less than a year. 44 Pilgrim Growth Opportunities Fund FINANCIAL HIGHLIGHTS PILGRIM LARGECAP GROWTH FUND -------------------------------------------------------------------------------- For the eleven months ended May 31, 2001, the year ended June 30, 2000 and the three months ended June 30, 1999, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to June 30, 1999, the financial information was audited by other independent auditors.
Eleven Months Year Three Months Year Period Ended Ended Ended Ended Ended May 31, June 30, June 30, March 31, March 31, 2001(1) 2000 1999(2) 1999 1998(3) ------- ---- ------- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 43.71 28.43 25.24 15.66 12.50 Income from investment operations: Net investment loss $ (0.17) (0.20) (0.03) (0.02) (0.01) Net realized and unrealized gain (loss) on investments $ (18.26) 15.86 3.22 9.87 3.26 Total from investment operations $ (18.43) 15.66 3.19 9.85 3.25 Less distributions from: Net investment income $ -- -- -- -- 0.01 Net realized gain on investments $ 0.47 0.38 -- 0.27 0.08 Total distributions $ 0.47 0.38 -- 0.27 0.09 Net asset value, end of period $ 24.81 43.71 28.43 25.24 15.66 Total Return(4): % (42.50) 55.57 12.64 63.76 62.47 Ratios/Supplemental Data: Net assets, end of period ($000's) $ 12,534 24,838 6,044 4,908 799 Ratios to average net assets: Net expenses after expense reimbursement(5)(6) % 1.19 1.26 1.23 1.26 1.25 Gross expenses prior to expense reimbursement(5) % 1.19 1.26 1.25 1.91 10.45 Net investment loss after expense reimbursement(5)(6) % (0.50) (0.77) (0.36) (0.28) (0.62) Portfolio turnover % 331 139 27 253 306
---------- (1) Effective October 1, 2000, ING Pilgrim Investments, LLC assumed responsibility for the day-to-day management of the Fund. (2) Effective May 24, 1999, ING Pilgrim Investments, LLC became the Adviser of the Fund; concurrently, Nicholas-Applegate Capital Management was appointed as sub-adviser and the Fund changed its year end to June 30. (3) The Fund commenced operations on July 21, 1997. (4) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value. Total return for less than one year is not annualized. (5) Annualized for periods less than one year. (6) The Adviser has agreed to limit expenses, excluding, interest, taxes, brokerage and extraordinary expenses. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim LargeCap Growth Fund 45 PILGRIM MIDCAP OPPORTUNITIES FUND FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- The information in the table below has been audited by KPMG LLP, independent auditors.
Five Months Period Ended Ended May 31, December 31, 2001 2000(1) ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 19.16 22.57 Income from investment operations: Net investment loss $ (0.08) (0.06) Net realized and unrealized loss on investments $ (4.45) (1.17) Total from investment operations $ (4.53) (1.23) Less distributions from: Net realized gain on investments $ -- 2.18 Total distributions $ -- 2.18 Net asset value, end of period $ 14.63 19.16 Total return(2): % (23.64) (5.86) Ratios/Supplemental Data: Net assets, end of period (000s) $ 3,071 3,264 Ratios to average net assets: Expenses(3) % 1.82 1.61 Net investment loss(3) % (1.28) (0.91) Portfolio turnover % 182 188
---------- (1) Class Q commenced offering of shares on April 4, 2000. (2) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value. Total return for less than one year is not annualized. (3) Annualized for periods less than one year. 46 Pilgrim MidCap Opportunities Fund FINANCIAL HIGHLIGHTS PILGRIM MIDCAP GROWTH FUND -------------------------------------------------------------------------------- For the eleven months ended May 31, 2001, the year ended June 30, 2000 and the three months ended June 30, 1999, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to June 30, 1999, the financial information was audited by other independent auditors.
Eleven Months Year Three Months Ended Ended Ended Year Ended March 31, May 31, June 30, June 30, ------------------------------ 2001 2000(1) 1999(2) 1999 1998 1997 ---- ------- ------- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 35.67 26.94 25.14 23.30 18.01 17.99 Income from investment operations: Net investment loss $ (0.12) (0.29) (0.06) (0.12) (0.21) (0.04) Net realized and unrealized gain (loss) on investments $ (10.10) 17.92 1.86 3.56 7.48 0.32 Total from investment operations $ (10.22) 17.63 1.80 3.44 7.27 0.28 Less distributions from: Net realized gain on investments $ 5.96 8.90 -- 1.60 1.98 0.26 Total distributions $ 5.96 8.90 -- 1.60 1.98 0.26 Net asset value, end of period $ 19.49 35.67 26.94 25.14 23.30 18.01 Total Return(3): % (33.14) 77.87 7.16 15.77 42.00 1.39 Ratios/Supplemental Data: Net assets, end of period (000's) $ 16,412 19,792 19,383 14,350 12,204 13,115 Ratios to average net assets: Net expenses after expense reimbursement/recoupment(4)(5) % 1.19 1.26 1.24 1.23 1.22 1.25 Gross expenses prior to expense reimbursement/recoupment(4) % 1.18 1.26 1.25 1.31 1.95 1.84 Net investment loss after expense reimbursement/recoupment(4)(5) % (0.58) (1.00) (0.95) (0.71) (0.97) (0.69) Portfolio turnover % 262 148 55 154 200 153
---------- (1) Effective April 1, 2000, ING Pilgrim Investments, LLC assumed responsibility for the day-to-day management of the Fund. (2) Effective May 24, 1999, ING Pilgrim Investments, LLC became the Adviser of the Fund, concurrently Nicholas-Applegate Capital Management was appointed as sub-adviser and the Fund changed its year end to June 30. (3) Total return is calculated assuming reinvestment of dividends and capital gain distributions at net asset value. Total return for less than one year is not annualized. (4) Annualized for periods less than one year. (5) The Adviser has agreed to limit expenses, excluding, interest, taxes, brokerage and extraordinary expenses. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim MidCap Growth Fund 47 PILGRIM GROWTH + VALUE FUND FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- For the seven months ended May 31, 2001, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to May 31, 2001, the financial information was audited by other independent auditors.
Seven Months Period Ended October 31, Ended May 31, 2001 2000(1) ------------------ ------- Per Share Operating Performance: Net asset value, beginning of period $ 24.90 26.73 Income from investment operations: Net investment loss $ (0.18) (0.05) Net realized and unrealized loss on investments $ (8.62) (1.78) Total from investment operations $ (8.80) (1.83) Less distributions from: Net realized gain on investments $ 2.16 -- Tax return of capital $ 0.06 -- Total distributions $ 2.22 -- Net asset value, end of period $ 13.88 24.90 Total return(2) % (38.00) (6.85) Ratios/Supplemental Data: Net assets, end of period (000's) $ 454 1,346 Ratios to average net assets: Expenses(3) % 1.69 1.53 Net investment loss(3) % (1.43) (1.19) Portfolio turnover % 95 163
---------- (1) Class Q commenced offering of shares on June 5, 2000. (2) Total return is calculated assuming reinvestment of dividends and capital gain distributions at net asset value. Total return for less than one year is not annualized. (3) Annualized for periods less than one year. 48 Pilgrim Growth + Value Fund PILGRIM SMALLCAP OPPORTUNITIES FUND FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- The information in the table below has been audited by KPMG LLP, independent auditors.
Five Months Period Ended Ended May 31, December 31, 2001 2000(1) ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 47.20 60.86 Income from investment operations: Net investment loss $ (0.20) (0.27) Net realized and unrealized loss on investments $ (8.19) (4.49) Total from investment operations $ (8.39) (4.76) Less distributions from: Net realized gain on investments $ -- 8.90 Total distributions $ -- 8.90 Net asset value, end of period $ 38.81 47.20 Total return(2) % (17.78) (8.29) Ratios/Supplemental Data: Net assets, end of period (000s) $ 2,832 2,545 Ratios to average net assets: Expenses(3) % 1.56 1.40 Net investment loss(3) % (1.28) (1.10) Portfolio turnover % 104 134
---------- (1) Class Q commenced offering of shares on April 4, 2000. (2) Total return is calculated assuming reinvestment of dividends and capital gain distributions at net asset value. Total return for less than one year is not annualized. (3) Annualized for periods less than one year. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim SmallCap Opportunities Fund 49 PILGRIM SMALLCAP GROWTH FUND FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- For the eleven months ended May 31, 2001, the year ended June 30, 2000 and the three months ended June 30, 1999, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to June 30, 1999, the financial information was audited by other independent auditors.
Eleven Months Year Three Months Ended Ended Ended Year Ended March 31, May 31, June 30, June 30, ----------------------------- 2001 2000(1) 1999(2) 1999 1998 1997 ---- ------- ------- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 20.47 21.19 18.56 19.27 13.19 14.16 Income from investment operations: Net investment income (loss) $ (0.16) (0.21) (0.06) (0.15) 0.03 (0.07) Net realized and unrealized gain (loss) on investments $ (4.61) 10.30 2.69 0.22 6.16 (0.77) Total from investment operations $ (4.77) 10.09 2.63 0.07 6.19 (0.84) Less distributions from: Net realized gain on investments $ 2.24 10.81 -- 0.78 0.11 0.13 Total distributions $ 2.24 10.81 -- 0.78 0.11 0.13 Net asset value, end of period $ 13.46 20.47 21.19 18.56 19.27 13.19 Total Return(3): % (25.46) 61.08 14.17 0.96 47.01 (6.03) Ratios/Supplemental Data: Net assets, end of period (000's) $ 9,080 12,569 11,013 9,107 12,508 1,013 Ratios to average net assets: Net expenses after expense reimbursement/recoupment(4)(5) % 1.50 1.52 1.45 1.53 1.52 1.51 Gross expenses prior to expense reimbursement/recoupment(4) % 1.49 1.57 1.49 1.63 2.39 10.79 Net investment loss after expense reimbursement/recoupment(4)(5) % (1.01) (1.21) (1.21) (0.97) (1.52) (1.02) Portfolio turnover % 170 127 32 90 92 113
---------- (1) Effective April 1, 2000, ING Pilgrim Investments, LLC assumed responsibility for the day-to-day management of the Fund. (2) Effective May 24, 1999, ING Pilgrim Investments, LLC, became the Adviser of the Fund, concurrently Nicholas-Applegate Capital Management was appointed as sub-adviser and the Fund changed its year end to June 30. (3) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value. Total return for less than one year is not annualized. (4) Annualized for periods less than one year. (5) The Adviser has agreed to limit expenses, excluding, interest, taxes, brokerage and extraordinary expenses. 50 Pilgrim SmallCap Growth Fund FINANCIAL HIGHLIGHTS PILGRIM BALANCED FUND -------------------------------------------------------------------------------- For the eleven months ended May 31, 2001, the year ended June 30, 2000 and the three months ended June 30, 1999, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to June 30, 1999, the financial information was audited by other independent auditors.
Eleven Months Year Three Months Ended Ended Ended Year Ended March 31, May 31, June 30, June 30, -------------------------- 2001 2000 1999(1) 1999 1998 1997 ---- ---- ------- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 14.94 19.04 18.85 18.48 13.42 12.69 Income from investment operations: Net investment income $ 0.44 0.54 0.11 0.44 0.30 0.24 Net realized and unrealized gain (loss) on investments $ (0.54) (0.57) 0.16 2.50 5.07 0.73 Total from investment operations $ (0.10) (0.03) 0.27 2.94 5.37 0.97 Less distributions from: Net investment income $ 0.47 0.40 0.08 0.50 0.31 0.24 Net realized gain on investments $ 1.14 3.67 -- 2.07 -- -- Total distributions $ 1.61 4.07 0.08 2.57 0.31 0.24 Net asset value, end of period $ 13.23 14.94 19.04 18.85 18.48 13.42 Total Return(2): % (0.70) (0.60) 1.44 17.49 40.21 7.60 Ratio/Supplemental Data: Net assets, end of period (000's) $ 373 230 190 176 166 73 Ratio to average net assets: Net expenses after expense reimbursement(3)(4) % 1.25 1.30 1.25 1.25 1.26 1.26 Gross expenses prior to expense reimbursement(3) % 1.46 1.51 1.51 1.63 11.28 126.75 Net investment income after expense reimbursement(3)(4) % 3.61 3.36 2.30 2.41 4.09 2.15 Portfolio turnover % 76 173 63 165 260 213
---------- (1) Effective May 24, 1999, ING Pilgrim Investments, LLC, became the Adviser of the Fund and the Fund changed its year end to June 30. (2) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return for less than one year is not annualized. (3) Annualized for periods less than one year. (4) The Adviser has agreed to limit expenses, excluding, interest, taxes, brokerage and extraordinary expenses [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Balanced Fund 51 PILGRIM CONVERTIBLE FUND FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- For the eleven months ended May 31, 2001, the year ended June 30, 2000 and the three months ended June 30, 1999, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to June 30, 1999, the financial information was audited by other independent auditors.
Eleven Months Year Three Months Ended Ended Ended Year Ended March 31, May 31, June 30, June 30, -------------------------- 2001 2000 1999(1) 1999 1998 1997 ---- ---- ------- ---- ---- ---- Per Share Operating Performance: Net asset value, beginning of period $ 26.85 22.51 21.22 18.47 15.19 13.72 Income from investment operations: Net investment income $ 0.59 0.44 0.09 0.43 0.48 0.42 Net realized and unrealized gain (loss) on investments $ (4.84) 7.82 1.31 3.09 4.19 1.50 Total from investment operations $ (4.25) 8.26 1.40 3.52 4.67 1.92 Less distributions from: Net investment income $ 0.53 0.35 0.11 0.46 0.48 0.42 Net realized gain on investments $ 4.70 3.57 -- 0.31 0.91 0.03 Total distributions $ 5.23 3.92 0.11 0.77 1.39 0.45 Net asset value, end of period $ 17.37 26.85 22.51 21.22 18.47 15.19 Total Return(2): % (17.50) 40.36 6.62 19.66 31.54 14.13 Ratios/Supplemental Data: Net assets, end of period (000's) $ 29,629 56,165 17,537 8,741 7,080 4,599 Ratio to average net assets: Net expenses after expense reimbursement/recoupment(3)(4) % 1.15 1.25 1.23 1.23 1.22 1.25 Gross expenses prior to expense reimbursement/recoupment(3) % 1.14 1.25 1.23 1.35 2.35 2.90 Net investment income after expense reimbursement/recoupment(3)(4) % 2.47 1.88 2.04 2.37 5.99 3.29 Portfolio turnover % 145 129 28 138 160 167
---------- (1) Effective May 24, 1999, ING Pilgrim Investments, LLC, became the Adviser of the Fund and the Fund changed its year end to June 30. (2) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value. Total return for less than one year is not annualized. (3) Annualized for periods less than one year. (4) The Adviser has agreed to limit expenses, excluding, interest, taxes, brokerage and extraordinary expenses. 52 Pilgrim Convertible Fund WHERE TO GO FOR MORE INFORMATION YOU'LL FIND MORE INFORMATION ABOUT THE PILGRIM FUNDS IN OUR: ANNUAL/SEMI-ANNUAL REPORTS Includes a discussion of recent market conditions and investment strategies that significantly affected performance, the financial statements and the auditors' reports (in annual report only). STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI contains more detailed information about the Pilgrim Funds. The SAI is legally part of this prospectus (it is incorporated by reference). A copy has been filed with the U.S. 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 7337 East Doubletree Ranch Road Scottsdale, AZ 85258-2034 1-800-992-0180 Or visit our website at WWW.PILGRIMFUNDS.COM This information may also be reviewed or obtained from the SEC. In order to review the information in person, you will need to visit the SEC's Public Reference Room in Washington, D.C. or call 202-942-8090. Otherwise, you may obtain the information for a fee by contacting the SEC at: U.S. Securities and Exchange Commission Public Reference Section Washington, D.C. 20549-0102 or at the e-mail address: publicinfo@sec.gov Or obtain the information at no cost by visiting the SEC's Internet website at http://www.sec.gov When contacting the SEC, you will want to refer to the Fund's SEC file number. The file numbers are as follows:
Pilgrim Growth Opportunities Fund 811-4431 Pilgrim Mutual Funds 811-7428 Pilgrim Equity Trust 811-8817 Pilgrim LargeCap Growth Fund Pilgrim MidCap Opportunities Fund Pilgrim MidCap Growth Fund Pilgrim Mayflower Trust 811-7978 Pilgrim SmallCap Growth Fund Pilgrim Research Enhanced Index Fund Pilgrim Balanced Fund Pilgrim Growth + Value Fund Pilgrim Convertible Fund Pilgrim SmallCap Opportunities Fund 811-4434 Pilgrim Growth and Income Fund, Inc. 811-0865 Pilgrim Investment Funds, Inc. 811-1939 Pilgrim MagnaCap Fund
[LOGO] ING PILGRIM QUSEQPROS100101-100101 Prospectus October 1, 2001 Class I Institutional Class Shares Pilgrim International Value Pilgrim Research Enhanced Index Pilgrim Growth Opportunities Pilgrim MidCap Opportunities Pilgrim SmallCap Opportunities ING Pilgrim Money Market [GRAPHIC] This prospectus contains important information about investing in the Pilgrim Funds. You should read it carefully before you invest, and keep it for future reference. Please note that your investment: is not a bank deposit, is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board or any other government agency and is affected by market fluctuations. There is no guarantee that the Funds will achieve their objectives. As with all mutual funds, the U.S. 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. [LOGO] ING PILGRIM WHAT'S INSIDE -------------------------------------------------------------------------------- [GRAPHIC] OBJECTIVE These pages contain a description of each of our Funds included in this prospectus, including each Fund's objective, investment strategy, and risks. [GRAPHIC] INVESTMENT STRATEGY You'll also find: [GRAPHIC] RISKS How the Fund has performed. A chart that shows the Fund's financial performance for the past ten years (or since inception, if shorter). [GRAPHIC] HOW THE FUND HAS PERFORMED What you pay to invest. A list of the fees and expenses you pay -- both directly and indirectly -- when you invest in a Fund. Funds At A Glance 2 Pilgrim International Value 4 Pilgrim Research Enhanced Index 6 Pilgrim Growth Opportunities 8 Pilgrim MidCap Opportunities 10 Pilgrim SmallCap Opportunities 12 ING Pilgrim Money Market 14 What You Pay to Invest 16 Shareholder Guide 17 Management of the Funds 21 Dividends, Distributions and Taxes 23 More Information About Risks 24 Financial Highlights 27 Where To Go For More Information Back cover FUNDS AT A GLANCE -------------------------------------------------------------------------------- This table is a summary of the objectives, main investments and risks of each Pilgrim Fund. It is designed to help you understand the differences between the Funds, the main risks associated with each, and how risk and investment objectives relate. This table is only a summary. You should read the complete descriptions of each Fund's investment objectives, strategies and risks, which begin on page 4.
FUND INVESTMENT OBJECTIVE ---- -------------------- International International Value Fund Long-term capital appreciation Equity Fund Adviser: ING Pilgrim Investments, LLC Sub-Adviser: Brandes Investment Partners, L.P. U.S. Equity Research Enhanced Index Fund Capital appreciation Funds Adviser: ING Pilgrim Investments, LLC Sub-Adviser: Aeltus Investment Management, Inc. Growth Opportunities Fund Long-term growth of capital Adviser: ING Pilgrim Investments, LLC MidCap Opportunities Fund Long-term capital appreciation Adviser: ING Pilgrim Investments, LLC SmallCap Opportunities Fund Capital appreciation Adviser: ING Pilgrim Investments, LLC Income ING Pilgrim Money Market Fund A high level of current income as is consistent with the Fund Adviser: ING Pilgrim Investments, LLC preservation of capital and liquidity and the maintenance Sub-Adviser: ING Investment Management LLC of a stable $1.00 net asset value per share.
2 FUNDS AT A GLANCE -------------------------------------------------------------------------------- MAIN INVESTMENTS MAIN RISKS --------------------------------------------------------------------------------
Equity securities of issuers located in Price volatility and other risks that accompany an investment in countries outside the U.S., believed to have foreign equities. Sensitive to currency exchange rates, prices below their long-term value. international political and economic conditions and other risks that affect foreign securities. Equity securities of large U.S. companies Price volatility and other risks that accompany an investment in that make up the S&P 500 Index. equity securities. Equity securities of large, medium, and small Price volatility and other risks that accompany an investment in U.S. companies believed to have growth growth-oriented equity securities. potential. Equity securities of medium-sized U.S. Price volatility and other risks that accompany an investment in companies believed to have growth equity securities of growth-oriented and medium-sized potential. companies. Particularly sensitive to price swings during periods of economic uncertainty. Equity securities of small-sized U.S. Price volatility and other risks that accompany an investment in companies believed to have growth equity securities of growth-oriented and small-sized companies. potential. Particularly sensitive to price swings during periods of economic uncertainty. A diversified portfolio of high quality, The Fund's yield will vary. There can be no assurance that the U.S. dollar-denominated short-term debt Fund will be able to maintain a stable net asset value of $1.00 securities which are determined by the per share. Sub-Adviser to present minimal credit risks.
3 Adviser ING Pilgrim Investments, LLC Sub-Adviser PILGRIM INTERNATIONAL VALUE FUND Brandes Investment Partners, L.P. -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks long-term capital appreciation. INVESTMENT STRATEGY [GRAPHIC] The Fund invests primarily in foreign companies with market capitalizations greater than $1 billion, but it may hold up to 25% of its assets in companies with smaller market capitalizations. The portfolio managers apply the technique of "value investing" by seeking stocks that their research indicates are priced below their long-term value. The Fund holds common stocks, preferred stocks, American, European and global depository receipts, as well as convertible securities. Under normal circumstances, the Fund will invest at least 65% of its total assets in securities of companies located in at least three countries other than the U.S., which may include emerging market countries. The Fund may invest up to the greater of: * 20% of its assets in any one country or industry, or, * 150% of the weighting of the country or industry in the Morgan Stanley Capital International Europe, Australia and Far East (MSCI EAFE) Index, as long as the Fund meets any industry concentration or diversification requirements under the Investment Company Act. The Fund also may lend portfolio securities on a short-term or long-term basis, up to 33 1/3% of its total assets. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Risks of Foreign Investing -- foreign investments may be riskier than U.S. investments for many reasons, including changes in currency exchange rates, unstable political and economic conditions, a lack of adequate company information, differences in the way securities markets operate, less secure foreign banks or securities depositories than those in the U.S., and foreign controls on investment. To the extent the Fund invests in emerging market countries, the risks may be greater, partly because emerging market countries may be less politically and economically stable than other countries. It may also be more difficult to buy and sell securities in emerging market countries. Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The Fund invests primarily in equity securities of larger companies, which sometimes have more stable prices than smaller companies. However, the Fund may also invest in small and medium-sized companies, which may be more susceptible to price swings than larger companies because they have fewer financial resources, more limited product and market diversification and many are dependent on a few key managers. Market Trends -- from time to time, the stock market may not favor the value-oriented stocks in which the Fund invests. Rather, the market could favor growth-oriented stocks, or may not favor equities at all. Inability to Sell Securities -- securities of smaller companies and some foreign companies may trade in lower volume and may be less liquid than securities of larger, more established companies or U.S. companies. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. Securities Lending -- there is the risk that when lending portfolio securities, the securities may not be available to the Fund on a timely basis and the Fund may, therefore, lose the opportunity to sell the securities at a desirable price. 4 Pilgrim International Value Fund PILGRIM INTERNATIONAL VALUE FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's Class A shares from year to year. Year by Year Total Return (%)(1)(2) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 15.23 17.86 13.46 51.49 1.89 ---------- (1) These figures are for the year ended December 31 of each year. They do not reflect sales charges and would be lower if they did. (2) Because Class I shares were first offered in 2001, the returns in the bar chart are based upon the performance of Class A shares of the Fund. Class A shares are not offered in this Prospectus. Class A shares would have substantially similar annual returns as the Class I shares because the classes are invested in the same portfolio of securities. Annual returns would differ only to the extent Class I and Class A shares have different expenses. Best and worst quarterly performance during this period: 4th quarter 1999: 24.50% 3rd quarter 1998: -14.73% The Fund's year-to-date total return as of June 30, 2001: -8.00%. The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- The Morgan Stanley Capital International Europe, Australia and Far East Index (MSCI EAFE Index). Average Annual Total Returns(3) MSCI EAFE Class A(4) Index(5) ---------- -------- One year, ended December 31, 2000 % -3.97 -13.96 Five years, ended December 31, 2000 % 17.52 7.43 Since inception of Class A(6) % 17.14 9.12 ---------- (3) This table shows performance of the Class A shares of the Fund, because Class I shares had not commenced operations during the year ended December 31, 2000. See footnote (2) to the bar chart above. (4) Reflects deduction of sales charge of 5.75%. (5) The MSCI EAFE Index is an unmanaged index that measures the performance of securities listed on exchanges in markets in Europe, Australia and the Far East. (6) Class A commenced operations on March 6, 1995. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim International Value Fund 5 Adviser ING Pilgrim Investments, LLC Sub-Adviser PILGRIM RESEARCH ENHANCED INDEX FUND Aeltus Investment Management, Inc. -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks capital appreciation. INVESTMENT STRATEGY [GRAPHIC] The Fund invests at least 80% of its net assets in stocks included in the Standard & Poor's Composite Stock Price Index (S&P 500 Index). The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization companies whose securities are traded on major U.S. stock markets. In managing the Fund, the portfolio managers attempt to achieve the investment objective by overweighting those stocks in the S&P 500 Index that the portfolio managers believe will outperform the index, and underweighting (or avoiding altogether) those stocks that the portfolio managers believe will underperform the index. In determining stock weightings, the portfolio managers use internally developed quantitative computer models to evaluate various criteria such as the financial strength of each company and its potential for strong, sustained earnings growth. At any one time, the portfolio managers generally include in the Fund approximately 400 of the stocks included in the S&P 500 Index. Although the Fund will not hold all the stocks in the S&P 500 Index, the portfolio managers expect that there will be a close correlation between the performance of the Fund and that of the S&P 500 Index in both rising and falling markets, as the Fund is designed to have risk characteristics (e.g. price-to-earnings ratio, dividend yield, volatility) which approximate those of the S&P 500 Index. The Fund may also invest in certain higher-risk investments, including derivatives (generally, these investments will be limited to S&P 500 Index options and futures on the S&P 500 Index). -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. The portfolio managers try to remain fully invested in companies included in the S&P 500 Index, and generally do not change this strategy even temporarily, which could make the Fund more susceptible to poor market conditions. Market Trends -- from time to time, the stock market may not favor the large company securities that are ranked as undervalued or fairly valued in which the Fund invests. Rather, the market could favor small company stocks, growth- oriented stocks, or may not favor equities at all. Risks of Using Derivatives -- derivatives are subject to the risk of changes in the market price of the security and the risk of loss due to changes in interest rates. The use of certain derivatives may also have a leveraging effect, which may increase the volatility of the Fund. The use of derivatives may reduce returns for the Fund. 6 Pilgrim Research Enhanced Index Fund PILGRIM RESEARCH ENHANCED INDEX FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's shares from year to year. Year by Year Total Returns (%)(1)(2) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 18.99 -11.83 ---------- (1) These figures are for the year ended December 31 of each year. (2) Prior to August 1, 2001 the Fund was managed by another sub-adviser. Best and worst quarterly performance during this period: 4th quarter 1999: 12.47% 4th quarter 2000: -8.40% The Fund's year-to-date total return as of June 30, 2001: -6.37%. The table below provides some indication of the risk of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the S&P 500 Index. Average Annual Total Returns S&P 500 Class I Index(3) ------- -------- One year, ended December 31, 2000 % -11.83 -9.11 Since inception(4) % 2.42 4.89 ---------- (3) The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large- capitalization companies whose securities are traded on major U.S. stock markets. (4) The class commenced operations on December 30, 1998. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Research Enhanced Index Fund 7 Adviser PILGRIM GROWTH OPPORTUNITIES FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] This Fund seeks long-term growth of capital. INVESTMENT STRATEGY [GRAPHIC] The Fund invests primarily in common stock of U.S. companies that the portfolio manager believes have above average prospects for growth. Under normal market conditions, the Fund invests at least 65% of its total assets in securities purchased on the basis of the potential for capital appreciation. These securities may be from large-cap, mid-cap or small-cap companies. The portfolio managers use a "top down" disciplined investment process, which includes extensive database screening, frequent fundamental research, identification and implementation of a trend-oriented approach in structuring the portfolio and a sell discipline. The portfolio managers seek to invest in companies expected to benefit most from major social, economic and technological trends that are likely to shape the future of business and commerce over the next three to five years, and attempt to provide a framework for identifying the industries and companies expected to benefit most. This top down approach is combined with rigorous fundamental research (a bottom up approach) to guide stock selection and portfolio structure. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. This Fund invests in companies that the portfolio manager feels have the potential for rapid growth, which may give the Fund a higher risk of price volatility than a Fund that emphasizes other styles, such as a value-oriented style. The Fund may invest in small and medium-sized companies, which may be more susceptible to price swings than larger companies because they have fewer financial resources, more limited product and market diversification and many are dependent on a few key managers. Market Trends -- from time to time, the stock market may not favor the growth securities in which the Fund invests. Rather, the market could favor value-oriented stocks, or may not favor equities at all. Inability to Sell Securities -- securities of smaller companies trade in lower volume and may be less liquid than securities of larger, more established companies. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. 8 Pilgrim Growth Opportunities Fund PILGRIM GROWTH OPPORTUNITIES FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's shares from year to year. Year by Year Total Returns (%)(1) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 24.06 93.86 -18.74 ---------- (1) These figures are for the year ended December 31 of each year. Best and worst quarterly performance during this period: 4th quarter 1999: 39.11% 4th quarter 2000: -24.29% The Fund's year-to-date total return as of June 30, 2001: -28.45%. The table below provides some indication of the risk of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index). Average Annual Total Returns S&P 500 Class I Index(2) ------- -------- One year, ended December 31, 2000 % -18.74 -9.11 Since inception(3) % 26.62 17.67 ---------- (2) The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large- capitalization companies whose securities are traded on major U.S. stock markets. (3) The class commenced operations on March 31, 1997. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Growth Opportunities Fund 9 Adviser PILGRIM MIDCAP OPPORTUNITIES FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] This Fund seeks long-term capital appreciation. INVESTMENT STRATEGY [GRAPHIC] The Fund normally invests at least 65% of its total assets in the common stocks of mid-sized U.S. companies that the portfolio managers feel have above average prospects for growth. For this Fund, mid-sized companies are companies with market capitalizations that fall within the range of companies in the Standard & Poor's MidCap 400 Index (S&P MidCap 400 Index). As of June 30, 2001, the market capitalization of companies in the S&P MidCap 400 Index ranged from $312 million to $11.8 billion. The market capitalization range will change as the range of the companies included in the S&P MidCap 400 Index changes. The portfolio managers use a "top down" disciplined investment process, which includes extensive database screening, frequent fundamental research, identification and implementation of a trend-oriented approach in structuring the portfolio and a sell discipline. The portfolio managers seek to invest in companies expected to benefit most from the major social, economic and technological trends that are likely to shape the future of business and commerce over the next three to five years, and attempt to provide a framework for identifying the industries and companies expected to benefit most. This top-down approach is combined with rigorous fundamental research (a bottom-up approach) to guide stock selection and portfolio structure. The Fund may invest in initial public offerings. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. This Fund invests in companies that the portfolio managers feel have the potential for growth, which may give the Fund a higher risk of price volatility than a Fund that emphasizes other styles, such as a value-oriented style. The Fund invests in medium-sized companies, which may be more susceptible to price swings than larger companies because they have fewer financial resources, more limited product and market diversification, and may be dependent on a few key managers. Market Trends -- from time to time, the stock market may not favor the mid-cap growth securities in which the Fund invests. Rather, the market could favor value-oriented stocks or large or small company stocks, or may not favor equities at all. The Fund's investment in technology sectors of the stock market and in initial public offerings has had a significant impact on performance in 1999 and other periods. There can be no assurance that these factors will continue to have a positive effect on the Fund. Inability to Sell Securities -- securities of mid-size companies usually trade in lower volume and may be less liquid than securities of larger, more established companies. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. Initial Public Offerings -- a significant portion of the Fund's return may be attributable to its investment in initial public offerings. When the Fund's asset base is small, the impact of such investments on the Fund's return will be magnified. As the Fund's assets grow, it is probable that the effect of the Fund's investment in initial public offerings on the Fund's total return will decline. 10 Pilgrim MidCap Opportunities Fund PILGRIM MIDCAP OPPORTUNITIES FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's shares from year to year. Year by Year Total Returns (%)(1) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 103.19 0.08 ---------- (1) These figures are for the year ended December 31 of each year. Best and worst quarterly performance during this period: 4th quarter 1999: 45.04% 4th quarter 2000: -19.25% The Fund's year-to-date total return as of June 30, 2001: -26.79%. The table below provides some indication of the risk of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the S&P MidCap 400 Index. Average Annual Total Returns S&P MidCap 400 Class I Index(2) ------- -------- One year, ended December 31, 2000 % 0.08 17.51 Since inception(3) % 50.66 31.35 ---------- (2) The S&P MidCap 400 Index is an unmanaged index that measures the performance of the mid-size company segment of the U.S. market. (3) The class commenced operations on August 20, 1998. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim MidCap Opportunities Fund 11 Adviser PILGRIM SMALLCAP OPPORTUNITIES FUND ING Pilgrim Investments, LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] This Fund seeks capital appreciation. INVESTMENT STRATEGY [GRAPHIC] The Fund invests at least 65% of its total assets in the common stock of smaller, lesser-known U.S. companies that the portfolio manager believes have above average prospects for growth. For this Fund, smaller companies are those with market capitalizations that fall within the range of companies in the Russell 2000 Index, which is an index that measures the performance of small companies. The market capitalization range will change as the range of the companies included in the Russell 2000 Index changes. The market capitalization of companies held by the Fund as of June 30, 2001 ranged from $133 million to $8.9 billion. The portfolio manager uses a "top down" disciplined investment process, which includes extensive database screening, frequent fundamental research, identification and implementation of a trend-oriented approach in structuring the portfolio and a sell discipline. The portfolio manager seeks to invest in companies expected to benefit most from major social, economic and technological trends that are likely to shape the future of business and commerce over the next three to five years, and attempt to provide a framework for identifying the industries and companies expected to benefit most. This top-down approach is combined with rigorous fundamental research (a bottom-up approach) to guide stock selection and portfolio structure. The Fund may invest in initial public offerings. -------------------------------------------------------------------------------- RISKS [GRAPHIC] You could lose money on an investment in the Fund. The Fund may be affected by the following risks, among others: Price Volatility -- the value of the Fund changes as the prices of its investments go up or down. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. This Fund invests in companies that the portfolio manager feels have above average prospects for growth, which may give the Fund a higher risk of price volatility than a Fund that emphasizes other styles, such as a value-oriented style. The Fund invests in smaller companies, which may be more susceptible to price swings than larger companies because they have fewer financial resources, more limited product and market diversification and many are dependent on a few key managers. Market Trends -- from time to time, the stock market may not favor the small sized growth securities in which the Fund invests. Rather, the market could favor value-oriented stocks or large company stocks, or may not favor equities at all. Inability to Sell Securities -- securities of smaller companies usually trade in lower volume and may be less liquid than securities of larger, more established companies. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. Initial Public Offerings -- a significant portion of the Fund's return may be attributable to its investment in initial public offerings. When the Fund's asset base is small, the impact of such investments on the Fund's return will be magnified. As the Fund's assets grow, it is probable that the effect of the Fund's investment in initial public offerings on the Fund's total return will decline. 12 Pilgrim SmallCap Opportunities Fund PILGRIM SMALLCAP OPPORTUNITIES FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's shares from year to year. Year by Year Total Returns (%)(1) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -5.21 ---------- (1) These figures are for the year ended December 31, 2000. Best and worst quarterly performance during this period: 1st quarter 2000: 15.82% 4th quarter 2000: -17.45% The Fund's year-to-date total return as of June 30, 2001: -19.11%. The table below provides some indication of the risks of investing in the Fund by comparing the Fund's performance to that of a broad measure of market performance -- the Russell 2000 Index. Average Annual Total Returns Russell 2000 Class I Index(2) ------- -------- One year, ended December 31, 2000 % -5.21 -3.02 Since inception(3) % 57.81 13.26 ---------- (2) The Russell 2000 Index is an unmanaged index that measures the performance of securities of small companies. (3) The class commenced operations on April 1, 1999. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim SmallCap Opportunities Fund 13 Adviser ING Pilgrim Investments, LLC Sub-Adviser ING PILGRIM MONEY MARKET FUND ING Investment Management LLC -------------------------------------------------------------------------------- OBJECTIVE [GRAPHIC] The Fund seeks to provide investors with a high level of current income as is consistent with the preservation of capital and liquidity and the maintenance of a stable $1.00 net asset value per share. INVESTMENT STRATEGY [GRAPHIC] The Fund operates as a diversified fund and invests in a portfolio of high-quality, U.S. dollar denominated short-term debt obligations which are determined by the Sub-Adviser to present minimal credit risks. Portfolio investments of the Fund are valued based on the amortized cost valuation method pursuant to Rule 2a-7 under the Investment Company Act of 1940. Obligations in which the Fund invests generally have remaining maturities of 397 days or less, although upon satisfying certain conditions of Rule 2a-7, the Fund may, to the extent otherwise permissible, invest in instruments subject to repurchase agreements and certain variable and floating rate obligations that bear longer final maturities. The dollar-weighted average portfolio maturity of the Fund will not exceed 90 days. The Fund invests in obligations permitted to be purchased under Rule 2a-7 including, but not limited to, (i) U.S. Government securities and obligations of its agencies or instrumentalities; (ii) commercial paper, mortgage-backed and asset-backed securities, guaranteed investment contracts, loan participation interests, medium-term notes, and other promissory notes, including floating and variable rate obligations, and (iii) the following domestic, Yankeedollar and Eurodollar obligations: certificates of deposit, time deposits, bankers acceptances, commercial paper, and other promissory notes, including floating and variable rate obligations issued by U.S. or foreign bank holding companies and their bank subsidiaries branches and agencies. The Fund may invest more than 25% of its total assets in instruments issued by domestic banks. The Fund may purchase securities on a "when-issued" basis and purchase or sell them on a "forward commitment" basis. The Fund may also invest in variable rate master demand obligations, which are unsecured demand notes that permit the underlying indebtedness to vary, and provide for periodic adjustments in the interest rate. The Fund may enter into repurchase agreements. In choosing investments for the Fund, the Sub-Adviser employs a highly disciplined, four step investment process designed to ensure preservation of capital and liquidity, as well as adherence to regulatory requirements. The four steps are: * First, a formal list of high-quality issuers is actively maintained; * Second, securities of issuers on the approved list which meet maturity guidelines and are rated "first tier" (that is, they are given the highest short-term rating by at least two nationally recognized statistical rating organizations, or by a single rating organization if a security is rated only by that organization, or are determined to be of comparable quality by the Sub-Adviser pursuant to guidelines approved by the Fund's Board of Trustees) are selected for investment; * Third, diversification is continuously monitored to ensure that regulatory limits are not exceeded; and * Finally, portfolio maturity decisions are made based upon expected cash flows, income opportunities available in the market and expectations of future interest rates. -------------------------------------------------------------------------------- RISKS [GRAPHIC] The Fund is subject to the risks associated with investing in debt securities. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. Changes in Interest Rates -- money market funds like the Fund are subject to less interest rate risk than other income funds because they invest in debt securities with a remaining maturity not greater than 397 days. Still, the value of the Fund's investment may fall when interest rates rise. Credit Risk -- money market funds like the Fund are subject to less credit risk than other income funds because they invest in short-term debt securities of the highest quality. Still, the Fund could lose money if the issuer of a debt security is unable to meet its financial obligations or goes bankrupt. U.S. Government Securities -- some U.S. Government agency securities may be subject to varying degrees of credit risk, and all U.S. Government Securities may be subject to price declines in the securities due to changing interest rates. If an obligation, such as obligations issued by the Federal National Mortgage Association, the Student Loan Marketing Association, the Federal Home Loan Bank and the Federal Home Loan Mortgage Corporation, is supported only by the credit of the agency or instrumentality issuing the obligation, the investor must look principally to the agency issuing or guaranteeing the oligation for ultimate repayment. Securities directly supported by the full faith and credit of the United States have less credit risk. Risk of Concentration in Banking Obligations -- the risks of concentrating in investments in the banking industry include credit risk, interest rate risks, and regulatory risk (the impact of state or federal legislation and regulations). Risks of Foreign Investments -- Euro and Yankee dollar investments involve certain risks that are different from investments in domestic obligations of U.S. banks. These risks may include unfavorable political and economic developments, possible withholding taxes, seizure of foreign deposits, currency controls or other governmental restrictions which might affect payment of principal or interest. In addition, foreign banks are not regulated by U.S. banking authorities and are generally not bound by financial reporting standards comparable to U.S. banks. Further, adverse political, regulatory, market or economic developments in foreign countries can affect entities located in those countries. 14 ING Pilgrim Money Market Fund ING PILGRIM MONEY MARKET FUND -------------------------------------------------------------------------------- HOW THE FUND HAS PERFORMED [GRAPHIC] The bar chart and table below show the Fund's annual returns and long-term performance, and illustrate the variability of the Fund's returns. The Fund's past performance is not an indication of future performance. The bar chart below provides some indication of the risks of investing in the Fund by showing changes in the performance of the Fund's shares from year to year. For the Fund's current seven-day yield and seven-day effective yield, call the Fund at 1-800-992-0180. Year by Year Total Returns (%)(1) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 6.34 ---------- (1) These figures are for the year ended December 31, 2000. Best and worst quarterly performance during this period: 3rd quarter 2000: 1.64% 1st quarter 2000: 1.42% The Fund's year-to-date total return as of June 30, 2001: 2.60%. The following performance table discloses the Fund's average annual total return. Average Annual Total Returns Class I ------- One year ended December 31, 2000 % 6.34 Since inception(2) % 6.19 ---------- (2) The class commenced operations on October 13, 1999. The Fund's seven-day yield as of December 31, 2000 for the Class I shares was 6.32%. The "seven-day yield" is an annualized figure -- the amount you would earn if you kept your investment in the Fund and the Fund continued to earn the same net interest income throughout the year. The Fund's seven-day effective yield as of December 31, 2000 for the Class I shares was 6.52%. The "seven-day effective yield" (also an annualized figure) assumes that dividends are reinvested and compounded. [GRAPHIC] If you have any questions, please call 1-800-992-0180. ING Pilgrim Money Market Fund 15 WHAT YOU PAY TO INVEST -------------------------------------------------------------------------------- There are two types of fees and expenses when you invest in mutual funds: fees, including sales charges, you pay directly when you buy or sell shares, and operating expenses paid each year by the fund. The tables that follow show the fees and expenses for each of the Pilgrim Funds. Fees You Pay Directly Class I ------- Maximum sales charge on your investment (as a % of offering price) none Maximum deferred sales charge (as a % of purchase or sales price, whichever is less) none Operating Expenses Paid Each Year by the Funds(1) (as a % of average net assets) Class I
Distribution Total and service Fund Waivers Management (12b-1) Other operating and Net Fund fee fees expenses(2) expenses Reimbursements(3) Expense ---- --- ---- ----------- -------- ----------------- ------- International Value 1.00% -- 0.25(4) 1.25 -- 1.25 Research Enhanced Index 0.70 -- 0.34(4) 1.04 -- 1.04 Growth Opportunities 0.95 -- 0.36(4) 1.31 -- 1.31 MidCap Opportunities(5) 1.00 -- 0.43(4) 1.43(6) -- 1.43(6) SmallCap Opportunities(5) 1.00 -- 0.28(4) 1.28(7) -- 1.28 Money Market 0.25 -- 0.30 0.55 -0.24 0.31
---------- (1) These tables show the estimated operating expenses for each Fund as a ratio of expenses to average daily net assets. These estimates are based on each Fund's actual operating expenses for its most recent complete fiscal year. (2) Because Class I shares are new for International Value Fund, expenses are estimated based on Class A expenses and contractual expenses negotiated with respect to Class I. (3) ING Pilgrim Investments, LLC ("ING Pilgrim") has entered into a written expense limitation agreement with ING Pilgrim Money Market Fund under which it will limit expenses of the Fund, excluding interest, taxes, brokerage and extraodinary expenses, subject to possible reimbursement to ING Pilgrim within three years. The amount of the Fund's expenses waived or reimbursed during the last fiscal year is shown under the heading "Waivers and Reimbursements." The expense limit will continue through at least February 28, 2002. The expense limitation agreements are contractual and shall renew automatically for one-year terms unless the Adviser provides written notice of the termination of the expense limitation agreement at least 30 days prior to the end of the then current terms or upon termination of the investment management agreement. (4) ING Pilgrim Group, LLC receives an annual administration fee equal to 0.10% of average daily net assets. (5) Effective February 23, 2001, certain Pilgrim Funds merged with MidCap Opportunities and SmallCap Opportunities Funds. It is expected that as a result of the mergers, operating expenses will be lower than the operating expenses prior to the mergers. (6) Excludes one-time merger fees of 0.09% incurred in connection with the merger of another investment company into Pilgrim MidCap Opportunities Fund. (7) Excludes one-time merger fees of 0.03% incurred in connection with the merger of another investment company into Pilgrim SmallCap Opportunities Fund. Examples The examples that follow are intended to help you compare the cost of investing in the Pilgrim Funds with the cost of investing in other mutual funds. Each example assumes that you invested $10,000, reinvested all your dividends, the Fund earned an average annual return of 5%, and annual operating expenses remained at the current level. Keep in mind that this is only an estimate -- actual expenses and performance may vary. Class I Fund 1 year 3 years 5 years 10 years ---- ------ ------- ------- -------- International Value 127 397 686 1,511 Research Enhanced Index 106 331 574 1,271 Growth Opportunities 133 415 718 1,579 MidCap Opportunities 146 452 782 1,713 SmallCap Opportunities 130 406 702 1,545 Money Market 56 176 307 689 16 What You Pay to Invest HOW TO PURCHASE SHARES SHAREHOLDER GUIDE -------------------------------------------------------------------------------- * The minimum initial investment for Class I shares is $1,000,000. Class I shares are only available to (i) certain defined benefit plans, insurance companies and foundations investing for their own account; (ii) certain wrap programs offered by broker-dealers and financial institutions; (iii) retirement plans affiliated with ING Group; and (iv) ING Group and its affiliates for purposes of corporate cash management. * The minimum amount of each Class I investment after your first one is $100,000. * 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 certified shares can't be sold or exchanged by telephone. * We have the right to refuse a request to buy shares. Make your investment using the table on the right. The Funds and the Distributor reserve the right to reject any purchase order. Please note that cash, travelers checks, third party checks, money orders and checks drawn on non-U.S. banks (even if payment may be effected through a U.S. bank) will not be accepted. The Pilgrim Funds reserve the right to waive minimum investment amounts. The Funds reserve the right to liquidate sufficient shares to recover annual transfer agent fees or to close your account and redeem your shares should you fail to maintain your account value at a minimum of $10,000. Initial Additional Method Investment Investment ------ ---------- ---------- By Contacting An investment Visit or consult an Your Investment professional with an investment professional. Professional authorized firm can help you establish and maintain your account. By Mail Visit or consult an Fill out the Account investment Additions form professional. Make included on the your check payable bottom of your to the Pilgrim Funds account statement and mail it, along along with your with a completed check payable to the Application. Please Fund and mail them indicate your to the address on the investment account statement. professional on the Remember to write New Account your account number Application. on the check. By Wire Call the ING Pilgrim Wire the funds in the Operations same manner Department at (800) described under 336-3436 to obtain "Initial Investment." an account number and indicate your investment professional on the account. Instruct your bank to wire funds to the Fund in the care of: State Street Bank and Trust Company ABA #101003621 Kansas City, MO credit to: __________ (the Fund) A/C #751-8315; for further credit to: _____________________ Shareholder A/C #_____________________ (A/C # you received over the telephone) Shareholder Name: ______________________ (Your Name Here) After wiring funds you must complete the Account Application and send it to: Pilgrim Funds P.O. Box 219368 Kansas City, MO 64121-9368 [GRAPHIC] If you have any questions, please call 1-800-992-0180. Shareholder Guide 17 HOW TO REDEEM SHARES SHAREHOLDER GUIDE -------------------------------------------------------------------------------- You may redeem shares using the table on the right: Under unusual circumstances, a Fund may suspend the right of redemption as allowed by federal securities laws. Systematic Withdrawal Plan You may elect to make periodic withdrawals from your account on a regular basis. * Your account must have a current value of at least $250,000. * Minimum withdrawal amount is $1,000. * You may choose from monthly, quarterly, semi-annual or annual payments. For additional information, contact the Shareholder Servicing Agent, see the Account Application or the SAI. Payments Normally, payment for shares redeemed will be made within three days after receipt by the Transfer Agent of a written request in good order. The Fund has the right to take up to seven days to pay your redemption proceeds, and may postpone payment longer in the event of an economic emergency as determined by the U.S. Securities and Exchange Commission. When you place a request to redeem shares for which the purchase money has not yet been collected, the request will be executed at the next determined net asset value, but the Fund will not release the proceeds until your purchase payment clears. This may take up to 15 days or more. To reduce such delay, purchases should be made by bank wire or federal funds. Each Fund normally intends to pay in cash for all shares redeemed, but under abnormal conditions that make payment in cash unwise, a Fund may make payment wholly or partly in securities at their then current market value equal to the redemption price. In such case, a Fund could elect to make payment in securities for redemptions in excess of $250,000 or 1% of its net assets during any 90-day period for any one shareholder. An investor may incur brokerage costs in converting such securities to cash. Method Procedures ------ ---------- By Contacting Your You may redeem by contacting your Investment Professional investment professional. Investment professionals may charge for their services in connection with your redemption request, but neither the Fund nor the Distributor imposes any such charge. By Mail Send a written request specifying the Fund name and share class, your account number, the name(s) in which the account is registered, and the dollar value or number of shares you wish to redeem to: Pilgrim Funds P.O. Box 219368 Kansas City, MO 64121-9368 If certificated shares have been issued, the certificate must accompany the written request. Corporate investors and other associations must have an appropriate certification on file authorizing redemptions. A suggested form of such certification is provided on the Account Application. A signature guarantee may be required. By Telephone -- You may redeem shares by telephone on Expedited Redemption all accounts other than retirement accounts, unless you check the box on the Account Application which signifies that you do not wish to use telephone redemptions. To redeem by telephone, call the Shareholder Servicing Agent at (800) 992-0180. Receiving Proceeds By Check: You may have redemption proceeds (up to a maximum of $100,000) mailed to an address which has been on record with Pilgrim Funds for at least 30 days. Receiving Proceeds By Wire: You may have redemption proceeds (subject to a minimum of $5,000) wired to your pre-designated bank account. You will not be able to receive redemption proceeds by wire unless you check the box on the Account Application which signifies that you wish to receive redemption proceeds by wire and attach a voided check. Under normal circumstances, proceeds will be transmitted to your bank on the business day following receipt of your instructions, provided redemptions may be made. In the event that share certificates have been issued, you may not request a wire redemption by telephone. 18 Shareholder Guide TRANSACTION POLICIES SHAREHOLDER GUIDE -------------------------------------------------------------------------------- Net Asset Value The net asset value (NAV) per share for each Fund and class is determined each business day as of the close of regular trading on the New York Stock Exchange (usually at 4:00 p.m. Eastern Time). The NAV per share of Class I of each Fund is calculated by taking the value of the Fund's assets attributable to Class I, subtracting the Fund's liabilities attributable to Class I, and dividing by the number of shares of Class I that are outstanding. Because foreign securities may trade on days when the Funds do not price shares, the NAV of a Fund that invests in foreign securities may change on days when shareholders will not be able to purchase or redeem the Fund's shares. In general, assets are valued based on actual or estimated market value, with special provisions for assets not having readily available market quotations, short-term debt securities, and for situations where market quotations are deemed unreliable. Short-term debt securities having a maturity of 60 days or less are valued at amortized cost, unless the amortized cost does not approximate market value. Securities prices may be obtained from automated pricing services. When market quotations are not readily available or are deemed unreliable, securities are valued at their fair value as determined in good faith under the supervision of the Board of Directors or Trustees. Valuing securities at fair value involves greater reliance on judgment than securities that have readily available market quotations. The Money Market Fund uses the amortized cost method to value its portfolio securities and seeks to maintain a constant net asset value of $1.00 per share, although there may be circumstances under which this goal cannot be acheived. The amortized cost method involves valuing a security at its cost and amortizing any discount or premium over the period until maturity, regardless of the impact of fluctuating interest rates or the market value of the security. Although the Board of Trustees has established procedures designed to stabilize, to the extent reasonably possible, the share price of the Fund, there can be no assurance that the Fund's net asset value can be maintained at $1.00 per share. Price of Shares When you buy shares, you pay the NAV. When you sell shares, you receive the NAV. Exchange orders are effected at NAV. Execution of Requests Purchase and sale requests are executed at the next NAV determined after the order is received in proper form by the Transfer Agent or Distributor. A purchase order will be deemed to be in proper form when all of the required steps set forth above under "How to Purchase Shares" have been completed. If you purchase by wire, however, the order will be deemed to be in proper form after the telephone notification and the federal funds wire have been received. If you purchase by wire, you must submit an application form in a timely fashion. If an order or payment by wire is received after the close of regular trading on the New York Stock Exchange (normally 4:00 p.m. Eastern Time), the shares will not be credited until the next business day. You will receive a confirmation of each new transaction in your account, which also will show you the number of Fund shares you own including the number of shares being held in safekeeping by the Transfer Agent for your account. You may rely on these confirmations in lieu of certificates as evidence of your ownership. Certificates representing shares of the Funds will not be issued unless you request them in writing. Telephone Orders The Funds and their transfer agent will not be responsible for the authenticity of phone instructions or losses, if any, resulting from unauthorized shareholder transactions if they reasonably believe that such instructions were genuine. The Funds and their transfer agent have established reasonable procedures to confirm that instructions communicated by telephone are genuine. These procedures include recording telephone instructions for exchanges and expedited redemptions, requiring the caller to give certain specific identifying information, and providing written confirmation to shareholders of record not later than five days following any such telephone transactions. If the Funds and their transfer agent do not employ these procedures, they may be liable for any losses due to unauthorized or fraudulent telephone instructions. Exchanges You may exchange shares of a Fund for shares of the same class of any other Pilgrim Fund. You should review the prospectus of the Pilgrim Fund you intend to exchange into before exchanging your shares. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Shareholder Guide 19 TRANSACTION POLICIES SHAREHOLDER GUIDE -------------------------------------------------------------------------------- The total value of shares being exchanged must at least equal the minimum investment requirement of the Fund into which they are being exchanged. Exchanges of shares are sales and may result in a gain or loss for federal and state income tax purposes. There is no specific limit on exchange frequency; however, the Funds are intended for long-term investment and not as a short-term trading vehicle. The Adviser may prohibit excessive exchanges (more than four per year). The Adviser also may, on 60 days' prior notice, restrict the frequency of, otherwise modify, or impose charges of up to $5.00 upon exchanges. If you exchange into Pilgrim Senior Income Fund, your ability to sell or liquidate your investment will be limited. Pilgrim Senior Income Fund, is a closed-end interval fund and does not redeem its shares on a daily basis, and it is not expected that a secondary market for the fund's shares will develop, so you will not be able to sell them through a broker or other investment professional. To provide a measure of liquidity, the fund will normally make quarterly repurchase offers for 5% of its outstanding common shares. If more than 5% of the fund's common shares are tendered, you may not be able to completely liquidate your holdings in any one quarter. You also would not have liquidity between these quarterly repurchase dates. Investors exercising the exchange privilege with Pilgrim Senior Income Fund should carefully review the prospectus of that fund. Investors may obtain a copy of the Pilgrim Senior Income Fund prospectus or any other Pilgrim Fund prospectus by calling (800) 992-0180. You will automatically have the ability to request an exchange by calling the Shareholder Service Agent unless you mark the box on the Account Application that indicates that you do not wish to have the telephone exchange privilege. A Fund may change or cancel its exchange policies at any time, upon 60 days' written notice to shareholders. Small Accounts Due to the relatively high cost of handling small investments, the Funds reserve the right upon 30 days' written notice to redeem, at NAV, the shares of any shareholder whose account (except for IRAs) has a value of less than $10,000, other than as a result of a decline in the NAV per share. Privacy Policy You may review the Fund's policy concerning investor privacy over the internet at www.pilgrimfunds.com, or you may obtain a copy of the policy by calling (800) 992-0180 and selecting Option 1. 20 Shareholder Guide ADVISER MANAGEMENT OF THE FUNDS -------------------------------------------------------------------------------- ING Pilgrim Investments, LLC (ING Pilgrim a Delaware limited liability company serves as the investment adviser to each of the Funds. ING Pilgrim has overall responsibility for management of the Funds. ING Pilgrim provides or oversees all investment advisory and portfolio management services for each Fund, and assists in managing and supervising all aspects of the general day-to-day business activities and operations of the Funds, including custodial, transfer agency, dividend disbursing, accounting, auditing, compliance and related services. Organized in December 1994, ING Pilgrim is registered as an investment adviser with the SEC. ING Pilgrim is an indirect wholly-owned subsidiary of ING Groep N.V. (NYSE: ING) (ING Group). ING Group is a global financial institution active in the field of insurance, banking, and asset management in more than 65 countries, with almost 100,000 employees. Prior to April 30, 2001, ING Mutual Funds Management Co. LLC (IMFC) served as investment adviser to certain of the Funds. On April 30, 2001, IMFC, an indirect wholly-owned subsidiary of ING Group that had been under common control with ING Pilgrim Investments, merged with ING Pilgrim Investments. As of June 30, 2001, ING Pilgrim managed over $18.4 billion in assets. ING Pilgrim's principal address is 7337 East Doubletree Ranch Road, Scottsdale, Arizona 85258. ING Pilgrim receives a monthly fee for its services based on the average daily net assets of each of the Funds. The following table shows the aggregate annual advisory fee paid by each Fund for the most recent fiscal year as a percentage of that Fund's average daily net assets: Fund Advisory Fee ---- ------------ International Value 1.00% Research Enhanced Index 0.70 Growth Opportunities 0.95 MidCap Opportunities 1.00 SmallCap Opportunities 1.00 Money Market 0.25 ING Pilgrim Directly Manages the Portfolios of the Following Funds: Growth Opportunities Fund and MidCap Opportunities Fund The following individuals share responsibility for the day-to-day management of the Growth Opportunities Fund and MidCap Opportunities Fund. Mary Lisanti, Executive Vice President and Chief Investment Officer -- Domestic Equities of ING Pilgrim, has served as a Senior Portfolio Manager of MidCap Opportunities Fund since the Fund was formed in August 1998 and Growth Opportunities Fund since November 1998. Prior to joining ING Pilgrim in October 1999, Ms. Lisanti was Executive Vice President and Chief Investment Officer -- Domestic Equities with Northstar Investment Management Corp., which subsequently merged into ING Pilgrim. From 1996 to 1998, Ms. Lisanti was a Portfolio Manager at Strong Capital Management. From 1993 to 1996, Ms. Lisanti was a Managing Director and Head of Small- and Mid-Capitalization Equity Strategies at Bankers Trust Corp. Jeffrey Bernstein, Senior Vice President of ING Pilgrim, has served as a Senior Portfolio Manager of MidCap Opportunities Fund since the Fund was formed in August 1998 and Growth Opportunities Fund since November 1998. Prior to joining ING Pilgrim in October 1999, Mr. Bernstein was a portfolio manager at Northstar Investment Management Corp., which subsequently merged into ING Pilgrim. Prior to May 1998, Mr. Bernstein was a Portfolio Manager at Strong Capital Management. From 1995 to 1997, Mr. Bernstein was a Portfolio Manager at Berkeley Capital. SmallCap Opportunities Fund Mary Lisanti, whose background is described above, has served as manager of the SmallCap Opportunities Fund since July 1998. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Management of the Funds 21 MANAGEMENT OF THE FUNDS SUB-ADVISER -------------------------------------------------------------------------------- International Value Fund Brandes Investment Partners, L.P. A registered investment adviser, Brandes Investment Partners, L.P. (Brandes) serves as Sub-Adviser to the Pilgrim International Value Fund. The company was founded in 1974 as an investment advisory firm with 56 investment professionals who manage more than $50 billion in assets. Brandes' principal address is 11988 El Camino Real, Suite 500 San Diego, California 92130. Brandes' Large Cap Investment Committee is responsible for making the day-to-day investment decisions for the Fund. Brandes uses a value-oriented approach to managing international investments, seeking to build wealth by buying high quality, undervalued stocks. Research Enhanced Index Fund Aeltus Investment Management, Inc. Aeltus Investment Management, Inc. (Aeltus) serves as Sub-Adviser to the Pilgrim Research Enhanced Index Fund. Founded in 1972, Aeltus is registered as an investment adviser. Aeltus is an indirect wholly-owned subsidiary of ING Group, and is an affiliate of ING Pilgrim. Aeltus has acted as adviser or sub-adviser to mutual funds since 1994 and has managed institutional accounts since 1972. As of June 30, 2001, Aeltus manages over $41 billion in assets. Its principal office is located at 10 State House Square, Hartford, Connecticut 06103-3602. Hugh T.M. Whelan and Douglas E. Cote share the responsibility for the day-to-management of the Pilgrim Research Enhanced Index Fund. Mr. Whelan has served as co-manager of the Pilgrim Research Enhanced Index Fund since August 1, 2001. At Aeltus, he has served as a quantitative equity analyst since 1999. Previously Mr. Whelan was a quantitative portfolio manager in Aeltus' fixed income group, specializing in corporate securities since 1994. Mr. Cote, has served as co-manager of the Pilgrim Research Enhanced Index Fund since August 1, 2001. At Aeltus, Mr. Cote has been serving as a quantitative equity analyst since 1996. Previously, Mr. Cote was responsible for developing quantitative applications for Aeltus' equity department. ING Pilgrim Money Market Fund ING Investment Management LLC ING Investment Management LLC (IIM) serves as Sub-Adviser to the ING Pilgrim Money Market Fund. IIM is located at 5780 Powers Ferry Road, N.W., Suite 300, Atlanta, GA 30327. IIM is engaged in the business of providing investment advice to portfolios which, as of September 30, 2000, were valued at $29.67 billion. IIM also advises other registered investment companies. Ms. Jennifer J. Thompson, CFA leads a team of three investment professionals in managing the ING Pilgrim Money Market Fund. Ms. Thompson has been employed by IIM as an investment professional since 1998 and has seven years of investment experience. 22 Management of the Funds DIVIDENDS, DISTRIBUTIONS AND TAXES -------------------------------------------------------------------------------- Dividends The Funds (other than Money Market Fund) distribute most or all of their net earnings and net capital gains to shareholders annually in the form of dividends. The Money Market Fund declares dividends daily and pays dividends monthly. The Fund distributes net capital gains, if any, annually. Dividend Reinvestment Unless you instruct a Fund to pay you dividends in cash, dividends and distributions paid by a Fund will be reinvested in additional shares of the Fund. You may, upon written request or by completing the appropriate section of the Account Application, elect to have all dividends and other distributions paid on Class I shares of a Fund invested in another Pilgrim Fund which offers the Class. Taxes The following information is meant as a general summary for U.S. shareholders. Please see the Statement of Additional Information for additional information. You should rely on your own tax adviser for advice about the particular federal, state and local tax consequences to you of investing in a Fund. Each Fund will distribute all, or substantially all, of its net investment income and net capital gains to its shareholders each year. Although the Funds will not be taxed on amounts they distribute, most shareholders will be taxed on amounts they receive. A particular distribution generally will be taxable as either ordinary income or long-term capital gains. It does not matter how long you have held your Fund shares or whether you elect to receive your distributions in cash or reinvest them in additional Fund shares. For example, if a Fund designates a particular distribution as a long-term capital gains distribution, it will be taxable to you at your long-term capital gains rate. Dividends declared by a Fund in October, November or December and paid during the following January may be treated as having been received by shareholders in the year the distributions were declared. You will receive an annual statement summarizing your dividend and capital gains distributions. If you invest through a tax-deferred account, such as a retirement plan, you generally will not have to pay tax on dividends until they are distributed from the account. These accounts are subject to complex tax rules, and you should consult your tax adviser about investment through a tax-deferred account. There may be tax consequences to you if you sell or redeem Fund shares. You will generally have a capital gain or loss, which will be long-term or short-term, generally depending on how long you hold those shares. If you exchange shares, you may be treated as if you sold them. You are responsible for any tax liabilities generated by your transactions. As with all mutual funds, a Fund may be required to withhold U.S. federal income tax at the rate of 30.5% (30% in 2002 and 2003) of all taxable distributions payable to you if you fail to provide the Fund with your correct taxpayer identification number or to make required certifications, or if you have been notified by the IRS that you are subject to backup withholding. Backup withholding is not an additional tax; rather, it is a way in which the IRS ensures it will collect taxes otherwise due. Any amounts withheld may be credited against your U.S. federal income tax liability. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Dividends, Distributions and Taxes 23 MORE INFORMATION ABOUT RISKS -------------------------------------------------------------------------------- All mutual funds involve risk -- some more than others -- and there is always the chance that you could lose money or not earn as much as you hope. A Fund's risk profile is largely a factor of the principal securities in which it invests and investment techniques that it uses. The following pages discuss the risks associated with certain of the types of securities in which the Funds may invest and certain of the investment practices that the Funds may use. For more information about these and other types of securities and investment techniques that may be used by the Funds, see the Statement of Additional Information (SAI). Many of the investment techniques and strategies discussed in this Prospectus and in the SAI are discretionary, which means that the adviser or sub-adviser can decide whether to use them or not. The Funds named below invest in these securities or use these techniques as part of the Fund's principal investment strategy. However, the adviser or sub-adviser of a Fund may also use these investment techniques or make investments in securities that are not a part of the Fund's principal investment strategy. PRINCIPAL RISKS Inability to Sell Securities (All Funds except Research Enhanced Index and Money Market Fund). Some securities usually trade in lower volume and may be less liquid than securities of large established companies. These less liquid securities could include securities of small and mid-size U.S. companies, high-yield securities, convertible securities, unrated debt and convertible securities, securities that originate from small offerings, and foreign securities, particularly those from companies in emerging markets. The Fund could lose money if it cannot sell a security at the time and price that would be most beneficial to the Fund. U.S. Government Securities (Money Market Fund). Some U.S. Government agency securities may be subject to varying degrees of credit risk particularly those not backed by the full faith and credit of the United States Government. All U.S. Government securities may be subject to price declines in the securities due to changing interest rates. Convertible Securities (MidCap Opportunities, SmallCap Opportunities and International Value Funds). The price of a convertible security will normally fluctuate in some proportion to changes in the price of the underlying equity security, and as such is subject to risks relating to the activities of the issuer and general market and economic conditions. The income component of convertible securities causes fluctuations based upon changes in interest rates and the credit quality of the issuer. Convertible securities are often lower rated securities. A Fund may be required to redeem or convert a convertible security before the holder would otherwise choose. Other Investment Companies (Money Market Fund). The Fund, except as limited in the SAI, may invest up to 10% of its assets in other investment companies. When the Fund invests in other investment companies, you indirectly pay a proportionate share of the expenses of that other investment company (including management fees, administration fees, and custodial fees) in addition to the expenses of the Fund. Restricted and Illiquid Securities (All Funds). Each Fund may invest in restricted and illiquid securities, except as limited in the SAI. If a security is illiquid, the Fund might be unable to sell the security at a time when the adviser might wish to sell, and the security could have the effect of decreasing the overall level of the Fund's liquidity. Further, the lack of an established secondary market may make it more difficult to value illiquid securities, which could vary from the amount the Fund could realize upon disposition. Restricted securities, i.e., securities subject to legal or contractual restrictions on resale, may be illiquid. However, some restricted securities may be treated as liquid, although they may be less liquid than registered securities traded on established secondary markets. Mortgage-Related Securities (Money Market Fund). Like other fixed income securities, when interest rates rise, the value of a mortgage-backed security generally will decline; however, when interest rates are declining, the value of mortgage-backed securities with prepayment features may not increase as much as other fixed income securities. The rate of prepayments on underlying mortgages will affect the price and volatility of a mortgage-related security, and may have the effect of shortening or extending the effective maturity of the security beyond what was anticipated at the time of the purchase. Unanticipated rates of prepayment on underlying mortgages can be expected to increase the volatility of such securities. In addition, the value of these securities may fluctuate in response to the market's perception of the creditworthiness of the issuers of mortgage-related securities owned by a Fund. Additionally, although mortgages and mortgage-related securities are generally supported by some form of government or private guarantee and/or insurance, there is no assurance that private guarantors or insurers will be able to meet their obligations. Asset-Backed Securities (Money Market Fund). Asset-backed securities involve certain risks that are not posed by mortgage-related securities, resulting mainly from the fact that asset-backed securities often do not contain the benefit of a complete security interest in the related collateral. The risks associated with asset-backed securities may be reduced by the addition of credit enhancements such as a bank letter of credit or a third-party guarantee. 24 More Information About Risks MORE INFORMATION ABOUT RISKS -------------------------------------------------------------------------------- Derivatives (Research Enhanced Index Fund). Generally, derivatives can be characterized as financial instruments whose performance is derived, at least in part, from the performance of an underlying asset or assets. Some derivatives are sophisticated instruments that typically involve a small investment of cash relative to the magnitude of risks assumed. These may include swap agreements, options, forwards and futures. Derivative securities are subject to market risk, which could be significant for those that have a leveraging effect. Derivatives are also subject to credit risks related to the counterparty's ability to perform, and any deterioration in the counterparty's creditworthiness could adversely affect the instrument. A risk of using derivatives is that the adviser or sub-adviser might imperfectly judge the market's direction. For instance, if a derivative is used as a hedge to offset investment risk in another security, the hedge might not correlate to the market's movements and may have unexpected or undesired results, such as a loss or a reduction in gains. Investments in Foreign Securities (International Value Fund). There are certain risks in owning foreign securities, including those resulting from: fluctuations in currency exchange rates; devaluation of currencies; political or economic developments and the possible imposition of currency exchange blockages or other foreign governmental laws or restrictions; reduced availability of public information concerning issuers; accounting, auditing and financial reporting standards or other regulatory practices and requirements that are not uniform when compared to those applicable to domestic companies; settlement and clearance procedures in some countries that may not be reliable and can result in delays in settlement; higher transaction and custody expenses than for domestic securities; and limitations on foreign ownership of equity securities. Also, securities of many foreign companies may be less liquid and the prices more volatile than those of domestic companies. With certain foreign countries, there is the possibility of expropriation, nationalization, confiscatory taxation and limitations on the use or removal of funds or other assets of the Funds, including the withholding of dividends. Each Fund that invests in foreign securities may enter into foreign currency transactions either on a spot or cash basis at prevailing rates or through forward foreign currency exchange contracts to have the necessary currencies to settle transactions, or to help protect Fund assets against adverse changes in foreign currency exchange rates, or to provide exposure to a foreign currency commensurate with the exposure to securities from that country. Such efforts could limit potential gains that might result from a relative increase in the value of such currencies, and might, in certain cases, result in losses to the Fund. Emerging Markets Investments (International Value Fund). Because of less developed markets and economies and, in some countries, less mature governments and governmental institutions, the risks of investing in foreign securities can be intensified in the case of investments in issuers domiciled or doing substantial business in emerging market countries. These risks include: high concentration of market capitalization and trading volume in a small number of issuers representing a limited number of industries, as well as a high concentration of investors and financial intermediaries; political and social uncertainties; over-dependence on exports, especially with respect to primary commodities, making these economies vulnerable to changes in commodity prices; overburdened infrastructure and obsolete or unseasoned financial systems; environmental problems; less well developed legal systems; and less reliable custodial services and settlement practices. Temporary Defensive Strategies (All Funds except Money Market Fund). When the adviser or sub-adviser to a Fund anticipates unusual market or other conditions, the Fund may temporarily depart from its principal investment strategies as a defensive measure. To the extent that a Fund invests defensively, it likely will not achieve capital appreciation. Portfolio Turnover (All Funds except International Value Fund). Each Fund is generally expected to engage in frequent and active trading of portfolio securities to achieve its investment objective. A high portfolio turnover rate involves greater expenses to a Fund, including brokerage commissions and other transaction costs, and is likely to generate more taxable short-term gains for shareholders, which may have an adverse effect on the performance of the Fund. OTHER RISKS Repurchase Agreements. Each Fund may enter into repurchase agreements, which involve the purchase by a Fund of a security that the seller has agreed to buy back. If the seller defaults and the collateral value declines, the Fund might incur a loss. If the seller declares bankruptcy, the Fund may not be able to sell the collateral at the desired time. Corporate Debt Securities. Corporate debt securities are subject to the risk of the issuer's inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to such factors as interest rate sensitivity, market perception of the credit-worthiness of the issuer and general market liquidity. When interest rates decline, the value of the Funds' debt securities can be expected to rise, and when interest rates rise, the value ofthose securities can be expected to decline. Debt securities with longer maturities tend to be more sensitive to interest rate movements than those with shorter maturities. Lending Portfolio Securities. In order to generate additional income, each Fund may lend portfolio securities in an amount up to 331|M/3% of total Fund assets to broker-dealers, major banks, or other recognized domestic institutional borrowers of securities. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the collateral should the borrower default or fail financially. Borrowing. Each Fund may borrow for certain types of temporary or emergency purposes subject to certain limits. [GRAPHIC] If you have any questions, please call 1-800-992-0180. More Information About Risks 25 MORE INFORMATION ABOUT RISKS -------------------------------------------------------------------------------- Borrowing may exaggerate the effect of any increase or decrease in the value of portfolio securities or the net asset value of a Fund, and money borrowed will be subject to interest costs. Interest costs on borrowings may fluctuate with changing market rates of interest and may partially offset or exceed the return earned on borrowed funds. Under adverse market conditions, a Fund might have to sell portfolio securities to meet interest or principal payments at a time when fundamental investment considerations would not favor such sales. Reverse Repurchase Agreements and Dollar Rolls. A reverse repurchase agreement or dollar roll involves the sale of a security, with an agreement to repurchase the same or substantially similar securities at an agreed upon price and date. Whether such a transaction produces a gain for a Fund depends upon the costs of the agreements and the income and gains of the securities purchased with the proceeds received from the sale of the security. If the income and gains on the securities purchased fail to exceed the costs, net asset value will decline faster than otherwise would be the case. Reverse repurchase agreements and dollar rolls, as leveraging techniques, may increase a Fund's yield; however, such transactions also increase a Fund's risk to capital and may result in a shareholder's loss of principal. Short Sales. Certain Funds may make short sales. A "short sale" is the sale by a Fund of a security which has been borrowed from a third party on the expectation that the market price will drop. If the price of the security rises, the Fund may have to cover its short position at a higher price than the short sale price, resulting in a loss. Pairing Off Transactions. A pairing-off transaction occurs when a Fund commits to purchase a security at a future date, and then the Fund "pairs-off" the purchase with a sale of the same security prior to or on the original settlement date. Whether a pairing-off transaction on a debt security produces a gain depends on the movement of interest rates. If interest rates increase, then the money received upon the sale of the same security will be less than the anticipated amount needed at the time the commitment to purchase the security at the future date was entered and the Fund will experience a loss. Percentage and Rating Limitations. Unless otherwise stated, the percentage limitations in this prospectus apply at the time of investment. 26 More Information About Risks FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- The financial highlights tables on the following pages are intended to help you understand each Fund's financial performance for the past five years or, if shorter, the period of the Fund's operations. Certain information reflects financial results for a single share. The total returns in the tables represent the rate that an investor would have earned (or lost) on an investment in the Fund (assuming reinvestment of all dividends and distributions). A report of each Fund's independent auditor, along with the Fund's financial statements, is included in the Fund's annual report, which is available upon request. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Financial Highlights 27 PILGRIM INTERNATIONAL VALUE FUND FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- Because Class I shares of the Pilgrim International Value Fund had not commenced operations prior to October 31, 2000, the Fund's fiscal year end, financial highlights are not presented for the Fund. 28 Pilgrim International Value Fund FINANCIAL HIGHLIGHTS PILGRIM RESEARCH ENHANCED INDEX FUND -------------------------------------------------------------------------------- For the seven months ended May 31, 2001, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to May 31, 2001, the financial information was audited by other independent auditors.
Class I -------------------------------------- Seven Months Period Ended Year Ended Ended May 31, October 31, Oct. 31, 2001(1) 2000 1999(2) ------- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 11.25 11.17 10.00 Income from investment operations: Net investment income $ 0.02 0.04 0.06 Net realized and unrealized gain (loss) on investments $ (1.33) 0.19 1.11 Total from investment operations $ (1.31) 0.23 1.17 Less distributions from: Net realized gain on investments $ -- 0.15 -- Total distributions $ -- 0.15 -- Net asset value, end of period $ 9.94 11.25 11.17 Total return(3) % (11.64) 2.00 11.70 Ratios/Supplemental Data: Net assets, end of period (000's) $ 25,172 28,473 27,927 Ratios to average net assets: Net expenses after expense reimbursement(4) % 1.04 1.07 0.98(5) Gross expenses prior to expense reimbursement(4) % 1.04 1.07 1.23 Net investment income after expense reimbursement(4) % 0.27 0.34 0.62(5) Portfolio turnover rate % 26 57 26
---------- (1) The Fund changed its fiscal year end to May 31. (2) The Fund commenced operations on December 30, 1998. (3) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return information for less than one year is not annualized. (4) Annualized for periods less than one year. (5) Expenses calculated net of taxes and advisor reimbursement. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim Research Enhanced Index Fund 29 PILGRIM GROWTH OPPORTUNITIES FUND FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- For the five months ended May 31, 2001 and the year ended December 31, 2000, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to December 31, 2000, the financial information was audited by other independent auditors.
Class I ---------------------------------------------------------------- Five Months Period Ended Year Ended December 31, Ended May 31, ---------------------------------- December 31, 2001(1) 2000 1999 1998 1997(2) ------- ---- ---- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 26.05 33.76 26.28 21.36 17.90 Income from investment operations: Net investment income (loss) $ (0.08) (0.15) (0.17) (0.05) 0.01 Net realized and unrealized gain (loss) on investments $ (6.87) (6.07) 20.49 5.18 4.30 Total from investment operations $ (6.95) (6.22) 20.32 5.13 4.31 Less distributions from: Net realized gain on investments $ -- 1.49 12.84 0.21 0.85 Total distributions $ -- 1.49 12.84 0.21 0.85 Net asset value, end of period $ 19.10 26.05 33.76 26.28 21.36 Total Return(3) % (26.68) (18.74) 93.86 24.06 24.29 Ratios/Supplemental Data: Net assets, end of period (000s) $ 79,174 108,005 132,953 83,233 113,529 Ratios to average net assets: Net expenses after expense reimbursement(4) % 1.31 1.16 1.00 1.00 1.02(5) Gross expenses prior to expense reimbursement(4) % 1.31 1.16 1.00 1.00 1.02 Net investment income (loss) after expense reimbursement(4) % (0.92) (0.56) (0.61) (0.13) 0.08(5) Portfolio turnover rate % 217 326 286 98 32
---------- (1) The Fund changed its fiscal year end to May 31. (2) Class I commenced offering of shares on March 31, 1997. (3) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return information for less than one year is not annualized. (4) Annualized for periods less than a year. (5) Expenses calculated net of taxes and advisor reimbursement. 30 Pilgrim Growth Opportunities Fund FINANCIAL HIGHLIGHTS PILGRIM MIDCAP OPPORTUNITIES FUND -------------------------------------------------------------------------------- For the five months ended May 31, 2001 and the year ended December 31, 2000, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to December 31, 2000, the financial information was audited by other independent auditors.
Class I ----------------------------------------------- Five Months Ended Year Ended December 31, May 31, -------------------------------- 2001(1) 2000 1999 1998(2) ------- ---- ---- ------- Per Share Operating Performance Net asset value, beginning of period $ 19.26 21.34 12.99 10.00 Net investment loss $ (0.06) (0.13) (0.15) (0.02) Net realized and unrealized gain (loss) on investments $ (4.47) 0.23 12.09 3.01 Total from investment operations $ (4.53) 0.10 11.94 2.99 Distributions from net realized gain $ -- (2.18) (3.59) -- Total distributions $ -- (2.18) (3.59) -- Net asset value, end of period $ 14.73 19.26 21.34 12.99 Total return(3): % (23.52) 0.08 103.19 29.90 Ratios/Supplemental Data: Net assets, end of period (000s) $ 52,007 68,006 67,954 33,441 Ratio of expenses to average net assets after reimbursement(4) % 1.52 1.36 1.41 1.50(5) Ratio of expenses to average net assets prior to expense reimbursement(4) % 1.52 1.36 1.41 2.01 Ratio of net investment loss to average net assets(4) % (0.97) (0.66) (1.04) (0.70)(5) Portfolio turnover % 182 188 201 61
---------- (1) The Fund changed its fiscal year end to May 31. (2) Fund commenced operations on August 20, 1998. (3) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return for less than one year is not annualized. (4) Annualized for periods less than one year. (5) Expenses calculated net of taxes and adviser reimbursement. [GRAPHIC] If you have any questions, please call 1-800-992-0180. Pilgrim MidCap Opportunities Fund 31 FINANCIAL HIGHLIGHTS PILGRIM SMALLCAP OPPORTUNITIES FUND -------------------------------------------------------------------------------- For the five months ended May 31, 2001 and the year ended December 31, 2000, the information in the table below has been audited by KPMG LLP, independent auditors. For all periods ended prior to December 31, 2000, the financial information was audited by other independent auditors.
Class I ----------------------------------- Five Months Year Ended Ended December 31, May 31, --------------------- 2001(1) 2000 1999(2) ------- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 47.47 59.54 31.78 Income from investment operations: Net investment loss $ (0.14) (1.00) (0.08) Net realized and unrealized gain (loss) on investments $ (8.31) (2.17) 35.40 Total from investment operations $ (8.45) (3.17) 35.32 Less distributions from: Net realized gain on investments $ -- 8.90 7.56 Total distributions $ -- 8.90 7.56 Net asset value, end of period $ 39.02 47.47 59.54 Total Return(3) % (17.80) (5.21) 126.05 Ratios/Supplemental Data: Net assets, end of period (000s) $ -- -- -- Ratios to average net assets: Net expenses after expense reimbursement(4) % 1.31 1.15 0.47(5) Gross expenses prior to expense reimbursement(4) % 1.31 1.15 0.47 Net investment loss after expense reimbursement(4) % (1.03) (0.75) (0.35)(5) Portfolio turnover rate % 104 134 223
---------- (1) The Fund changed its fiscal year end to May 31. (2) Class I commenced offering of shares on April 1, 1999. (3) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return for less than one year is not annualized. (4) Annualized for periods less than one year. (5) Expenses calculated net of taxes and advisor reimbursement . 32 Pilgrim SmallCap Opportunities Fund FINANCIAL HIGHLIGHTS ING PILGRIM MONEY MARKET FUND -------------------------------------------------------------------------------- For the five months ended March 31, 2000, the information in the table below has been audited by PricewaterhouseCoopers LLP, independent accountants. For all periods ended prior to March 31, 2001, the financial information was audited by other independent accountants.
Class I -------------------------------------------- Five Months Year Period Ended Ended Ended March 31, October 31, October 31, 2001(1) 2000 1999(2) ------- ---- ------- Per Share Operating Performance: Net asset value, beginning of period $ 1.00 1.00 1.00 Income from investment operations: Net investment income $ 0.02 0.06 -- Total from investment operations $ 0.02 0.06 -- Less distributions from: Net investment income $ 0.02 0.06 -- Total distributions $ 0.02 0.06 -- Net asset value, end of period $ 1.00 1.00 1.00 Total Return(3): % 2.46 6.19 0.28 Ratios/Supplemental Data: Net assets, end of period (000's) $ 10,816 12,061 1,906 Ratios to average net assets: Net expenses after expense reimbursement(4)(5) % 0.31 0.28 0.31 Gross expenses prior to expense reimbursement(4) % 0.55 0.41 0.59 Net investment income after expense reimbursement(4)(5) % 6.08 5.96 5.29
---------- (1) The Fund changed its fiscal year end to March 31. (2) Class I commenced offering of shares on October 13, 1999. (3) Total return is calculated assuming reinvestment of all dividends and capital gain distributions at net asset value and excluding the deduction of sales charges. Total return for less than one year is not annualized. (4) Annualized for periods less than one year. (5) The Investment Manager has agreed to limit expenses, excluding interest, taxes, brokerage and extraordinary expenses. [GRAPHIC] If you have any questions, please call 1-800-992-0180. ING Pilgrim Money Market Fund 33 You'll find more information about the Pilgrim Funds in our: Annual/Semi-Annual Reports Includes a discussion of recent market conditions and investment strategies that significantly affected performance, the financial statements and the auditors' reports (in annual report only). Statement of Additional Information (SAI) The SAI contains more detailed information about the Pilgrim Funds. The SAI is legally part of this prospectus (it is incorporated by reference). A copy has been filed with the U.S. 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 7337 East Doubletree Ranch Road Scottsdale, AZ 85258-2034 1-800-992-0180 Or visit our website at www.pilgrimfunds.com This information may also be reviewed or obtained from the SEC. In order to review the information in person, you will need to visit the SEC's Public Reference Room in Washington, D.C. or call 202-942-8090. Otherwise, you may obtain the information for a fee by contacting the SEC at: U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Public Reference Section Washington, D.C. 20549-0102 or at the e-mail address: publicinfo@sec.gov Or obtain the information at no cost by visiting the SEC's Internet website at http://www.sec.gov When contacting the SEC, you will want to refer to the Fund's SEC file number. The file numbers are as follows: Pilgrim Growth Opportunities Fund 811-4431 Pilgrim Equity Trust 811-8817 Pilgrim MidCap Opportunities Fund Pilgrim Mayflower Trust 811-7978 Pilgrim Research Enhanced Index Fund Pilgrim International Value Fund Pilgrim SmallCap Opportunities Fund 811-4434 Pilgrim Funds Trust 811-8895 ING Pilgrim Money Market Fund [LOGO] ING PILGRIM IPROS100101-100101 GRAPHICS DESCRIPTION APPENDIX The cover of the Class Q and A, B, C, M and T prospectuses has an image of a globe showing the North American Continent. The Class I prospectus has an image of the entrance to the New York Stock Exchange. The ING Pilgrim Logo which is a lion at rest between the words ING and Pilgrim appears at the bottom of the outside front cover. There are four icon sized graphics used throughout the prospectus as follows: 1. In the sections describing the objective of the Funds, the graphic icon is that of a dart in the bullseye of a target. 2. In the sections describing the investment strategy of the Funds, the graphic icon is that of a compass pointing due north. 3. In the sections describing the risks of the Funds, the graphic icon is that of an old fashioned scale tilting heavy on the left side. 4. In the sections describing the performance history of the Funds, the graphic icon is that of a stack of US currency bills. 5. On the bottom footer of every odd numbered page (right hand page), the graphic icon is that of a telephone by the 800 number of the fund to call for information. STATEMENT OF ADDITIONAL INFORMATION 7337 East Doubletree Ranch Road Scottsdale, Arizona 85258 (800) 992-0180 October 1, 2001 PILGRIM FINANCIAL SERVICES FUND, INC. Pilgrim Financial Services Fund PILGRIM EQUITY TRUST Pilgrim MidCap Opportunities Fund PILGRIM FUNDS TRUST Pilgrim Tax Efficient Equity Fund Pilgrim Internet Fund PILGRIM GROWTH AND INCOME FUND, INC. Pilgrim Growth and Income Fund PILGRIM GROWTH OPPORTUNITIES FUND Pilgrim Growth Opportunities Fund PILGRIM INVESTMENT FUNDS, INC. Pilgrim MagnaCap Fund PILGRIM MAYFLOWER TRUST Pilgrim Growth + Value Fund Pilgrim Research Enhanced Index Fund PILGRIM MUTUAL FUNDS Pilgrim LargeCap Growth Fund Pilgrim MidCap Growth Fund Pilgrim SmallCap Growth Fund Pilgrim Convertible Fund Pilgrim Balanced Fund PILGRIM SMALLCAP OPPORTUNITIES FUND Pilgrim SmallCap Opportunities Fund This Statement of Additional Information ("SAI") relates to each series (each a "Fund" and collectively, the "Pilgrim Funds") of each Registrant (each a "Company") and each investment company listed above. A Prospectus or Prospectuses (the "Prospectus") for the Pilgrim Funds which provide the basic information you should know before investing in the Pilgrim Funds, may be obtained without charge from the Pilgrim Funds or the Pilgrim Funds' Principal Underwriter, ING Pilgrim Securities, Inc., at the address listed above. This SAI is not a prospectus and it should be read in conjunction with the Prospectus, dated October 1, 2001, which has been filed with the U.S. Securities and Exchange Commission ("SEC"). In addition, the financial statements from the Pilgrim Funds' Annual Reports dated May 31, 2001 are incorporated herein by reference. Copies of the Pilgrim Funds' Prospectus and Annual or Semi-Annual Reports may be obtained without charge by contacting the Pilgrim Funds at the address and phone number written above. TABLE OF CONTENTS HISTORY OF THE PILGRIM FUNDS...................................................1 MANAGEMENT OF THE PILGRIM FUNDS................................................3 INVESTMENT ADVISER FEES.......................................................14 EXPENSE LIMITATION AGREEMENTS.................................................20 RULE 12B-1 PLANS..............................................................22 SUPPLEMENTAL DESCRIPTION OF INVESTMENTS.......................................27 INVESTMENT RESTRICTIONS.......................................................69 PORTFOLIO TRANSACTIONS........................................................81 ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................86 DETERMINATION OF SHARE PRICE..................................................92 SHAREHOLDER INFORMATION.......................................................94 SHAREHOLDER SERVICES AND PRIVILEGES...........................................94 DISTRIBUTIONS.................................................................97 TAX CONSIDERATIONS............................................................98 CALCULATION OF PERFORMANCE DATA..............................................105 GENERAL INFORMATION..........................................................111 FINANCIAL STATEMENTS.........................................................112 HISTORY OF THE PILGRIM FUNDS PILGRIM EQUITY TRUST Pilgrim Equity Trust ("Equity Trust") is a Massachusetts business trust registered as an open-end, diversified management investment company. Equity Trust was organized in June of 1998. The Company currently consists of one separate diversified investment fund, Pilgrim MidCap Opportunities Fund ("MidCap Opportunities Fund"). On November 1, 1999, the name of Equity Trust was changed from the "Northstar Equity Trust," and MidCap Opportunities Fund was changed from "Northstar Mid-Cap Growth Fund." PILGRIM FINANCIAL SERVICES FUND, INC. Pilgrim Financial Services Fund, Inc. ("Financial Services Fund") is a Maryland corporation registered as an open-end, diversified management investment company. Financial Services Fund was organized in November 1985 and changed its name from "Pilgrim Regional BankShares, Inc." to "Pilgrim America Bank and Thrift Fund, Inc." in April, 1996. The Fund operated as a closed-end fund prior to October 17, 1997. On October 16, 1997, shareholders approved open-ending the Fund, and since October 17, 1997, the Fund has operated as an open-end fund. On November 16, 1998, the name of the Fund was changed to "Pilgrim Bank and Thrift Fund." On May 22, 2001, the name of the Fund was changed to "Pilgrim Financial Services Fund." PILGRIM FUNDS TRUST Pilgrim Funds Trust is a Delaware business trust registered as an open-end, diversified management investment company. Pilgrim Funds Trust was organized on July 30, 1998. The Company currently consists of 12 separate diversified investment funds, each with its own investment objective and policy. On February 28, 2001, the name of the Trust was changed from "ING Funds Trust" to "Pilgrim Funds Trust," and the names of ING Tax Efficient Equity and ING Internet Fund were changed to Pilgrim Tax Efficient Equity Fund and Pilgrim Internet Fund, respectively. PILGRIM GROWTH AND INCOME FUND, INC. Pilgrim Growth and Income Fund, Inc. ("Growth and Income Fund") is a Maryland corporation registered as an open-end, diversified management investment company. Growth and Income Fund was organized in April 1991. The Fund was originally organized as a New Jersey corporation on February 11, 1959. On July 26, 2000, the name of Growth and Income Fund was changed from "Lexington Growth and Income Fund, Inc." PILGRIM GROWTH OPPORTUNITIES FUND Pilgrim Growth Opportunities Fund ("Growth Opportunities Fund") is a Massachusetts business trust registered as an open-end, diversified management investment company. Growth Opportunities Fund was organized in 1986. On November 1, 1999, the name of Growth Opportunities Fund was changed from "Northstar Growth Fund" (formerly Advantage Growth Fund). PILGRIM INVESTMENT FUNDS, INC. Pilgrim Investment Funds, Inc. ("Investment Funds") is a Maryland corporation registered as an open-end, diversified management investment company. Investment Funds was organized in July 1969. The Company currently consists of two separate diversified investment funds, each with its own investment objective and policy: Pilgrim MagnaCap Fund ("MagnaCap Fund") and Pilgrim High Yield Fund ("High Yield Fund"). 1 On July 14, 1995, the name of Investments Funds' was changed from "Pilgrim Investment Funds, Inc." to "Pilgrim America Investment Funds, Inc.," MagnaCap Fund's name was changed from "Pilgrim MagnaCap Fund" to "Pilgrim America MagnaCap Fund." On November 16, 1998, the name of the Investments Funds became "Pilgrim Investment Funds, Inc.," and the name of MagnaCap Fund became "Pilgrim MagnaCap Fund." PILGRIM MAYFLOWER TRUST Pilgrim Mayflower Trust ("Mayflower Trust") is a Massachusetts business trust registered as an open-end, diversified management investment company. The Company currently consists of three separate diversified investment funds. The Mayflower Trust was organized in 1993. Pilgrim Growth + Value Fund ("Growth + Value Fund") was organized in 1996. Pilgrim Research Enhanced Index Fund ("Research Enhanced Index Fund") was organized in 1998. On November 1, 1999, the name of Mayflower Trust was changed from "Northstar Trust" (formerly Northstar Advantage Trust), and the names of the Northstar Growth + Value Fund and Northstar Research Enhanced Index Fund were changed to Pilgrim Growth + Value Fund and Pilgrim Research Enhanced Index Fund, respectively. PILGRIM MUTUAL FUNDS Pilgrim Mutual Funds ("Mutual Funds") is a Delaware business trust registered as an open-end, diversified management investment company. The Trust was organized in 1992. Prior to a reorganization of the Trust, which became effective on July 24, 1998 (the "Reorganization"), the Trust offered Shares in a number of separate diversified portfolios, each of which invested all of its assets in a corresponding master fund of Nicholas-Applegate Investment Trust (the "Master Trust"). The Reorganization eliminated this two-tiered "master-feeder" structure. Old Name New Name -------- -------- Nicholas-Applegate Large Cap Growth Fund Pilgrim Large Cap Growth Fund Nicholas-Applegate Mid Cap Growth Fund Pilgrim Mid Cap Growth Fund Nicholas-Applegate Small Cap Growth Fund Pilgrim Small Cap Growth Fund Nicholas-Applegate Convertible Fund Pilgrim Convertible Fund Nicholas-Applegate Balanced Growth Fund Pilgrim Balanced Fund Old Name New Name -------- -------- Pilgrim Large Cap Growth Fund Pilgrim LargeCap Growth Fund Pilgrim Mid Cap Growth Fund Pilgrim MidCap Growth Fund Pilgrim Small Cap Growth Fund Pilgrim SmallCap Growth Fund PILGRIM SMALLCAP OPPORTUNITIES FUND Pilgrim SmallCap Opportunities Fund ("SmallCap Opportunities Fund") is a Massachusetts business trust registered as an open-end, diversified management investment company. SmallCap Opportunities Fund was organized in 1986. On November 1, 1999, the name of SmallCap Opportunities Fund was changed from "Northstar Special Fund" (formerly Advantage Special Fund). 2 MANAGEMENT OF THE PILGRIM FUNDS BOARD OF DIRECTORS/TRUSTEES Each Company is managed by its Board Directors/Trustees. The Directors/Trustees ("Trustees" and "Directors" are used interchangeably in this SAI) and officers of the Companies are listed below. An asterisk (*) has been placed next to the name of each Director/Trustee who is an "interested person," as that term is defined in the Investment Company Act of 1940, as amended (the "1940 Act"), by virtue of that person's affiliation with the Companies, or the Companies' investment adviser, ING Pilgrim Investments, LLC (the "Investment Adviser"). The Board of Directors/Trustees governs each Fund and is responsible for protecting the interests of shareholders. The Directors/Trustees are experienced executives who oversee the Pilgrim Funds' activities, review contractual arrangements with companies that provide services to each Fund, and review each Fund's performance. An Executive Committee of the Board of Trustees was formed in order to act on behalf of the full Board of Trustees between meetings when necessary. The following Trustees serve as members of the Executive Committee: Messrs. Turner, McInerney, May, and Patton. Set forth below is information regarding the Directors/Trustees and Officers of the Pilgrim Funds. (Ms. Baldwin is not a Director/Trustee of the Pilgrim Funds, but rather serves as a member of its Advisory Board.)
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUNDS PRINCIPAL OCCUPATION DURING PAST 5 YEARS --------------------- --------------------------- ---------------------------------------- MARY A. BALDWIN, PH.D. Advisory Board Member for each Realtor, Coldwell Banker Success Realty (formerly, The 7337 E. Doubletree Ranch Rd. of the Funds managed by the Prudential Arizona Realty) for more than the last five Scottsdale, Arizona 85258 Investment Adviser. years. Ms. Baldwin is also President, United States Olympic Age: 62 Committee (since December 2000) and was formerly Vice President, United States Olympic Committee (November 1996 - December 2000), and Treasurer, United States Olympic Committee (November 1992 - November 1996). PAUL S. DOHERTY Director/Trustee of each of the President, of Doherty, Wallace, Pillsbury and Murphy, P.C., 7337 E. Doubletree Ranch Rd. Funds managed by the Investment Attorneys. Mr. Doherty was formerly a Director of Tambrands, Scottsdale, Arizona 85258 Adviser. Inc. (1993 - 1998). Age: 67 ALAN L. GOSULE Director/Trustee of each of the Partner of Clifford Chance Rogers & Wells, LLP, Attorneys 7337 E. Doubletree Ranch Rd. Funds managed by the Investment (since 1991). Mr. Gosule is a Director of F.L. Putnam Scottsdale, Arizona 85258 Adviser. Investment Management Co., Inc., Simpson Housing Limited Age: 61 Partnership, Home Properties of New York, Inc., and Colonnade Partners. WALTER H. MAY Director/Trustee of each of the Retired. Mr. May was formerly Managing Director and Director 7337 E. Doubletree Ranch Rd. Funds managed by the Investment of Marketing for Piper Jaffray, Inc., an investment Scottsdale, Arizona 85258 Adviser. banking/underwriting firm. Age: 65
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NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUNDS PRINCIPAL OCCUPATION DURING PAST 5 YEARS --------------------- --------------------------- ---------------------------------------- *THOMAS J. MCINERNEY Director/Trustee of each of the General Manager and Chief Executive Officer of ING U.S. 7337 E. Doubletree Ranch Rd. Funds managed by the Investment Worksite Financial Services (since December 2000). Mr. Scottsdale, Arizona 85258 Adviser. McInerney was formerly President of Aetna Financial Services Age: 45 (August 1997 - December 2000), head of National Accounts and Core Sales and Marketing for Aetna U.S. Healthcare (April 1996-March 1997), head of Corporate Strategies for Aetna Inc. (July 1995 - April 1996), and held a variety of line and corporate staff positions since 1978. Mr. McInerney is a member of the Board National Commission on Retirement Policy, the Governor's Council on Economics Competitiveness and Technology of Connecticut, the Board of Directors of the Connecticut Business & Industry Association, the Board of Trustees of The Bushnell, the Board for The Connecticut Forum, and the Board of the MetroHartford Chamber of Commerce, and is Chairman of Concerned Citizens for Effective Government. Effective February 26, 2001, Mr. McInerney became a Director of each of the Pilgrim Funds managed by the Investment Adviser. Mr. McInerney is a Director of Aeltus Investment Management, Inc. JOCK PATTON Director/Trustee of each of the Private Investor. Director of Hypercom Corporation (since 7337 E. Doubletree Ranch Rd. Funds managed by the Investment January 1999), and JDA Software Group, Inc. (since January Scottsdale, Arizona 85258 Adviser. 1999). Mr. Patton is also a Director of Buick of Scottsdale, Age: 56 Inc., National Airlines, Inc., BG Associates, Inc., BK Entertainment, Inc., Arizona Rotorcraft, Inc. and Director and Chief Executive Officer of Rainbow Multimedia Group, Inc. Mr. Patton was formerly Director of Stuart Entertainment, Inc., Director of Artisoft, Inc. (August 1994 - July 1998), and President and co-owner of StockVal, Inc. (April 1993 - June 1997). DAVID W.C. PUTNAM Director/Trustee of each of the President and Director of F.L. Putnam Securities Company, 7337 E. Doubletree Ranch Rd. Funds managed by the Investment Inc. and its affiliates. Mr. Putnam is Director of Anchor Scottsdale, Arizona 85258 Adviser. Investment Trust, the Principled Equity Market Trust and Age: 62 Progressive Capital Accumulation Trust. Mr. Putnam was formerly Director of Trust Realty Corp. and Bow Ridge Mining Co.
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NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUNDS PRINCIPAL OCCUPATION DURING PAST 5 YEARS --------------------- --------------------------- ---------------------------------------- BLAINE E. RIEKE Director/Trustee of each of the General Partner of Huntington Partners, an investment 7337 E. Doubletree Ranch Rd. Funds managed by the Investment partnership (1997 - present). Mr. Rieke was formerly Scottsdale, Arizona 85258 Adviser. Chairman and Chief Executive Officer of Firstar Trust Age: 68 Company (1973 - 1996). Mr. Rieke was the Chairman of the Board and a Trustee of each of the ING Funds. Effective February 26, 2001, Mr. Rieke became a Director/Trustee of each of the Pilgrim Funds managed by the Investment Adviser. *JOHN G. TURNER Director/Trustee and Chairman Trustee and Vice Chairman of ING Americas. Mr. Turner was 7337 E. Doubletree Ranch Rd. of each of the Funds managed by formerly Chairman and Chief Executive Officer of ReliaStar Scottsdale, Arizona 85258 the Investment Adviser. Financial Corp. and ReliaStar Life Insurance Co. Age: 62 (1993-2000); Chairman of ReliaStar United Services Life Insurance Company and ReliaStar Life Insurance Company of New York (since 1995); Chairman of Northern Life Insurance Company (since 1992); Chairman and Director/Trustee of the Northstar affiliated investment companies (since October 1993). Mr. Turner was formerly Director of Northstar Investment Management Corporation and affiliates (1993-1999); President of ReliaStar Financial Corp. and ReliaStar Life Insurance Co. (1989-1991) and President and Chief Operating Officer of ReliaStar Life Insurance Company (1986-1991). Mr. Turner is also a Director of Aeltus Investment Management, Inc. RICHARD A. WEDEMEYER Director/Trustee of each of the Vice President of The Channel Corporation, an importer of 7337 E. Doubletree Ranch Rd. Funds managed by the Investment specialty alloy aluminum products (1996 - present). Mr. Scottsdale, Arizona 85258 Adviser. Wedemeyer was formerly Vice President of Performance Age: 65 Advantage, Inc. (1992 - 1996), and Vice President, Operations and Administration, of Jim Henson Productions (1979 - 1997). Mr. Wedemeyer is a trustee of the First Choice Funds. Mr. Wedemeyer was a trustee of each of the ING Funds. Effective February 26, 2001, Mr. Wedemeyer became a Director/Trustee of each of the Pilgrim Funds managed by the Investment Adviser.
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NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUNDS PRINCIPAL OCCUPATION DURING PAST 5 YEARS --------------------- --------------------------- ---------------------------------------- JAMES M. HENNESSY President, Chief Executive President and Chief Executive Officer of each of the Pilgrim 7337 E. Doubletree Ranch Rd. Officer, and Chief Operating Funds (since February 2001); Chief Operating Officer of each Scottsdale, Arizona 85258 Officer of the Pilgrim Funds (since July 2000); Director of ING Age: 52 Pilgrim Group, LLC, ING Pilgrim Investments, LLC, ING Pilgrim Securities, Inc., ING Pilgrim Capital Corporation, LLC, ING Lexington Management Corporation, Lexington Funds Distributor, Inc., Market Systems Research Advisors, Inc., Market Systems Research, Inc., Express America T.C. Corporation, EAMC Liquidation Corp. (since December 2000); and President and Chief Executive Officer of ING Pilgrim Investments, LLC, ING Pilgrim Group, LLC, ING Pilgrim Capital Corporation, LLC, ING Lexington Management Corporation, Express America T.C. Corporation, EAMC Liquidation Corp. (since December 2000). Formerly Senior Executive Vice President (June 2000 - December 2000) and Secretary (April 1995 - December 2000), ING Pilgrim Capital Corporation, ING Pilgrim Group, Inc., ING Pilgrim Investments, Inc., ING Lexington Management Corporation, Express America T.C. Corporation, EAMC Liquidation Corp.; Senior Executive Vice President (July 2000 - February 2001) and Secretary (April 1995 - February 2001) of each of the Pilgrim Funds; Executive Vice President, Pilgrim Capital Corporation and its affiliates (May 1998 - June 2000) and Senior Vice President, Pilgrim Capital and its affiliates (April 1995 - April 1998). STANLEY D. VYNER Executive Vice President and Executive Vice President of most of the Pilgrim Funds (since 7337 E. Doubletree Ranch Rd. Chief Investment Officer -- July 1996). Formerly, President and Chief Executive Officer Scottsdale, Arizona 85258 Fixed Income and International of Pilgrim Investments (August 1996-August 2000). Age: 51 Equities. MARY LISANTI Executive Vice President and Executive Vice President of the Pilgrim Funds (since May 7337 E. Doubletree Ranch Rd. Chief Operating Officer -- 1998). Formerly Portfolio Manger, Strong Capital Management; Scottsdale, Arizona 85258 Domestic Equities; Senior and Managing Director and Head of Small- and Age: 45 Portfolio Manager Pilgrim Mid-Capitalization Equity Strategies at Bankers Trust Corp. Equity Trust, Pilgrim Growth (1993-1996). Opportunities Fund, Pilgrim Mayflower Trust, and Pilgrim SmallCap Opportunities Fund.
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NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUNDS PRINCIPAL OCCUPATION DURING PAST 5 YEARS --------------------- --------------------------- ---------------------------------------- MICHAEL J. ROLAND Senior Vice President and Senior Vice President and Chief Financial Officer, ING 7337 E. Doubletree Ranch Rd. Principal Financial Officer. Pilgrim Group, LLC, ING Pilgrim Investments, LLC, and ING Scottsdale, Arizona 85258 Pilgrim Securities, Inc. (since June 1998); Senior Vice Age: 43 President and Principal Financial Officer of each of the other Pilgrim Funds. He served in same capacity from January, 1995 - April, 1997. Formerly, Chief Financial Officer of Endeaver Group (April 1997 to June 1998). ROBERT S. NAKA Senior Vice President and Senior Vice President, ING Pilgrim Investments, LLC (since 7337 E. Doubletree Ranch Rd. Assistant Secretary. November 1999) and ING Pilgrim Group, LLC (since August Scottsdale, Arizona 85258 1999); Senior Vice President and Assistant Secretary of each Age: 38 of the other Pilgrim Funds. Formerly Vice President, ING Pilgrim Investments, Inc. (April 1997 - October 1999), ING Pilgrim Group, Inc. (February 1997 - August 1999) and Assistant Vice President, ING Pilgrim Group, Inc. (August 1995-February 1997). ROBYN L. ICHILOV Vice President and Treasurer Vice President, ING Pilgrim Investments, LLC (since August 7337 E. Doubletree Ranch Rd. 1997); Accounting Manager (since November 1995); Vice Scottsdale, Arizona 85258 President and Treasurer of most of the Pilgrim Funds. Age: 33 KIMBERLY A. ANDERSON Vice President and Secretary Vice President of ING Pilgrim Group, LLC (since January 7337 E. Doubletree Ranch Rd. 2001) and Vice President and Secretary of each of the Scottsdale, Arizona 85258 Pilgrim Funds (since February 2001). Formerly Assistant Vice Age: 37 President and Assistant Secretary of each of the Pilgrim Funds (August 1999-February 2001) and Assistant Vice President of ING Pilgrim Group, Inc. (November 1999-January 2001). Ms. Anderson has held various other positions with ING Pilgrim Group, Inc. for more than the last five years. STEVEN RAYNER Vice President and Co-Portfolio Vice President of ING Pilgrim Investments, LLC and Pilgrim 7337 E. Doubletree Ranch Rd. Manager Pilgrim Financial Financial Services Fund (since January 2001). Formerly Scottsdale, Arizona 85258 Services Fund Assistant Vice President of ING Pilgrim Investments, Inc. Age: 35 (February 1998 - January 2001). Mr. Rayner has held various other positions with ING Pilgrim Investments, Inc. since June 1995. ROBERT KLOSS Vice President and Co-Portfolio Vice President of ING Pilgrim Investments, LLC and Pilgrim 7337 E. Doubletree Ranch Rd. Manager of Pilgrim Financial Financial Services Fund (since January 2001). Mr. Kloss has Scottsdale, Arizona 85258 Services Fund. held various other positions with ING Pilgrim Investments, Age: 45 Inc. for the last five years.
7
NAME, ADDRESS AND AGE POSITION(S) HELD WITH FUNDS PRINCIPAL OCCUPATION DURING PAST 5 YEARS --------------------- --------------------------- ---------------------------------------- THOMAS JACKSON Senior Vice President and Senior Vice President, ING Pilgrim Investments, LLC (since 7337 E. Doubletree Ranch Rd. Senior Portfolio Manager of July 2000). Formerly, Senior Vice President and Senior Scottsdale, Arizona 85258 Pilgrim Growth and Income Fund, Portfolio Adviser at Lexington Management Corporation; Age: 56 Pilgrim Investment Funds, and Equity Analyst with Merrill Lynch, J.W. Seligman, Dean Pilgrim Mutual Funds. Witter and Union Carbide Corporation. RALPH G. NORTON III Senior Vice President Senior Vice President and Chief Investment Officer, Fixed 7337 E. Doubletree Ranch Rd. Income, ING Pilgrim Investments, LLC (since August 2001). Scottsdale, Arizona 85258 Formerly, Senior Market Strategist, Aeltus Investment Age: 42 Management, Inc. (from January 2001 to August 2001); Chief Investment Officer, ING Mutual Funds Management Co. (1990 to January 2001). EDWIN SCHRIVER Senior Vice President and Senior Vice President, ING Pilgrim Investments, LLC (since 7337 E. Doubletree Ranch Rd. Senior Portfolio Manager November 1999). Formerly, Senior High Yield Analyst for Scottsdale, Arizona 85258 Pilgrim Investment Funds, Dreyfus Corporation (from April 1998 to November 1999); Age: 56 Pilgrim Mayflower Trust, and President of Cresent City Research (from July 1993 to April Pilgrim Mutual Funds 1998). ROBERT K. KINSEY Vice President and Portfolio Vice President, ING Pilgrim Investments, LLC (since March 7337 E. Doubletree Ranch Rd. Manager Pilgrim Mutual Funds. 1999). Formerly Vice President and Fixed Income Sub-Adviser, Scottsdale, Arizona 85258 Federated Investors (January 1995 - March 1999); Principal Age: 42 and Sub-Adviser, Harris Investment Management (July 1992 - January 1995).
COMPENSATION OF DIRECTORS/TRUSTEES Each Fund pays each Director/Trustee who is not an interested person, and Advisory Board Member Ms. Baldwin, a pro rata share, as described below, of: (i) an annual retainer of $35,000 (Mssrs. Patton and May, as lead directors, receive an annual retainer of $45,000); (ii) $5,500 for each in person meeting of the Board; (iii) $1,000 per attendance of any committee meeting; (iv) $1,000 per telephonic meeting; and (v) out-of-pocket expenses. The pro rata share paid by each Fund is based on each Fund's average net assets as a percentage of the average net assets of all the funds managed by the Investment Adviser for which the Directors serve in common as Directors/Trustees (and, in the case of Mary A. Baldwin, Pilgrim Funds for which she serves as a member of the Advisory Board). As Advisory Board Members to the Lexington International Funds, Mssrs. Chadha and McCosh receive $15,000 annually plus reasonable travel expenses. The following table sets forth information regarding compensation of Directors/Trustees by each Company and other funds managed by the Investment Advisers for the year ended December 31, 2000. (This period was chosen because the Pilgrim Funds have varying fiscal year ends.) Officers of the Companies and Directors/Trustees who are interested persons of the Companies do not receive any compensation from the Fund or any other funds managed by the Investment Adviser. In the column headed "Total Compensation From Registrant and Fund Complex Paid to Directors," the number in parentheses indicates the total number of boards in the fund complex on which the Directors/Trustees served during that fiscal year. 8 COMPENSATION TABLE
AGGREGATE AGGREGATE AGGREGATE AGGREGATE COMPENSATION COMPENSATION COMPENSATION COMPENSATION AGGREGATE AGGREGATE FROM FROM FROM FROM COMPENSATION COMPENSATION GROWTH PILGRIM SMALLCAP GROWTH FROM FROM AND NAME OF MUTUAL OPPORTUNITIES OPPORTUNITIES EQUITY MAYFLOWER INCOME PERSON, POSITION FUNDS(1)(2) FUND(2) FUND(2) TRUST(2) TRUST(2) FUND(3) ---------------- ----------- ------- ------- -------- -------- ------- Mary A. Baldwin(5) 15,342 2,313 2,965 625 5,165 N/A Advisory Board Member Al Burton(9) 17,031 2,568 3,292 693 5,734 1,026 Director S.M.S. Chadha(8)(13) N/A N/A N/A N/A N/A 3,933 Advisory Board Member Robert M. Demichele(8)(14) N/A N/A N/A N/A N/A 0 Director Paul S. Doherty(5) 15,201 2,292 2,938 619 5,118 916 Director Beverly C. Duer N/A N/A N/A N/A N/A 3,051 Director(8) Barbara R. Evans(8) N/A N/A N/A N/A N/A 2,081 Director Robert B. Goode, Jr.(9) 18,890 2,546 3,265 688 5,686 1,018 Director Alan S. Gosule(5) 16,890 2,546 3,265 688 5,686 1,018 Director Joseph N. Hankin(10) N/A N/A N/A N/A N/A N/A Director Richard M. Hisey(8)(14) N/A N/A N/A N/A N/A 0 Director Mark L. Lipson(5)(8)(14) 0 0 0 0 0 N/A Director Jerard F. Maher(8) N/A N/A N/A N/A N/A 3,404 Director Walter H. May(5) 16,608 2,503 3,210 676 5,592 1,001 Director Andrew M. McCosh(8)(13) N/A N/A N/A N/A N/A 3,933 Director TOTAL PENSION OR COMPENSATION AGGREGATE AGGREGATE RETIREMENT FROM AGGREGATE COMPENSATION COMPENSATION BENEFITS ESTIMATED REGISTRANT COMPENSATION FROM FROM ACCRUED ANNUAL AND FUND FROM FINANCIAL PILGRIM AS PART OF BENEFITS COMPLEX PAID NAME OF INVESTMENT SERVICES FUNDS FUND UPON TO PERSON, POSITION FUNDS FUND TRUST(4) EXPENSES RETIREMENT DIRECTORS/TRUSTEES ---------------- ----- ---- -------- -------- ---------- ------------------ Mary A. Baldwin(5) 2,453 1,724 N/A 0 0 54,500 Advisory Board (27 Boards) Member Al Burton(9) 2,723 1,914 N/A 0 0 60,500 Director (27 Boards) S.M.S. Chadha(8)(13) N/A N/A N/A 22,298 Advisory Board (15 Boards) Member Robert M. Demichele(8)(14) N/A N/A N/A 0 Director (15 Boards) Paul S. Doherty(5) 2,431 1,708 N/A 0 0 54,000 Director (27 Boards) Beverly C. Duer N/A N/A N/A 17,298 Director(8) (15 Boards) Barbara R. Evans(8) N/A N/A N/A 11,798 Director (15 Boards) Robert B. Goode, Jr.(9) 2,701 1,898 N/A 0 0 60,000 Director (27 Boards) Alan S. Gosule(5) 2,701 1,898 N/A 0 0 60,000 Director (27 Boards) Joseph N. Hankin(10) N/A N/A 22,512 22,512 Director (2 Boards) Richard M. Hisey(8)(14) N/A N/A N/A 0 Director (8 Boards) Mark L. Lipson(5)(8)(14) 0 0 N/A Director Jerard F. Maher(8) N/A N/A N/A 19,298 Director (15 Boards) Walter H. May(5) 2,656 1,867 N/A 59,000 Director (27 Boards) Andrew M. McCosh(8)(13) N/A N/A N/A 22,298 Director (15 Boards)
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AGGREGATE AGGREGATE AGGREGATE AGGREGATE COMPENSATION COMPENSATION COMPENSATION COMPENSATION AGGREGATE AGGREGATE FROM FROM FROM FROM COMPENSATION COMPENSATION GROWTH PILGRIM SMALLCAP GROWTH FROM FROM AND NAME OF MUTUAL OPPORTUNITIES OPPORTUNITIES EQUITY MAYFLOWER INCOME PERSON, POSITION FUNDS(1)(2) FUND(2) FUND(2) TRUST(2) TRUST(2) FUND(3) ---------------- ----------- ------- ------- -------- -------- ------- Thomas J. Mcinerney(11)(14) N/A N/A N/A N/A N/A N/A Director Donald B. Miller(8) N/A N/A N/A N/A N/A 3,570 Director Francis Olmstead(7) N/A N/A N/A N/A N/A 2,963 Director Jock Patton(5) 17,172 2,589 3,319 699 5,781 1,035 Director John J. Pileggi(10) N/A N/A N/A N/A N/A N/A Director John G. Preston(14) N/A N/A N/A N/A N/A 0 Director David W.c. Putnam(5) 16,820 2,536 3,251 685 5,663 1,014 Director Jack D. Rehm(10) N/A N/A N/A N/A N/A N/A Director Blaine E. Rieke(12) N/A N/A N/A N/A N/A N/A Director Margaret W. Russell(7) N/A N/A N/A N/A N/A 3,016 Director John R. Smith(9) 17,031 2,568 3,292 693 5,734 1,026 Director Philip C. Smith(7) N/A N/A N/A N/A N/A 3,387 Director Robert W. Stallings(9)(14) 0 0 0 0 0 0 Director Allen H. Stowe(8) N/A N/A N/A N/A N/A 3,404 Director Francis A. Sunderland(7) N/A N/A N/A N/A N/A 2,963 Director John G. Turner(5)(6)(14) 0 0 0 0 0 0 Director Richard A. Wedemeyer(12) N/A N/A N/A N/A N/A N/A Director David W. Wallace(9) 17,031 2,568 3,292 693 5,734 1,026 Director TOTAL PENSION OR COMPENSATION AGGREGATE AGGREGATE RETIREMENT FROM AGGREGATE COMPENSATION COMPENSATION BENEFITS ESTIMATED REGISTRANT COMPENSATION FROM FROM ACCRUED ANNUAL AND FUND FROM FINANCIAL PILGRIM AS PART OF BENEFITS COMPLEX PAID NAME OF INVESTMENT SERVICES FUNDS FUND UPON TO PERSON, POSITION FUNDS FUND TRUST(4) EXPENSES RETIREMENT DIRECTORS/TRUSTEES ---------------- ----- ---- -------- -------- ---------- ------------------ Thomas J. Mcinerney(11)(14) N/A N/A N/A N/A Director Donald B. Miller(8) N/A N/A N/A 20,236 Director (15 Boards) Francis Olmstead(7) N/A N/A N/A 16,800 Director (N/A) Jock Patton(5) 2,746 1,930 N/A 0 0 61,000 Director (27 Boards) John J. Pileggi(10) N/A N/A N/A N/A Director John G. Preston(14) N/A N/A N/A 0 Director (15 Boards) David W.c. Putnam(5) 2,690 1,891 N/A 0 0 59,750 Director (27 Boards) Jack D. Rehm(10) N/A N/A 22,512 22,512 Director (2 Boards) Blaine E. Rieke(12) N/A N/A 25,511 22,511 Director (2 Boards) Margaret W. Russell(7) N/A N/A N/A 17,100 Director (N/A) John R. Smith(9) 2,723 1,914 N/A 0 0 60,500 Director (27 Boards) Philip C. Smith(7) N/A N/A N/A 19,200 Director (N/A) Robert W. Stallings(9)(14) 0 0 N/A 0 0 0 Director Allen H. Stowe(8) N/A N/A N/A 19,298 Director (8 Boards) Francis A. Sunderland(7) N/A N/A N/A 16,800 Director (N/A) John G. Turner(5)(6)(14) 0 0 N/A 0 Director Richard A. Wedemeyer(12) N/A N/A 20,428 20,428 Director (2 Boards) David W. Wallace(9) 2,723 1,914 N/A 0 0 60,500 Director (27 Boards)
10 ---------- (1) Prior to May 24, 1999, the Company was part of a different Fund complex. Effective May 24, 1999, when ING Pilgrim Investments became the investment adviser to the Funds, the Company joined the Pilgrim family of funds. (2) Prior to November 1, 1999, the Fund was part of a different Fund complex. Effective November 1, 1999, the Fund joined Pilgrim family of funds. (3) Prior to July 26, 2000, Fund was part of a different Fund complex. Effective July 26, 2000, Growth and Income Fund joined the Pilgrim family of funds. (4) Prior to September 1, 2000, the Fund was part of a different Fund complex. Effective September 1, 2000, Pilgrim Funds Trust joined the Pilgrim family of funds. (5) Also serves as a member of the Board of Trustees, or is an Advisory Board Member of the Pilgrim Prime Rate Trust. (6) Elected a Director of the Pilgrim Funds on September 1, 2000. (7) Retired prior to July 26, 2000 (8) Resigned as Director/Trustee prior to July 26, 2000 (9) Resigned as a Director effective February 26, 2001 (10) Resigned as a Trustee effective March 23, 2001 (11) Elected as a Director of the Pilgrim Funds on February 26, 2001 (12) Formerly a Trustee of ING Funds Trust. Elected Director of the Pilgrim Funds on February 26, 2001. (13) Prior to July 26, 2000, Messrs. Chadha and McCosh served as Directors/Trustees of the Lexington Funds. Effective July 26, 2000, Messrs. Chadha and McCosh serve as Advisory Board Members of certain International Funds. (14) "Interested person," as defined in the 1940 Act, of the Company because of the affiliation with an investment adviser to the Pilgrim Funds. Officers and Directors who are interested persons do not receive any compensation from the Funds. CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS Control is defined by the 1940 Act as the beneficial ownership, either directly or through one or more controlled companies, of more than 25 percent of the voting securities of the company. A control person may be able to take actions regarding its Fund without the consent or approval of shareholders. As of September 1, 2001, Lion Connecticut Holdings Inc., 151 Farminton Avenue, Hartford, Connecticut 06156, owned 53.7% of the Pilgrim Tax Efficient Equity Fund and, therefore, is a control person of the Fund. 11 As of September 1, 2001, the Directors/Trustees and officers as a group owned less than 1% of any class of each Fund's outstanding Shares. As of that date, to the knowledge of management, no person owned beneficially or of record more then 5% of the outstanding Shares of any class of the Pilgrim Funds, except as follows:
CLASS AND TYPE PERCENTAGE PERCENTAGE FUND ADDRESS OF OWNERSHIP OF CLASS OF FUND ---- ------- ------------ -------- ------- Pilgrim Growth & State Street Bank & Trust Class C 5.21% 0.0815% Income Fund John M Murphy IRA Beneficial 871 Shawmut Ct NW Owner Grand Rapids, MI 49504 Pilgrim Growth & PaineWebber FBO Class C 15.32% 0.2396% Income Fund James & Kathleen Domenico Beneficial 34 Tamarade Dr Owner Littleton, CO 80127 Pilgrim Tax Efficient Lion Connecticut Holdings Inc. Class A 69.19% 53.7553% Equity Fund 151 Farminton Ave Shareholder Hartford, CT 06156 Pilgrim Tax Efficient Richard & Deloria Bradley Class C 15.00% 0.6067% Equity Fund 161 Copeland Rd Shareholder Buckatunna, MS 39322 Pilgrim MidCap Equitable Life for Separate Account 65 Class Q 29.95% 1.1447% Growth Fund FBO Various Expediter 401k Plans Beneficial 220 Plaza Dr HM-2 Owner Secaucus, NJ 07094 Pilgrim MidCap Donald Pels Class Q 23.52% 0.8990% Growth Fund 375 Park Ave #3305 Shareowner New York, NY 10152 Pilgrim Growth + First Clearing Corp FBO Class Q 12.73% 0.0132% Value Fund Bellevue Urological Group, #1418-6376 Beneficial 6651 Chippewa St, Ste 101 Owner St. Louis, MO 63109 Pilgrim Growth & First Clearing Corp FBO Class Q 42.39% 0.0442% Value Fund Robert Ryan IRA, #7246-1236 Beneficial 1345 Branchwater Ln Owner Birmingham, AL 35216 Pilgrim Convertible Trust Company of America Class Q 19.92% 1.1424% Fund FBO TCA Beneficial 7103 S Revere Pkwy Owner Englewood, CO 80112 Pilgrim SmallCap Bear Stearns Securities Corp Class A 9.37% 3.4754% Growth Fund FBO Acct #784-22008-13 Beneficial 1 Metrotech Center North Owner Brooklyn, NY 11201 Pilgrim International Mac & Co. Class I 8.94% 0.7213% Value Fund FBO Acct #BNCF3308002 Beneficial 1 Mellon Center, Rm 151-1035 Owner Pittsburgh, PA 15258
12 INVESTMENT ADVISER The investment adviser for the Pilgrim Funds is ING Pilgrim Investments, LLC ("Investment Adviser") which is registered as an investment adviser with the SEC and serves as an investment adviser to registered investment companies (or series thereof), as well as privately managed accounts. ING Pilgrim Investments, subject to the authority of the Directors/Trustees of the Pilgrim Funds, has the overall responsibility for the management of each Pilgrim Fund's portfolio. ING Pilgrim Investments is a direct, wholly owned subsidiary of ING Groep N.V. (NYSE: ING) ("ING Group"). ING Group is a global financial institution active in the field of insurance, banking, and asset management in more than 65 countries, with almost 100,000 employees. On February 26, 2001, the name of the Investment Adviser changed from ING Pilgrim Investments, Inc. to ING Pilgrim Investments, LLC. Prior to April 30, 2001, ING Mutual Funds Management LLC ("IMFC") served as investment adviser to certain of the Pilgrim Funds. On April 30, 2001, IMFC, an indirect wholly owned subsidiary of ING Group that had been under common control with ING Pilgrim Investments, merged with ING Pilgrim Investments. ING Pilgrim Investments serves pursuant to separate Investment Management Agreements between ING Pilgrim Investments and each Company. The Investment Management Agreements require the Investment Adviser to oversee the provision of all investment advisory and portfolio management services for each of the Pilgrim Funds, respectively. ING Pilgrim Investments has delegated certain management responsibilities to certain other investment advisers ("Sub-Advisers") for several of the Pilgrim Funds. ING Pilgrim Investments, as Investment Adviser, oversees the investment management of the Sub-Advisers for the Pilgrim Funds. Each Investment Management Agreement requires the Investment Adviser to provide, subject to the supervision of the Board of Directors/Trustees, investment advice and investment services to the Fund and to furnish advice and recommendations with respect to investment of the Fund's assets and the purchase or sale of its portfolio securities. The Investment Adviser also provides investment research and analysis. Each Investment Management Agreement provides that the Investment Adviser is not subject to liability to the Fund for any act or omission in the course of, or connected with, rendering services under the Agreement, except by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations and duties under the Agreement. After an initial two year term, each Investment Management Agreement continues in effect from year to year so long as such continuance is specifically approved at least annually by (a) the Board of Directors/Trustees or (b) the vote of a "majority" (as defined in the 1940 Act) of the Fund's outstanding shares voting as a single class; provided, that in either event the continuance is also approved by at least a majority of the Board of Directors/Trustees who are not "interested persons" (as defined in the 1940 Act) of the Investment Adviser by vote cast in person at a meeting called for the purpose of voting on such approval. Each Investment Management Agreement is terminable without penalty with not less than 60 days' notice by the Board of Directors/Trustees or by a vote of the holders of a majority of the Fund's outstanding shares voting as a single class, or upon not less than 60 days' notice by the Investment Adviser. The Investment Management Agreement will terminate automatically in the event of its "assignment" (as defined in the 1940 Act). As of June 30, 2001, ING Pilgrim Investments had assets under management of over $18.4 billion. 13 INVESTMENT ADVISER FEES
SERIES ANNUAL INVESTMENT MANAGEMENT FEE ------ -------------------------------- Balanced Fund 0.75% of the first $500 million of the Fund's average net assets, 0.675% of the next $500 million of average net assets, and 0.65% of the average net assets in excess of $1 billion Financial Services Fund 1.00% of the first $30 million of average daily net assets, 0.75% of the next $95 million of average daily net assets and 0.70% of average daily net assets in excess of $125 million. The fees are computed and accrued daily and paid monthly Convertible Fund 0.75% of the first $500 million of the Fund's average net assets, 0.675% of the next $500 million of average net assets, and 0.65% of the average net assets in excess of $1 billion Growth and Income Fund 0.75% on the first $100 million, 0.60% on the next $50 million, 0.50% on the next $100 million and 0.40% thereafter Growth Opportunities Fund 0.95% of the Fund's average daily net assets Growth + Value Fund 1.00% of the Fund's average daily net assets Internet Fund 1.25% of the Fund's average daily net assets LargeCap Growth Fund 0.75% of the first $500 million of the Fund's average net assets, 0.675% of the next $500 million of average net assets, and 0.65% of the average net assets in excess of $1 billion MagnaCap Fund 1.00% of the Fund's average daily net assets on the first $30 million of net assets. The annual rate is reduced to 0.75% on net assets from $30 million to $250 million; to 0.625% on net assets from $250 million to $500 million; and to 0.50% on net assets over $500 million. The fees are accrued daily and paid monthly. MidCap Growth Fund 0.75% of the first $500 million of the Fund's average net assets, 0.675% of the next $500 million of average net assets, and 0.65% of the average net assets in excess of $1 billion MidCap Opportunities Fund 1.00% of the Fund's average daily net assets Research Enhanced Index Fund 0.70% of the Fund's average daily net assets SmallCap Growth Fund 1.00% of the Fund's average net assets SmallCap Opportunities Fund 1.00% of the Fund's average daily net assets Tax Efficient Equity Fund 0.80% of the Fund's average daily net assets
14 TOTAL ADVISORY FEES PAID BY THE FOLLOWING FUNDS WHICH ARE SERIES OF PILGRIM MUTUAL FUNDS (1) JUNE 30 MAY 31 ----------------------- MARCH 31 2001(2) 2000 1999(3) 1999 ---------- ---------- ---------- ---------- Balanced Fund $ 913,795 $ 476,583 $ 66,601 $ 261,803 Convertible Fund $3,050,129 $2,652,928 $ 438,229 $1,997,038 LargeCap Growth Fund $4,287,057 $2,997,541 $ 115,161 $ 178,627 MidCap Growth Fund $3,249,540 $3,101,608 $ 549,879 $3,049,230 SmallCap Growth Fund $4,007,172 $4,206,863 $ 811,208 $5,334,833 ---------- (1) Prior to the Reorganization, Pilgrim Mutual Funds had not engaged the services of an investment adviser for the Trust's A, B, C and Institutional Portfolios because these portfolios invested all their assets in master funds of the Master Trust. Consequently, the amounts of the advisory fees reported below for Pilgrim Mutual Funds were for services provided to the master funds of the Master Trust. (2) Reflects eleven month period from July 1, 2000 to May 31, 2001. (3) Reflects three month period from April 1, 1999 to June 30, 1999. TOTAL ADVISORY FEES PAID BY THE FINANCIAL SERVICES FUND AND MAGNACAP FUND JUNE 30 MAY 31 ------------------------- 2001(2) 2000 1999 ---------- ---------- ---------- Financial Services Fund(1) $2,766,066 $3,609,716 $5,893,806 MagnaCap Fund $2,711,207 $3,251,123 $3,200,909 ---------- (1) Prior to October 17, 1997, the Investment Adviser was paid management fees based on average weekly net assets. Fees paid for fiscal year ended June 30, 1998 includes management fees for a six-month period ended June 30, 1998. (2) Reflects eleven month period from July 1, 2000 to May 31, 2001. TOTAL ADVISORY FEES PAID BY THE FOLLOWING FUNDS WHICH ARE SERIES OF MAYFLOWER TRUST OCTOBER 31, MAY 31, ------------------------ 2001(2) 2000 1999 ---------- ---------- ---------- Growth + Value Fund $4,401,021 $7,639,602 $2,711,399 Research Enhanced Index Fund(1) $ 815,269 $1,741,851 $ 690,257 ---------- (1) Research Enhanced Index Fund commenced operations on December 30, 1998. (2) Reflects seven month period from November 1, 2000 to May 31, 2001. TOTAL ADVISORY FEES PAID BY THE FOLLOWING FUNDS WHICH ARE SERIES OF PILGRIM FUNDS TRUST MAY 31, OCTOBER 31 --------------------- ----------------- 2001(3) 2000 1999 1998 ---------- -------- -------- ------- Pilgrim Internet Fund(1) $414,886(4) $699,143 $ 26,872 N/A Pilgrim Tax-Efficient Equity Fund(2) $260,789(5) $225,464 $ 77,690 N/A ---------- (1) Pilgrim Internet Fund commenced operations on July 1, 1999 (2) Pilgrim Tax-Efficient Equity Fund commenced operations on December 15, 1998. (3) Reflects seven month period from November 1, 2000 to May 31, 2001. (4) Does not reflect expense reimbursement of $314,555 for the seven-month period ended May 31, 2001. (5) Does not reflect expense reimbursement of $122,924 for the seven-month period ended May 31, 2001. 15 TOTAL ADVISORY FEES PAID BY THE FUNDS WHICH COMPRISE PILGRIM EQUITY TRUST, PILGRIM GROWTH & INCOME FUND, PILGRIM GROWTH OPPORTUNITIES FUND, AND PILGRIM SMALLCAP OPPORTUNITIES FUND
DECEMBER 31, MAY 31, ------------------------------------ 2001 2000 1999 1998 ---------- ---------- ---------- ---------- Growth and Income Fund $ 582,390 $1,549,898 $1,498,729 $1,466,333 Growth Opportunities Fund(1) $2,339,228 $5,951,486 $1,865,457 $1,541,921 MidCap Opportunities Fund(1)(2) $ 567,295 $1,439,697 $ 483,746 $ 73,797 SmallCap Opportunities Fund $1,954,402 $5,594,488 $1,915,854 $2,033,840
---------- (1) Does not reflect expense reimbursement of $37,687 for MidCap Opportunities Fund for the year ended December 31, 1998. (2) MidCap Opportunities Fund commenced operations on August 20, 1998. (3) Reflects five month period from January 1, 2000 to May 31, 2001. SUB-ADVISORY AGREEMENTS The Investment Management Agreement for certain Pilgrim Funds provides that the Investment Adviser, with the approval of a Company's Board of Directors/Trustees, may select and employ investment advisers to serve as Sub-Adviser for any Fund ("Sub-Adviser"), and shall monitor the Sub-Advisers' investment programs and results, and coordinate the investment activities of the Sub-Advisers to ensure compliance with regulatory restrictions. The Investment Adviser pays all of its expenses arising from the performance of its obligations under the Investment Management Agreement, including all fees payable to the Sub-Advisers, executive salaries and expenses of the Directors/Trustees and officers of the Company who are employees of the Investment Adviser or its affiliates and office rent of the Company. The Sub-Advisers pay all of their expenses arising from the performance of their obligations under the sub-advisory agreements (each a "Sub-Advisory Agreement and collectively, the "Sub-Advisory Agreements"). Subject to the expense reimbursement provisions described in this SAI, other expenses incurred in the operation of the Company are borne by the Pilgrim Funds, including, without limitation, investment advisory fees; brokerage commissions; interest; legal fees and expenses of attorneys; fees of independent auditors, transfer agents and dividend disbursing agents, accounting agents, and custodians; the expense of obtaining quotations for calculating each Fund's net asset value; taxes, if any, and the preparation of each Fund's tax returns; cost of stock certificates and any other expenses (including clerical expenses) of issue, sale, repurchase or redemption of shares; fees and expenses of registering and maintaining the registration of shares of the Pilgrim Funds under federal and state laws and regulations; expenses of printing and distributing reports, notices and proxy materials to existing shareholders; expenses of printing and filing reports and other documents filed with governmental agencies; expenses of annual and special shareholder meetings; expenses of printing and distributing prospectuses and statements of additional information to existing shareholders; fees and expenses of Directors/Trustees of the Company who are not employees of the Investment Adviser or any Sub-Adviser, or their affiliates; membership dues in trade associations; insurance premiums; and extraordinary expenses such as litigation expenses. The Sub-Advisory Agreements may be terminated without payment of any penalties by the Investment Adviser, the Directors/Trustees, on behalf of a Company, or the shareholders of a Fund upon 60 days' prior written notice. Otherwise, the Sub-Advisory Agreements will remain in effect for two years and will, thereafter, continue in effect from year to year, subject to the annual approval of the appropriate Board of Directors/Trustees, on behalf of a Fund, or the vote of a majority of the outstanding voting securities, and the vote, cast in person at a meeting duly called and held, of a majority of the Directors/Trustees, on behalf of a Fund who are not parties to the Sub-Advisory Agreement or "interested persons" (as defined in the 1940 Act) of any such Party. 16 Pursuant to a Sub-Advisory Agreement between ING Pilgrim Investments and Navellier Fund Management, Inc. ("Navellier"), Navellier acts as Sub-Adviser to Growth + Value Fund. In this capacity, Navellier, subject to the supervision and control of ING Pilgrim Investments and the Trustees of the Fund, manages the Fund's portfolio investments consistently with its investment objective and executes any of the Fund's investment policies that it deems appropriate to utilize from time to time. Fees payable under the Sub-Advisory Agreement accrue daily and are paid monthly by ING Pilgrim Investments. Navellier is wholly owned and controlled by its sole stockholder, Louis G. Navellier. Navellier's address is 1 East Liberty, Third Floor, Reno, Nevada, 89501. Pursuant to a Sub-Advisory Agreement between ING Pilgrim Investments and Aeltus Investment Management, Inc., ("Aeltus"), Aeltus acts as Sub-Adviser to Research Enhanced Index Fund. In this capacity, Aeltus, subject to the supervision and control of ING Pilgrim Investments and the Trustees of the Fund, on behalf of the Fund, manages the Fund's portfolio investments consistently with the Fund's investment objective, and executes any of the Fund's investment policies that it deems appropriate to utilize from time to time. Fees payable under the Sub-Advisory Agreement accrue daily and are paid monthly by ING Pilgrim Investments. Aeltus's address is 10 State House Square, Hartford, Connecticut 06103-3602. Aeltus is a wholly owned subsidiary of ING Group. ING Investment Management Advisors B.V. ("IIMA"), serves as Sub-Adviser to Internet Fund. Located at Schenkkade 65, 2595 AS, The Hague, The Netherlands, IIMA operates under the collective management of ING Investment Management. Delta Asset Management ("Delta") serves as Sub-Adviser to the Tax Efficient Equity Fund. Located at 333 South Grand Avenue, Los Angeles, California, 90071, Delta is a division of Furman Selz Capital Management LLC. For the following Funds, as compensation to each Sub-Adviser for its services, the Investment Adviser pays the Sub-Adviser a monthly fee in arrears equal to the following as a percentage of the Fund's average daily net assets managed during the month: SERIES ANNUAL SUB-ADVISORY FEE ------ ----------------------- Growth + Value Fund 0.50% of the Fund's average daily net assets Internet Fund 0.625% of the Fund's average daily net assets Research Enhanced Index Fund 0.20% of the Fund's average daily net assets Tax-Efficient Equity Fund 0.40% of the Fund's average daily net assets FORMER SUB-ADVISER FOR RESEARCH ENHANCED INDEX FUND. J.P. Morgan Investment Management LLC ("J.P. Morgan") served as Sub-Adviser to Research Enhanced Index Fund through August 2001. For the fiscal years ended October 31, 2000, the Investment Adviser paid portfolio management fees to J.P. Morgan of $497,672. FORMER SUB-ADVISER FOR SMALLCAP OPPORTUNITIES FUND. Navellier Fund Management, Inc. ("Navellier") served as Sub-Adviser to SmallCap Opportunities Fund through July, 1998. For the fiscal years ended December 31, 1997 and 1998, the Investment Adviser paid portfolio management fees to Navellier of $1,498,283 and $789,408, respectively. FORMER SUB-ADVISER FOR LARGECAP GROWTH FUND, AND CONVERTIBLE FUND. Nicholas-Applegate Capital Management ("NACM") served as Sub-Adviser to LargeCap Growth Fund, and Convertible Fund through September 30, 2000. Prior to May 24, 1999, NACM was the investment adviser of the Funds, and neither the Funds nor NACM paid portfolio manager fees. For the fiscal year ended June 30, 2000, the Investment Adviser paid portfolio management fees to NACM of $2,820,752 and for the three-month period ended September 30, 2000 paid portfolio management fees of $1,155,335. FORMER SUB-ADVISER FOR SMALLCAP GROWTH FUND AND MIDCAP GROWTH FUND. Nicholas-Applegate Capital Management ("NACM") served as Sub-Adviser to SmallCap Growth Fund and MidCap Growth Fund through March 31, 2000. Prior to May 24, 1999, NACM was the investment adviser of the Funds, and neither the Funds nor NACM paid portfolio manager fees. For the nine-month period ended March 31, 2000, the Investment Adviser paid portfolio management fees to NACM of $2,605,826. 17 TOTAL SUB-ADVISORY FEES PAID BY THE INVESTMENT ADVISER OCTOBER 31, MAY 31, ------------------------ 2001(4) 2000 1999 ---------- ---------- ---------- Growth + Value Fund $2,200,510 $3,819,801 $1,355,700 Internet Fund(1) $ 68,059 $ 349,572 $ 13,346 Research-Enhanced Index Fund(2) $ 232,934 $ 497,672 $ 199,666 Tax Efficient Equity Fund(3) $ 91,563 $ 172,732 $ 38,845 ---------- (1) The Pilgrim Internet Fund commenced operations on July 1, 1999. (2) The Pilgrim Research Enhanced Index Fund commenced operations on December 30, 1998. (3) The Pilgrim Tax Efficient Equity Fund commenced operations on December 15, 1998. (4) Reflects seven month period from November 1, 2000 to May 31, 2001. TOTAL SUB-ADVISORY FEES PAID BY THE INVESTMENT ADVISER JUNE 30, MAY 31, --------------------- 2001(4) 2000 1999 ---------- ---------- ------- Convertible Fund(1)(2) $ 481,251 $1,324,939 N/A LargeCap Growth Fund(1)(2) $ 674,084 $1,495,813 N/A MidCap Growth Fund(1)(3) N/A $1,085,388 N/A SmallCap Growth Fund(1)(3) N/A $1,520,438 N/A ---------- (1) Prior to May 24, 1999, the funds were managed by Nicholas-Applegate Capital Management and had no Sub-Advisory fees. (2) Effective October 1, 2000, ING Pilgrim Investments, LLC began advising the Fund directly. (3) Effective April 1, 2000, ING Pilgrim Investments, LLC began advising the Fund directly. (4) Reflects eleven month period from July 1, 2000 to May 31, 2001. ADMINISTRATION ING Pilgrim Group, LLC serves as administrator for the Funds, pursuant to an Administrative Services Agreement with Financial Services Fund, Equity Trust, Growth and Income Fund, MagnaCap Fund, Mayflower Trust, Pilgrim Mutual Funds, SmallCap Opportunities Fund, Growth Opportunities Fund and Pilgrim Funds Trust. Subject to the supervision of the Board of Directors/Trustees, the Administrator provides the overall business management and administrative services necessary to the proper conduct of the Funds' business, except for those services performed by the Investment Adviser under the Investment Management Agreements, the custodian for the Funds under the Custodian Agreements, the transfer agent for the Funds under the Transfer Agency Agreements, and such other service providers as may be retained by the Funds from time to time. The Administrator acts as liaison among these service providers to the Funds. The Administrator is also responsible for ensuring that the Funds operate in compliance with applicable legal requirements and for monitoring the Investment Adviser for compliance with requirements under applicable law and with the investment policies and restrictions of the Funds. The Administrator is an affiliate of the Investment Adviser. Prior to May 24, 1999, Pilgrim Mutual Funds had an Administration Agreement with Investment Company Administration ("ICA"), 4455 East Camelback Road, Suite 261-E, Phoenix, Arizona 85018. Pursuant to an Administration Agreement with Pilgrim Mutual Funds, ICA was responsible for performing all administrative services required for the daily business operations of Pilgrim Mutual Funds, subject to the supervision of the Board of Trustees of Pilgrim Mutual Funds. For the fiscal years ended March 31, 1999 and 1998, ICA received aggregate compensation of $1,059,155 and $848,799, respectively, for all of the series of Pilgrim Mutual Funds. Also, prior to May 24, 1999, Pilgrim Mutual Funds had an Administrative Services Agreement with NACM under which NACM was responsible for providing all administrative services which are not provided by ICA or by Pilgrim Mutual Funds' Distributor, transfer agents, accounting agents, independent accountants 18 and legal counsel. For the fiscal years ended March 31, 1999 and 1998, NACM received aggregate compensation of $1,603,130 and $1,972,037, respectively, for all of the series of Pilgrim Mutual Funds pursuant to the Administrative Services Agreement. TOTAL ADMINISTRATIVE FEES PAID BY THE FOLLOWING FUNDS WHICH ARE SERIES OF PILGRIM MUTUAL FUNDS(1) JUNE 30, MAY 31, ----------------- MARCH 31, 2001(2) 2000 1999(3) 1999 ------- ------ ------- -------- Balanced Fund N/A N/A N/A 110,065 Convertible Fund N/A N/A N/A 386,381 LargeCap Growth Fund N/A N/A N/A 95,257 MidCap Growth Fund N/A N/A N/A 546,605 SmallCap Growth Fund N/A N/A N/A 656,416 ---------- (1) Prior to the Reorganization, Pilgrim Mutual Funds had not engaged the services of an investment adviser for the Trust's A, B, C and Institutional Portfolios because these portfolios invested all their assets in master funds of the Master Trust. Consequently, the amounts of the advisory fees reported below for Pilgrim Mutual Funds were for services provided to the master funds of the Master Trust. (2) Reflects eleven month period from July 1, 2000 to May 31, 2001. (3) Reflects three month period from April 1, 1999 to June 30, 1999. TOTAL ADMINISTRATIVE FEES PAID BY THE FOLLOWING FUNDS WHICH ARE SERIES OF MAYFLOWER TRUST OCTOBER 31, MAY 31, ---------------------- 2001(2) 2000 1999 -------- -------- -------- Growth + Value Fund $440,102 $836,071 $358,875 Research Enhanced Index Fund(1) $116,467 $272,002 $122,493 ---------- (1) Research Enhanced Index Fund commenced operations on December 30, 1998. (2) Reflects seven month period from November 1, 2000 to May 31, 2001. TOTAL ADMINISTRATIVE FEES PAID BY THE FUNDS WHICH COMPRISE EQUITY TRUST, GROWTH AND INCOME FUND, GROWTH OPPORTUNITIES FUND AND SMALLCAP OPPORTUNITIES FUND DECEMBER 31, MAY 31, ---------------------- 2001(2) 2000 1999 -------- -------- -------- Growth and Income Fund $ 91,556 N/A N/A Growth Opportunities Fund $246,235 $868,829 $248,728 MidCap Opportunities Fund(1) $ 56,730 $155,988 $ 48,903 SmallCap Opportunities Fund $195,440 $826,269 $255,447 ---------- (1) MidCap Opportunities Fund commenced operations on August 20, 1998. (2) Reflects five month period from January 1, 2000 to May 31, 2001. TOTAL ADMINISTRATIVE FEES PAID BY THE FUNDS WHICH COMPRISE PILGRIM FUNDS TRUST OCTOBER 31, MAY 31, ----------- 2001(2) 2000 1999 ------- ---- ---- Tax Efficient Equity Fund (1) $32,599 N/A N/A Internet Fund (1) $33,191 N/A N/A ---------- (1) Internet Fund commenced operations July 1, 1999 and Tax Efficient Equity Fund commenced operations December 15, 1998. (2) Reflects Seven-month period from November 1, 2000 to May 31, 2001. 19 EXPENSE LIMITATION AGREEMENTS The Investment Adviser has entered into expense limitation agreements with the following Pilgrim Funds, pursuant to which the Investment Adviser has agreed to waive or limit their fees. In connection with these agreements and certain U.S. tax requirements, the Investment Adviser will assume other expenses so that the total annual ordinary operating expenses of the Pilgrim Funds (which excludes interest, taxes, brokerage commissions, extraordinary expenses such as litigation, other expenses not incurred in the ordinary course of each Fund's business, and expenses of any counsel or other persons or services retained by the Company's Directors who are not "interested persons" (as defined in the 1940 Act) of the Investment Advisers do not exceed:
FUND CLASS A CLASS B CLASS C CLASS I CLASS M CLASS Q CLASS T ----- ------- ------- ------- ------- ------- ------- ------- Balanced Fund 1.60% 2.25% 2.25% N/A N/A 1.25% 1.75% Convertible Fund 1.60% 2.25% 2.25% N/A N/A 1.25% N/A Growth and Income Fund 2.75% 3.50% 3.50% N/A N/A 2.75% N/A Internet Fund 1.90% 2.65% 2.65% N/A N/A N/A N/A LargeCap Growth Fund 1.60% 2.25% 2.25% N/A N/A 1.25% N/A MidCap Growth Fund 1.60% 2.25% 2.25% N/A N/A 1.25% N/A SmallCap Growth Fund 1.95% 2.60% 2.60% N/A N/A 1.50% N/A Tax Efficient Equity Fund 1.45% 2.20% 2.20% N/A N/A N/A N/A
Each Fund will at a later date reimburse the Investment Adviser for management fees waived and other expenses assumed by the Investment Adviser during the previous 36 months, but only if, after such reimbursement, the Fund's expense ratio does not exceed the percentage described above. The Investment Adviser will only be reimbursed for fees waived or expenses assumed after the effective date of the expense limitation agreements. Each expense limitation agreement provides that these expense limitations shall continue until October 31, 2002 for SmallCap Growth Fund, MidCap Growth Fund, LargeCap Growth Fund, Convertible Fund, Balanced Fund, Internet Fund, and Tax Efficient Equity Fund and until July 26, 2002 for Growth and Income Fund; until February 28, 2002 for Tax Efficient Equity Fund and Internet Fund. Thereafter, each agreement will automatically renew for a one-year term unless the Investment Adviser provides written notice of the termination of the agreement to the Fund at least 30 days prior to the end of the then-current term. In addition, the agreement will terminate upon termination of the Investment Management Agreement, or it may be terminated by the Fund, without payment of any penalty, upon ninety (90) days' prior written notice to the Investment Adviser at its principal place of business. For Pilgrim Mutual Funds, prior to the expense limitation agreement described above, the Investment Adviser voluntarily agreed to waive all or a portion of its fee and to reimburse operating expenses of the Funds, excluding distribution fees, interest, taxes, brokerage and extraordinary expenses, up to 0.75%. The voluntary fee reductions are as follows: JUNE 30 MAY 31 --------------------- MARCH 31 FUND 2001(1) 2000 1999(2) 1998 ---- --------- --------- --------- --------- Balanced Fund $ 262,968 $ 179,601 $ 31,139 $ 182,871 Convertible Fund $ (28,211)(3) $ 0 $ 12,611 $ 339,803 LargeCap Growth Fund $ (10,162)(3) $ 0 $ 4,314 $ 132,912 MidCap Growth Fund $ (29,600)(3) $ 10,354 $ 1,010 $ 591,684 SmallCap Growth Fund $ (47,191)(3) $ 204,352 $ 29,487 $ 675,970 ---------- (1) Reflects eleven month period from June 30, 2000 to May 31, 2001. (2) Reflects three month period from April 1, 1999 to June 30, 1999. (3) Reflects Reimbursements by the Fund for voluntary fee reductions made in prior periods. OCTOBER 31 MAY 31 ------------------------ FUND 2001(1) 2000 1999(2) ---- ------------ ---------- ---------- Internet Fund (2) $ 314,555(3) $1,866,267 $ 153,685 Tax Efficient Equity Fund (2) $ 122,924(3) $ 517,049 $ 413,162 ---------- (1) Reflects seven month period from November 11, 2000 to May 31, 2001. (2) Internet Fund commenced operations July 1, 1999 and Tax Efficient Equity Fund commenced operations December 15, 1998. (3) ING Mutual Fund Management served as the investment adviser to the Tax Efficient Equity Fund and Internet Fund prior to April 30, 2001. On April 30, 2001, ING Mutual Funds Management, LLC merged into the Investment Adviser. The Investment Adviser assumed all contracts, obligations and assets of ING Mutual Funds Management, LLC. 20 Prior to July 26, 2000, Pilgrim Growth and Income Fund, Inc. voluntarily limited expenses of the Funds to the following amount: MAXIMUM OPERATING EXPENSE LIMIT (AS A PERCENTAGE OF AVERAGE NET ASSETS) FUND NAME PREVIOUS EXPENSE CAP --------- -------------------- Pilgrim Growth and Income Fund 2.75% Class A DISTRIBUTOR Shares of each Fund are distributed by ING Pilgrim Securities, Inc. ("ING Pilgrim Securities" or the "Distributor") pursuant to an Underwriting Agreement between each Company and the Distributor. Each Underwriting Agreement requires the Distributor to use its best efforts on a continuing basis to solicit purchases of shares of the Funds. Each Company and the Distributor have agreed to indemnify each other against certain liabilities. At the discretion of the Distributor, all sales charges may at times be reallowed to an authorized dealer ("Authorized Dealer"). If 90% or more of the sales commission is reallowed, such Authorized Dealer may be deemed to be an "underwriter" as that term is defined under the Securities Act of 1933, as amended. Each Underwriting Agreement will remain in effect for two years and from year to year thereafter only if its continuance is approved annually by a majority of the Board of Directors/Trustees who are not parties to such agreement or "interested persons" of any such party and must be approved either by votes of a majority of the Directors/Trustees or a majority of the outstanding voting securities of the Company. See the Prospectus for information on how to purchase and sell shares of the Pilgrim Funds, and the charges and expenses associated with an investment. The sales charge retained by the Distributor and the commissions reallowed to selling dealers are not an expense of the Pilgrim Funds and have no effect on the net asset value of the Pilgrim Funds. The Distributor, like the Investment Adviser, is an indirect, wholly owned subsidiary of ING Group. Prior to July 26, 2000, the distributor for Growth and Income Fund was Lexington Funds Distributor, Inc. ("LFD"). Prior to November 6, ING Funds Distributor, Inc. served as the distributor for the Pilgrim Tax Efficient Equity and Pilgrim Internet Funds. For the fiscal year ended May 31, 2001, the Distributor received the following amounts in sales charges in connection with the sale of shares:
Class A Class A Class M Class M Sales Charges Sales Charges Class B Class C Sales Charges Sales Charges Class T Before After Deferred Deferred Before After Deferred Dealer Dealer Sales Sales Dealer Dealer Sales Fund Re-Allowance Re-Allowance Charges Charges Re-Allowance Re-Allowance Charges ---- ------------ ------------ ------- ------- ------------ ------------ ------- Balanced Fund $ 41,348 $ 5,393 $ 0 $ 3,444 N/A N/A $ 0 Convertible Fund $ 772,204 $ 100,722 $ 0 $ 37,540 N/A N/A N/A Financial Services Fund $ 367,564 $ 47,943 $ 0 N/A N/A N/A N/A Growth and Income Fund $ 12,678 $ 1,654 $ 0 $ 674 N/A N/A N/A Growth Opportunities Fund $ 371,878 $ 48,506 $ 0 $ 44,851 N/A N/A $ 0 Growth + Value Fund $1,117,379 $ 145,745 $ 0 $ 77,220 N/A N/A N/A Internet Fund $ 76,852 $ 10,024 $ 0 $ 3,374 N/A N/A N/A LargeCap Growth Fund $1,256,708 $ 163,918 $ 0 $ 59,975 N/A N/A N/A MagnaCap Fund $ 152,769 $ 19,926 $ 0 $ 4,073 $4,810 $1,031 N/A MidCap Growth Fund $ 506,498 $ 66,065 $ 0 $ 15,019 N/A N/A N/A MidCap Opportunities Fund $ 46,872 $ 6,114 $ 0 $ 5,884 N/A N/A N/A Researched Enhanced Index Fund $ 32,648 $ 4,258 $ 0 $ 15,808 N/A N/A N/A SmallCap Growth Fund $ 369,095 $ 48,143 $ 0 $ 25,157 N/A N/A N/A SmallCap Opportunities Fund $ 50,992 $ 6,651 $ 0 $ 21,098 N/A N/A $ 0 Tax Efficient Equity Fund $ 28,144 $ 3,671 $ 0 $ 567 N/A N/A N/A
The Distributor received $5,621,753 and $1,128,487 in sales charges, after re-allowance to Dealers, in connection with the sale of shares of shares of all Funds managed by ING Pilgrim Investments, LLC during calendar year 2000 and 1999, respectively. 21 RULE 12b-1 PLANS Each Company has a distribution plan pursuant to Rule 12b-1 under the 1940 Act applicable to most classes of shares offered by each Fund ("Rule 12b-1 Plans"). The Pilgrim Funds intend to operate the Rule 12b-1 Plans in accordance with their terms and the National Association of Securities Dealers, Inc. rules concerning sales charges. Under the Rule 12b-1 Plans, the Distributor may be entitled to payment each month in connection with the offering, sale, and shareholder servicing of Class A, Class B, Class C, Class M, Class Q and Class T shares in amounts as set forth in the following table. The Pilgrim Funds do not have a 12b-1 Plan with respect to the Institutional Class.
FEES BASED ON AVERAGE DAILY NET ASSETS --------------------------------------------------------- NAME OF FUND CLASS A CLASS B CLASS C CLASS M CLASS Q CLASS T ------------ ------- ------- ------- ------- ------- ------- Balanced Fund 0.35% 1.00% 1.00% N/A 0.25% 0.75% Financial Services Fund 0.25% 1.00% N/A N/A N/A N/A Convertible Fund 0.35% 1.00% 1.00% N/A 0.25% N/A Growth and Income Fund 0.25% 1.00% 1.00% N/A 0.25% N/A Growth Opportunities Fund 0.30% 1.00% 1.00% N/A 0.25% 0.95% Growth + Value Fund 0.30% 1.00% 1.00% N/A 0.25% N/A Internet Fund 0.35% 1.00% 1.00% N/A N/A N/A LargeCap Growth Fund 0.35% 1.00% 1.00% N/A 0.25% N/A MagnaCap Fund 0.30% 1.00% 1.00% 0.75% 0.25% N/A MidCap Growth Fund 0.35% 1.00% 1.00% N/A 0.25% N/A MidCap Opportunities Fund 0.30% 1.00% 1.00% N/A 0.25% N/A Research Enhanced Index Fund 0.30% 1.00% 1.00% N/A 0.25% N/A SmallCap Growth Fund 0.35% 1.00% 1.00% N/A 0.25% N/A SmallCap Opportunities Fund 0.30% 1.00% 1.00% N/A 0.25% 0.95% Tax Efficient Equity Fund 0.35% 1.00% 1.00% N/A N/A N/A
These fees may be used to cover the expenses of the Distributor primarily intended to result in the sale of Class A, Class B, Class C, Class M, Class Q and Class T Shares of the Pilgrim Funds, including payments to dealers for selling shares of the Pilgrim Funds and for servicing shareholders of these classes of the Pilgrim Funds. Activities for which these fees may be used include: promotional activities; preparation and distribution of advertising materials and sales literature; expenses of organizing and conducting sales seminars; personnel costs and overhead of the Distributor; printing of prospectuses and statements of additional information (and supplements thereto) and reports for other than existing shareholders; payments to dealers and others that provide shareholder services; interest on accrued distribution expenses; and costs of administering the Rule 12b-1 Plans. No more than 0.75% per annum of a Fund's average net assets may be used to finance distribution expenses, exclusive of shareholder servicing payments, and no Authorized Dealer may receive shareholder servicing payments in excess of 0.25% per annum of a Fund's average net assets held by the Authorized Dealer's clients or customers. Under the Rule 12b-1 Plans, ongoing payments will be made on a quarterly basis to Authorized Dealers for both distribution and shareholder servicing at rates that are based on the average daily net assets of shares that are registered in the name of that Authorized Dealer as nominee or held in a shareholder account that designates that Authorized Dealer as the dealer of record. The rates, on an annual basis, are as follows: 0.25% for Class A, 0.25% for Class B, 1.00% for Class C, 0.65% for Class M, and 0.15% - 0.95% for Class T. Rights to these ongoing payments begin to accrue in the 13th month following a purchase of Class A, B or C Shares and in the 1st month following a purchase of Class M and Class T Shares. In addition, a 0.25% fee may be paid on Class Q shares. The Distributor will be reimbursed for its actual expenses incurred under a Rule 12b-1 Plan with respect to Class A Shares of MagnaCap Fund. The Distributor has incurred costs and expenses with respect to Class A Shares that may be reimbursable in future months or years in the amounts of $801,313 for MagnaCap 22 Fund (0.30% of its net assets) as of May 31, 2001. With respect to Class A Shares of each other Fund and Class B, Class C, Class M, Class Q and Class T Shares of each Fund that offers the class, the Distributor will receive payment without regard to actual distribution expenses it incurs. In the event a Rule 12b-1 Plan is terminated in accordance with its terms, the obligations of a Fund to make payments to the Distributor pursuant to the Rule 12b-1 Plan will cease and the Fund will not be required to make any payments for expenses incurred after the date the Plan terminates. In addition to providing for the expenses discussed above, the Rule 12b-1 Plans also recognize that the Investment Adviser and/or the Distributor may use their resources to pay expenses associated with activities primarily intended to result in the promotion and distribution of the Pilgrim Funds' shares and other funds managed by the Investment Adviser. In some instances, additional compensation or promotional incentives may be offered to dealers. Such compensation and incentives may include, but are not limited to: cash; merchandise; trips and financial assistance to dealers in connection with pre-approved conferences or seminars; sales or training programs for invited sales personnel; payment for travel expenses (including meals and lodging) incurred by sales personnel and members of their families or other invited guests to various locations for such seminars or training programs; seminars for the public; advertising and sales campaigns regarding one or more of the Funds or other funds managed by the Investment Adviser and/or other events sponsored by dealers. In addition, the Distributor may, at its own expense, pay concessions in addition to those described above to dealers that satisfy certain criteria established from time to time by the Distributor. These conditions relate to increasing sales of shares of the Funds over specified periods and to certain other factors. These payments may, depending on the dealer's satisfaction of the required conditions, be periodic and may be up to (1) 0.30% of the value of the Funds' shares sold by the dealer during a particular period, and (2) 0.10% of the value of the Pilgrim Funds' shares held by the dealer's customers for more than one year, calculated on an annual basis. The Rule 12b-1 Plans have been approved by the Board of Directors/Trustees of each Fund, including all of the Directors/Trustees who are not interested persons of the Company as defined in the 1940 Act. Each Rule 12b-1 Plan must be renewed annually by the Board of Directors/Trustees, including a majority of the Directors/Trustees who are not interested persons of the Company and who have no direct or indirect financial interest in the operation of the Rule 12b-1 Plan, cast in person at a meeting called for that purpose. It is also required that the selection and nomination of such Directors be committed to the Directors/Trustees who are not interested persons. Each Rule 12b-1 Plan and any distribution or service agreement may be terminated as to a Fund at any time, without any penalty, by such Directors/Trustees or by a vote of a majority of the Fund's outstanding shares on 60 days written notice. The Distributor or any dealer or other firm may also terminate their respective distribution or service agreement at any time upon written notice. In approving each Rule 12b-1 Plan, the Board of Directors/Trustees has determined that differing distribution arrangements in connection with the sale of new shares of a Fund is necessary and appropriate in order to meet the needs of different potential investors. Therefore, the Board of Directors/Trustees, including those Directors/Trustees who are not interested persons of the Company, concluded that, in the exercise of their reasonable business judgment and in light of their fiduciary duties, there is a reasonable likelihood that the Rule 12b-1 Plans as tailored to each class of each Fund, will benefit such Pilgrim Funds and their respective shareholders. Each Rule 12b-1 Plan and any distribution or service agreement may not be amended to increase materially the amount spent for distribution expenses as to a Fund without approval by a majority of the Fund's outstanding shares, and all material amendments to a Plan or any distribution or service agreement shall be approved by the Directors/Trustees who are not interested persons of the Company, cast in person at a meeting called for the purpose of voting on any such amendment. 23 The Distributor is required to report in writing to the Board of Directors/Trustees at least quarterly on the monies reimbursed to it under each Rule 12b-1 Plan, as well as to furnish the Board with such other information as may be reasonably be requested in connection with the payments made under the Rule 12b-1 Plan in order to enable the Board to make an informed determination of whether the Rule 12b-1 Plan should be continued. Total distribution expenses incurred by the Distributor for the costs of promotion and distribution with respect to each class of shares for the Funds for the fiscal year ended May 31, 2001 were as follows. DISTRIBUTION EXPENSES CLASS A CLASS B CLASS C CLASS Q CLASS T --------------------- ------- ------- ------- ------- ------- GROWTH AND INCOME FUND Advertising 573 8 9 N/A N/A Printing 10,881 153 165 N/A N/A Salaries & Commissions 68,106 958 1,035 N/A N/A Broker Servicing 181,298 2,551 2,755 N/A N/A Miscellaneous 34,460 485 524 N/A N/A TOTAL 295,318 4,155 4,488 N/A N/A SMALLCAP OPPORTUNITIES FUND Advertising 350 423 587 5 109 Printing 6,644 8,044 11,152 98 2,070 Salaries & Commissions 41,798 50,611 70,161 614 13,024 Broker Servicing 155,339 188,091 260,746 2,281 48,402 Miscellaneous 58,236 70,514 97,752 855 18,146 TOTAL 262,367 317,683 440,398 3,853 81,750 MIDCAP OPPORTUNITIES FUND Advertising 73 51 154 3 N/A Printing 1,383 962 2,925 65 N/A Salaries & Commissions 8,756 6,090 18,519 409 N/A Broker Servicing 17,596 12,239 37,213 822 N/A Miscellaneous 21,993 15,297 46,513 1,028 N/A TOTAL 49,801 34,639 105,324 2,327 N/A GROWTH OPPORTUNITIES FUND Advertising 386 316 921 13 236 Printing 7,338 5,995 17,491 238 4,491 Salaries & Commissions 47,692 38,968 113,684 1,548 29,188 Broker Servicing 94,917 77,554 226,255 3,081 58,090 Miscellaneous 129,039 105,434 307,594 4,189 78,973 TOTAL 279,372 228,267 665,945 9,069 170,978 LARGECAP GROWTH FUND Advertising 1,102 1,300 2,602 73 N/A Printing 20,934 24,698 49,431 1,385 N/A Salaries & Commissions 142,085 167,631 335,504 9,402 N/A Broker Servicing 305,294 360,183 720,885 20,201 N/A Miscellaneous 302,825 357,271 715,057 20,038 N/A TOTAL 772,240 911,083 1,823,479 51,099 N/A 24 CLASS A CLASS B CLASS C CLASS Q CLASS T ------- ------- ------- ------- ------- MIDCAP GROWTH FUND Advertising 380 282 1,755 25 N/A Printing 7,224 5,360 33,339 476 N/A Salaries & Commissions 48,895 36,278 225,669 3,219 N/A Broker Servicing 333,146 247,191 1,537,601 21,932 N/A Miscellaneous 80,719 59,890 372,549 5,314 N/A TOTAL 470,364 348,991 2,170,913 30,966 N/A SMALLCAP GROWTH FUND Advertising 493 260 1,656 22 N/A Printing 9,360 4,939 31,467 415 N/A Salaries & Commissions 62,270 32,854 209,334 2,764 N/A Broker Servicing 367,269 193,771 1,234,655 16,302 N/A Miscellaneous 103,295 54,498 347,248 4,585 N/A TOTAL 542,687 286,322 1,824,360 24,088 N/A CONVERTIBLE FUND Advertising 485 576 1,860 131 N/A Printing 9,213 10,949 35,348 2,494 N/A Salaries & Commissions 62,099 73,800 238,262 16,814 N/A Broker Servicing 236,672 281,268 908,062 64,080 N/A Miscellaneous 95,972 114,056 368,226 25,985 N/A TOTAL 404,441 480,649 1,551,758 109,504 N/A BALANCED FUND Advertising 200 171 258 3 84 Printing 3,801 3,252 4,896 57 1,599 Salaries & Commissions 25,153 21,520 32,398 379 10,584 Broker Servicing 129,360 110,677 166,622 1,948 54,434 Miscellaneous 20,341 17,404 26,201 306 8,560 TOTAL 178,855 153,024 230,375 2,693 75,261 GROWTH + VALUE Advertising 604 988 2,284 14 N/A Printing 16,468 18,774 43,404 268 N/A Salaries & Commissions 79,407 129,997 300,541 1,852 N/A Broker Servicing 178,148 291,648 674,261 4,156 N/A Miscellaneous 202,069 330,809 764,798 4,714 N/A TOTAL 471,696 772,261 1,785,288 11,004 N/A RESEARCH ENHANCED INDEX FUND N/A Advertising 43 106 443 1 N/A Printing 810 2,012 8,408 23 N/A Salaries & Commissions 5,383 13,369 55,859 152 N/A Broker Servicing 36,249 90,029 376,161 1,026 N/A Miscellaneous 13,085 32,498 135,782 370 N/A TOTAL 55,570 138,014 576,653 1,572 N/A 25
DISTRIBUTION EXPENSES CLASS A CLASS B CLASS C CLASS M CLASS Q CLASS T --------------------- ------- ------- ------- ------- ------- ------- MAGNACAP FUND Advertising 1,068 367 60 133 15 N/A Printing 20,290 6,969 1,139 2,524 289 N/A Salaries & Commissions 131,258 45,082 7,370 16,327 1,872 N/A Broker Servicing 534,174 183,468 29,992 66,447 7,620 N/A Miscellaneous 103,524 35,556 5,813 12,877 1,477 N/A Total 790,314 271,422 44,374 98,308 11,273 N/A FINANCIAL SERVICES FUND Advertising 955 905 N/A N/A N/A N/A Printing 18,143 17,201 N/A N/A N/A N/A Salaries & Commissions 118,981 112,803 N/A N/A N/A N/A Broker Servicing 328,061 311,026 N/A N/A N/A N/A Miscellaneous 86,251 81,773 N/A N/A N/A N/A Total 552,391 523,708 N/A N/A N/A N/A TAX EFFICIENT EQUITY FUND Advertising 226 44 12 N/A N/A N/A Printing 4,285 829 221 N/A N/A N/A Salaries & Commissions 27,124 5,249 1,402 N/A N/A N/A Broker Servicing 84,415 16,337 4,363 N/A N/A N/A Miscellaneous 13,046 2,525 674 N/A N/A N/A Total 129,096 24,984 6,672 N/A N/A N/A INTERNET FUND Advertising 156 76 49 N/A N/A N/A Printing 2,759 1,451 924 N/A N/A N/A Salaries & Commissions 18,735 9,187 5,852 N/A N/A N/A Broker Servicing 54,324 26,639 16,969 N/A N/A N/A Miscellaneous 9,175 4,499 2,866 N/A N/A N/A Total 85,349 41,852 26,660 N/A N/A N/A
SHAREHOLDER SERVICING AGENT ING Pilgrim Group, LLC serves as Shareholder Servicing Agent for the Pilgrim Funds. The Shareholder Servicing Agent is responsible for responding to written and telephonic inquiries from shareholders. Each Fund pays the Shareholder Servicing Agent a monthly fee on a per-contact basis, based upon incoming and outgoing telephonic and written correspondence. OTHER EXPENSES In addition to the management fee and other fees described previously, each Fund pays other expenses, such as legal, audit, transfer agency and custodian out-of-pocket fees, proxy solicitation costs, and the compensation of Directors/Trustees who are not affiliated with the Investment Adviser. Most Fund expenses are allocated proportionately among all of the outstanding shares of that Fund. However, the Rule 12b-1 Plan fees for each class of shares are charged proportionately only to the outstanding shares of that class. 26 CODE OF ETHICS The Pilgrim Funds, the Adviser and the Distributor have adopted a Code of Ethics governing personal trading activities of all Directors/Trustees, officers of the Pilgrim Funds and persons who, in connection with their regular functions, play a role in the recommendation of any purchase or sale of a security by each Fund or obtain information pertaining to such purchase or sale. The Code of Ethics is intended to prohibit fraud against a Fund that may arise from personal trading. Personal trading is permitted by such persons subject to certain restrictions; however such persons are generally required to pre-clear all security transactions with the Pilgrim Funds' Compliance Officer or her designee and to report all transactions on a regular basis. The Sub-Advisers have adopted their own Codes of Ethics to govern the personal trading activities of their personnel. SUPPLEMENTAL DESCRIPTION OF INVESTMENTS Some of the different types of securities in which the Funds may invest, subject to their respective investment objectives, policies and restrictions, are described in the Prospectus under "The Funds," and "More Information About Risks." Additional information concerning the characteristics and risks of certain of the Funds' investments are set forth below. There can be no assurance that any of the Funds will achieve their investment objectives. For the purposes of this section, Pilgrim Internet Fund and Pilgrim Tax Efficient Equity Fund will be referred to collectively as the funds that comprise Pilgrim Funds Trust. Pilgrim Growth + Value Fund and Pilgrim Research Enhanced Index Fund will be referred to collectively as the funds that comprise Mayflower Trust. Pilgrim LargeCap Growth Fund, Pilgrim MidCap Growth Fund, Pilgrim SmallCap Growth Fund, Pilgrim Convertible Fund and Pilgrim Balanced Fund will be collectively referred to as "Pilgrim Mutual Funds." TEMPORARY DEFENSIVE AND OTHER SHORT-TERM POSITIONS Each Fund may invest its assets in certain short-term, high-quality debt instruments (and, in the case of Financial Services Fund, investment grade debt instruments) and in U.S. Government securities for the following purposes: (i) to meet anticipated day-to-day operating expenses; (ii) pending the Investment Adviser's or Sub-Adviser's ability to invest cash inflows; (iii) to permit the Fund to meet redemption requests; and (iv) for temporary defensive purposes. A Fund for which the investment objective is capital appreciation may also invest in such securities if the Fund's assets are insufficient for effective investment in equities. Although it is expected that each Fund will normally be invested consistent with its investment objectives and policies, the short-term instruments in which a Fund may invest include: (i) short-term obligations of the U.S. Government and its agencies, instrumentalities, authorities or political subdivisions; (ii) other short-term debt securities; (iii) commercial paper, including master notes; (iv) bank obligations, including certificates of deposit, time deposits and bankers' acceptances; and (v) repurchase agreements. The Funds will normally invest in short-term instruments that do not have a maturity of greater than one year. COMMON STOCK, PREFERRED STOCK, CONVERTIBLE SECURITIES AND OTHER EQUITY SECURITIES Each Fund may invest in common stocks, which represent an equity (ownership) interest in a company. This ownership interest generally gives a Fund the right to vote on issues affecting the company's organization and operations. Such investments will be diversified over a cross-section of industries and individual companies. For Funds other than LargeCap Growth Fund, some of these companies will be organizations with market capitalizations of $500 million or less or companies that have limited product lines, markets and financial resources and are dependent upon a limited management group. Examples of possible investments include emerging growth companies employing new technology, cyclical companies, initial public offerings of companies offering 27 high growth potential, or other corporations offering good potential for high growth in market value. The securities of such companies may be subject to more abrupt or erratic market movements than larger, more established companies both because the securities typically are traded in lower volume and because the issuers typically are subject to a greater degree to changes in earnings and prospects. Each Fund may also buy other types of equity securities such as preferred stock, convertible securities, and warrants or other securities that are exchangeable for shares of common stock. Preferred stock, unlike common stock, offers a stated dividend rate payable from a corporation's earnings. Such preferred stock dividends may be cumulative or non-cumulative, participating, or auction rate. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of preferred stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as call/redemption provisions prior to maturity, a negative feature when interest rates decline. Dividends on some preferred stock may be "cumulative," requiring all or a portion of prior unpaid dividends to be paid before dividends are paid on the issuer's common stock. Preferred stock also generally has a preference over common stock on the distribution of a corporation's assets in the event of liquidation of the corporation, and may be "participating," which means that it may be entitled to a dividend exceeding the stated dividend in certain cases. The rights of preferred stocks on the distribution of a corporation's assets in the event of a liquidation are generally subordinate to the rights associated with a corporation's debt securities. A convertible security is a security that may be converted either at a stated price or rate within a specified period of time into a specified number of shares of common stock. By investing in convertible securities, a Fund seeks the opportunity, through the conversion feature, to participate in the capital appreciation of the common stock into which the securities are convertible, while investing at a better price than may be available on the common stock or obtaining a higher fixed rate of return than is available on common stocks. The value of a convertible security is a function of its "investment value" (determined by its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and its "conversion value" (the security's worth, at market value, if converted into the underlying common stock). The credit standing of the issuer and other factors may also affect the investment value of a convertible security. The conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is low relative to the investment value, the price of the convertible security is governed principally by its investment value. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the convertible security will be increasingly influenced by its conversion value. The market value of convertible debt securities tends to vary inversely with the level of interest rates. The value of the security declines as interest rates increase and increases as interest rates decline. Although under normal market conditions longer term debt securities have greater yields than do shorter term debt securities of similar quality, they are subject to greater price fluctuations. A convertible security may be subject to redemption at the option of the issuer at a price established in the instrument governing the convertible security. If a convertible security held by a Fund is called for redemption, the Fund must permit the issuer to redeem the security, convert it into the underlying common stock or sell it to a third party. Rating requirements do not apply to convertible debt securities purchased by the Funds because the Funds purchase such securities for their equity characteristics. The Funds that comprise Pilgrim Mutual Funds may invest in "synthetic" convertible securities which are derivative positions composed of two or more different securities whose investment characteristics, taken together, resemble those of convertible securities. For example, a fund may purchase a non-convertible debt security and a warrant or option, which enables the fund to have a convertible-like position with respect to a company, group of companies or stock index. Synthetic convertible securities are typically offered by financial institutions and investment banks in private placement transactions. Upon conversion, the fund generally receives an amount in cash equal to the difference between the conversion price and the then current value of the underlying security. Unlike a true convertible security, a synthetic convertible 28 comprises two or more separate securities, each with its own market value. Therefore, the market value of a synthetic convertible is the sum of the values of its fixed-income component and its convertible component. For this reason, the values of a synthetic convertible and a true convertible security may respond differently to market fluctuations. A Fund only invests in synthetic convertibles with respect to companies whose corporate debt securities are rated "A" or higher by Moody's or "A" or higher by S&P and will not invest more than 15% of its net assets in such synthetic securities and other illiquid securities. As a matter of operating policy, the Funds that comprise Pilgrim Mutual Funds will invest no more than 5% of its net assets in warrants. A warrant gives the holder a right to purchase at any time during a specified period a predetermined number of shares of common stock at a fixed price. Unlike convertible debt securities or preferred stock, warrants do not pay a fixed dividend. Investments in warrants involve certain risks, including the possible lack of a liquid market for resale of the warrants, potential price fluctuations as a result of speculation or other factors, and failure of the price of the underlying security to reach or have reasonable prospects of reaching a level at which the warrant can be prudently exercised (in which event the warrant may expire without being exercised, resulting in a loss of the Fund's entire investment therein). MidCap Growth Fund and MidCap Opportunities Fund will invest substantially all of their assets, and Financial Services Fund may invest, in the equity securities of certain mid-cap companies. Mid-cap companies will tend to be smaller, less established companies and investment in these companies may involve greater risk than is customarily associated with securities of larger, more established companies. Mid-cap companies may experience relatively higher growth rates and higher failure rates than do larger companies. The trading volume of securities of mid-cap companies is normally less than that of larger companies and, therefore, may disproportionately affect their market price, tending to make them rise more in response to buying demand and fall more in response to selling pressure than is the case with larger companies. EURODOLLAR CONVERTIBLE SECURITIES The Funds that comprise Pilgrim Mutual Funds may invest in Eurodollar convertible securities, which are fixed-income securities of a U.S. issuer or a foreign issuer that are issued outside the United States and are convertible into equity securities of the same or a different issuer. Interest and dividends on Eurodollar securities are payable in U.S. dollars outside of the United States. The Funds may invest without limitation in Eurodollar convertible securities that are convertible into foreign equity securities listed, or represented by ADRs listed, on the New York Stock Exchange or the American Stock Exchange or convertible into publicly traded common stock of U.S. companies. The Funds may also invest up to 15% of its total assets invested in convertible securities, taken at market value, in Eurodollar convertible securities that are convertible into foreign equity securities which are not listed, or represented by ADRs listed, on such exchanges. EURODOLLAR AND YANKEE DOLLAR INSTRUMENTS The Funds that comprise Pilgrim Mutual Funds and Pilgrim Funds Trust may invest in Eurodollar and Yankee Dollar instruments. Eurodollar instruments are bonds that pay interest and principal in U.S. dollars held in banks outside the United States, primarily in Europe. Eurodollar instruments are usually issued on behalf of multinational companies and foreign governments by large underwriting groups composed of banks and issuing houses from many countries. Yankee Dollar instruments are U.S. dollar denominated bonds issued in the U.S. by foreign banks and corporations. These investments involve risks that are different from investments in securities issued by U.S. issuers. See "Foreign Investment Considerations." 29 SECURITIES OF BANKS AND THRIFTS Financial Services Fund may invest in equity securities of banks and thrifts. A "money center bank" is a bank or bank holding company that is typically located in an international financial center and has a strong international business with a significant percentage of its assets outside the United States. "Regional banks" are banks and bank holding companies which provide full service banking, often operating in two or more states in the same geographic area, and whose assets are primarily related to domestic business. Regional banks are smaller than money center banks and also may include banks conducting business in a single state or city and banks operating in a limited number of states in one or more geographic regions. The third category which constitutes the majority in number of banking organizations are typically smaller institutions that are more geographically restricted and less well-known than money center banks or regional banks and are commonly described as "community banks". Financial Services Fund may invest in the securities of banks or thrifts that are relatively smaller, engaged in business mostly within their geographic region, and are less well-known to the general investment community than money center and larger regional banks. The shares of depository institutions in which the Fund may invest may not be listed or traded on a national securities exchange or on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"); as a result there may be limitations on the Fund's ability to dispose of them at times and at prices that are most advantageous to the Fund. The profitability of banks and thrifts is largely dependent upon interest rates and the resulting availability and cost of capital funds over which these concerns have limited control, and, in the past, such profitability has shown significant fluctuation as a result of volatile interest rate levels. In addition, general economic conditions are important to the operations of these concerns, with exposure to credit losses resulting from financial difficulties of borrowers. Changes in State and Federal law are producing significant changes in the banking and financial services industries. Deregulation has resulted in the diversification of certain financial products and services offered by banks and financial services companies, creating increased competition between them. In addition, State and Federal legislation authorizing interstate acquisitions as well as interstate branching has facilitated the increasing consolidation of the banking and thrift industries. Although regional banks involved in intrastate and interstate mergers and acquisitions may benefit from such regulatory changes, those which do not participate in such consolidation may find that it is increasingly difficult to compete effectively against larger banking combinations. Proposals to change the laws and regulations governing banks and companies that control banks are frequently introduced at the Federal and State levels and before various bank regulatory agencies. The likelihood of any changes and the impact such changes might have are impossible to determine. The last few years have seen a significant amount of regulatory and legislative activity focused on the expansion of bank powers and diversification of services that banks may offer. These expanded powers have exposed banks to well-established competitors and have eroded the distinctions between regional banks, community banks, thrifts and other financial institutions. The thrifts in which Financial Services Fund invests generally are subject to the same risks as banks discussed above. Such risks include interest rate changes, credit risks, and regulatory risks. Because thrifts differ in certain respects from banks, however, thrifts may be affected by such risks in a different manner than banks. Traditionally, thrifts have different and less diversified products than banks, have a greater concentration of real estate in their lending portfolio, and are more concentrated geographically than banks. Thrifts and their holding companies are subject to extensive government regulation and supervision including regular examinations of thrift holding companies by the Office of Thrift Supervision (the "OTS"). Such regulations have undergone substantial change since the 1980's and will probably change in the next few years. 30 PORTFOLIO HEDGING Each Fund (except Financial Services Fund) may hedge against changes in financial markets, currency rates and interest rates. The Fund may hedge with "derivatives." Derivatives are instruments whose value is linked to, or derived from, another instrument, like an index or a commodity. Hedging transactions involve certain risks. Although the Fund may benefit from hedging, unanticipated changes in interest rates or securities prices may result in greater losses for the Fund than if they did not hedge. If the Fund do not correctly predict a hedge, it may lose money. In addition, the Fund pay commissions and other costs in connection with hedging transactions. RISKS ASSOCIATED WITH HEDGING TRANSACTIONS. Hedging transactions have special risks associated with them, including possible default by the Counterparty to the transaction, illiquidity and, to the extent the Investment Adviser's view as to certain market movements is incorrect, the risk that the use of a hedging transaction could result in losses greater than if it had not been used. Use of call options could result in losses to the Fund, force the sale or purchase of portfolio securities at inopportune times or for prices lower than current market values, or cause the Fund to hold a security it might otherwise sell. Currency hedging involves some of the same risks and considerations as other transactions with similar instruments. Currency transactions can result in losses to the Fund if the currency being hedged fluctuates in value to a degree or in a direction that is not anticipated. Further, the risk exists that the perceived linkage between various currencies may not be present or may not be present during the particular time that the Fund is engaging in portfolio hedging. Currency transactions are also subject to risks different from those of other portfolio transactions. Because currency control is of great importance to the issuing governments and influences economic planning and policy, purchases and sales of currency and related instruments can be adversely affected by government exchange controls, limitations or restrictions on repatriation of currency, and manipulations or exchange restrictions imposed by governments. These forms of governmental actions can result in losses to the Fund if it is unable to deliver or receive currency or monies in settlement of obligations and could also cause hedges it has entered into to be rendered useless, resulting in full currency exposure as well as incurring transaction costs. In addition, the Fund pays commissions and other costs in connection with such investments. Losses resulting from the use of hedging transactions will reduce the Fund's net asset value, and possibly income, and the losses can be greater than if hedging transactions had not been used. RISKS OF HEDGING TRANSACTIONS OUTSIDE THE UNITED STATES. When conducted outside the U.S., hedging transactions may not be regulated as rigorously as in the U.S., may not involve a clearing mechanism and related guarantees, and will be subject to the risk of government actions affecting trading in, or the price of, foreign securities, currencies and other instruments. The value of positions taken as part of non-U.S. hedging transactions also could be adversely affected by: (1) other complex foreign political, legal and economic factors; (2) lesser availability of data on which to make trading decisions than in the U.S.; (3) delays in the Fund's ability to act upon economic events occurring in foreign markets during non-business hours in the U.S.; (4) the imposition of different exercise and settlement terms and procedures and margin requirements than in the U.S.; and (5) lower trading volume and liquidity. 31 SHORT-TERM INVESTMENTS The Funds may invest in the following securities and instruments: BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS. The Funds may acquire certificates of deposit, bankers' acceptances and time deposits. Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank for a definite period of time and earning a specified return. Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or exporter to pay for specific merchandise, which are "accepted" by a bank, meaning in effect that the bank unconditionally agrees to pay the face value of the instrument on maturity. Certificates of deposit and bankers' acceptances acquired by the Funds will be dollar-denominated obligations of domestic or foreign banks or financial institutions which at the time of purchase have capital, surplus and undivided profits in excess of $100 million (including assets of both domestic and foreign branches), based on latest published reports, or less than $100 million if the principal amount of such bank obligations are fully insured by the U.S. Government. A Fund holding instruments of foreign banks or financial institutions may be subject to additional investment risks that are different in some respects from those incurred by a fund which invests only in debt obligations of U.S. domestic issuers. See "Foreign Investments" below. Domestic banks and foreign banks are subject to different governmental regulations with respect to the amount and types of loans which may be made and interest rates which may be charged. In addition, the profitability of the banking industry depends largely upon the availability and cost of funds for the purpose of financing lending operations under prevailing money market conditions. General economic conditions as well as exposure to credit losses arising from possible financial difficulties of borrowers play an important part in the operations of the banking industry. Federal and state laws and regulations require domestic banks to maintain specified levels of reserves, limited in the amount which they can loan to a single borrower, and subject to other regulations designed to promote financial soundness. However, such laws and regulations do not necessarily apply to foreign bank obligations that a Fund may acquire. In addition to purchasing certificates of deposit and bankers' acceptances, to the extent permitted under their respective investment objectives and policies stated above and in their Prospectuses, the Funds may make interest-bearing time or other interest-bearing deposits in commercial or savings banks. Time deposits are non-negotiable deposits maintained at a banking institution for a specified period of time at a specified interest rate. SAVINGS ASSOCIATION OBLIGATIONS. Certain Funds may invest in certificates of deposit (interest-bearing time deposits) issued by savings banks or savings and loan associations that have capital, surplus and undivided profits in excess of $100 million, based on latest published reports, or less than $100 million if the principal amount of such obligations is fully insured by the U.S. Government. COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE OBLIGATIONS. The Funds may invest a portion of their assets in commercial paper and short-term notes. Commercial paper consists of unsecured promissory notes issued by corporations. Issues of commercial paper and short-term notes will normally have maturities of less than nine months and fixed rates of return, although such instruments may have maturities of up to one year. Corporate obligations include bonds and notes issued by corporations to finance longer-term credit needs than supported by commercial paper. While such obligations generally have maturities of ten years or more, the Funds may 32 purchase corporate obligations which have remaining maturities of one year or less from the date of purchase and which are rated "AA" or higher by S&P or "Aa" or higher by Moody's. U.S. GOVERNMENT SECURITIES The Funds may invest in U.S. Government securities which include instruments issued by the U.S. Treasury, such as bills, notes and bonds. These instruments are direct obligations of the U.S. Government and, as such, are backed by the full faith and credit of the United States. They differ primarily in their interest rates, the lengths of their maturities and the dates of their issuances. In addition, U.S. Government securities include securities issued by instrumentalities of the U.S. Government, such as the Government National Mortgage Association, which are also backed by the full faith and credit of the United States. Also included in the category of U.S. Government securities are instruments issued by instrumentalities established or sponsored by the U.S. Government, such as the Student Loan Marketing Association, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. While these securities are issued, in general, under the authority of an Act of Congress, the U.S. Government is not obligated to provide financial support to the issuing instrumentalities, although under certain conditions certain of these authorities may borrow from the U.S. Treasury. In the case of securities not backed by the full faith and credit of the U.S., the investor must look principally to the agency or instrumentality issuing or guaranteeing the obligation for ultimate repayment, and may not be able to assert a claim against the U.S. itself in the event the agency or instrumentality does not meet its commitment. Each Fund will invest in securities of such agencies or instrumentalities only when the Sub-Adviser is satisfied that the credit risk with respect to any instrumentality is comparable to the credit risk of U.S. government securities backed by the full faith and credit of the United States. MUNICIPAL SECURITIES The Funds that comprise Pilgrim Mutual Funds may invest in debt obligations issued by state and local governments, territories and possessions of the U.S., regional government authorities, and their agencies and instrumentalities ("municipal securities"). Municipal securities include both notes (which have maturities of less than one year) and bonds (which have maturities of one year or more) that bear fixed or variable rates of interest. In general, "municipal securities" debt obligations are issued to obtain funds for a variety of public purposes, such as the construction, repair, or improvement of public facilities including airports, bridges, housing, hospitals, mass transportation, schools, streets, water and sewer works. Municipal securities may be issued to refinance outstanding obligations as well as to raise funds for general operating expenses and lending to other public institutions and facilities. The two principal classifications of municipal securities are "general obligation" securities and "revenue" securities. General obligation securities are secured by the issuer's pledge of its full faith, credit, and taxing power for the payment of principal and interest. Characteristics and methods of enforcement of general obligation bonds vary according to the law applicable to a particular issuer, and the taxes that can be levied for the payment of debt service may be limited or unlimited as to rates or amounts of special assessments. Revenue securities are payable only from the revenues derived from a particular facility, a class of facilities or, in some cases, from the proceeds of a special excise tax. Revenue bonds are issued to finance a wide variety of capital projects including: electric, gas, water and sewer systems; highways, bridges, and tunnels; port and airport facilities; colleges and universities; and hospitals. Although the principal security behind these bonds may vary, many provide additional security in the form of a debt service reserve fund the assets of which may be used to make principal and interest payments on the issuer's obligations. Housing finance authorities have a wide range of security, including partially or fully insured mortgages, rent subsidized and collateralized mortgages, and the net revenues from housing or other public projects. Some authorities are provided further security in the form of a state's assistance (although without obligation) to make up deficiencies in the debt service reserve fund. 33 The Funds may purchase insured municipal debt in which scheduled payments of interest and principal are guaranteed by a private, non-governmental or governmental insurance company. The insurance does not guarantee the market value of the municipal debt or the value of the shares of the Fund. Securities of issuers of municipal obligations are subject to the provisions of bankruptcy, insolvency and other laws affecting the rights and remedies of creditors, such as the Bankruptcy Reform Act of 1978. In addition, the obligations of such issuers may become subject to laws enacted in the future by Congress, state legislatures or referenda extending the time for payment of principal or interest, or imposing other constraints upon enforcement of such obligations or upon the ability of municipalities to levy taxes. Furthermore, as a result of legislation or other conditions, the power or ability of any issuer to pay, when due, the principal of and interest on its municipal obligations may be materially affected. MORAL OBLIGATION SECURITIES Municipal securities may include "moral obligation" securities which are usually issued by special purpose public authorities. If the issuer of moral obligation bonds cannot fulfill its financial responsibilities from current revenues, it may draw upon a reserve fund, the restoration of which is moral commitment but not a legal obligation of the state or municipality which created the issuer. INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS The Funds that comprise Pilgrim Mutual Funds may invest in tax-exempt industrial development bonds and pollution control bonds which, in most cases, are revenue bonds and generally are not payable from the unrestricted revenues of an issuer. They are issued by or on behalf of public authorities to raise money to finance privately operated facilities for business, manufacturing, housing, sport complexes, and pollution control. Consequently, the credit quality of these securities is dependent upon the ability of the user of the facilities financed by the bonds and any guarantor to meet its financial obligations. MUNICIPAL LEASE OBLIGATIONS The Funds that comprise Pilgrim Mutual Funds may invest in lease obligations or installment purchase contract obligations of municipal authorities or entities ("municipal lease obligations"). Although lease obligations do not constitute general obligations of the municipality for which its taxing power is pledged, a lease obligation is ordinarily backed by the municipality's covenant to budget for, appropriate and make the payment due under the lease obligation. A Fund may also purchase "certificates of participation," which are securities issued by a particular municipality or municipal authority to evidence a proportionate interest in base rental or lease payments relating to a specific project to be made by the municipality, agency or authority. However, certain lease obligations contain "non-appropriation" clauses which provide that the municipality has no obligation to make lease or installment purchase payments in any year unless money is appropriated for such purpose for such year. Although "non-appropriation" lease obligations are secured by the leased property, disposition of the property in the event of default and foreclosure might prove difficult. In addition, these securities represent a relatively new type of financing, and certain lease obligations may therefore be considered to be illiquid securities. The Funds will attempt to minimize the special risks inherent in municipal lease obligations and certificates of participation by purchasing only lease obligations which meet the following criteria: (1) rated A or better by at least one nationally recognized securities rating organization; (2) secured by payments from a governmental lessee which has actively traded debt obligations; (3) determined by the Investment Adviser or Sub-Adviser to be critical to the lessee's ability to deliver essential services; and (4) contain legal features 34 which the Investment Adviser or Sub-Adviser deems appropriate, such as covenants to make lease payments without the right of offset or counterclaim, requirements for insurance policies, and adequate debt service reserve funds. SHORT-TERM MUNICIPAL OBLIGATIONS The Funds that comprise Pilgrim Mutual Funds may invest in short-term municipal obligations. These securities include the following: TAX ANTICIPATION NOTES are used to finance working capital needs of municipalities and are issued in anticipation of various seasonal tax revenues, to be payable from these specific future taxes. They are usually general obligations of the issuer, secured by the taxing power of the municipality for the payment of principal and interest when due. REVENUE ANTICIPATION NOTES are issued in expectation of receipt of other kinds of revenue, such as federal revenues available under the Federal Revenue Sharing Program. They also are usually general obligations of the issuer. BOND ANTICIPATION NOTES normally are issued to provide interim financing until long-term financing can be arranged. The long-term bonds then provide the money for the repayment of the notes. CONSTRUCTION LOAN NOTES are sold to provide construction financing for specific projects. After successful completion and acceptance, many projects receive permanent financing through the Federal National Mortgage Association or the Government National Mortgage Association. SHORT-TERM DISCOUNT NOTES (tax-exempt commercial paper) are short-term (365 days or less) promissory notes issued by municipalities to supplement their cash flow. INDEX-, CURRENCY-, AND EQUITY-LINKED SECURITIES The Funds that comprise Pilgrim Mutual Funds may invest in "index-linked" or "commodity-linked" notes, which are debt securities of companies that call for interest payments and/or payment at maturity in different terms than the typical note where the borrower agrees to make fixed interest payments and to pay a fixed sum at maturity. Principal and/or interest payments on an index-linked note depend on the performance of one or more market indices, such as the S&P 500 Index or a weighted index of commodity futures such as crude oil, gasoline and natural gas. The Funds may also invest in "equity linked" and "currency-linked" debt securities. At maturity, the principal amount of an equity-linked debt security is exchanged for common stock of the issuer or is payable in an amount based on the issuer's common stock price at the time of maturity. Currency-linked debt securities are short-term or intermediate term instruments having a value at maturity, and/or an interest rate, determined by reference to one or more foreign currencies. Payment of principal or periodic interest may be calculated as a multiple of the movement of one currency against another currency, or against an index. Index and currency-linked securities are derivative instruments which may entail substantial risks. Such instruments may be subject to significant price volatility. The company issuing the instrument may fail to pay the amount due on maturity. The underlying investment or security may not perform as expected by the Investment Adviser or Sub-Adviser. Markets, underlying securities and indexes may move in a direction that was not anticipated by the Investment Adviser or Sub-Adviser. Performance of the derivatives may be influenced by interest rate and other market changes in the U.S. and abroad. Certain derivative instruments may be illiquid. See "Illiquid Securities" below. 35 CORPORATE DEBT SECURITIES Each Fund may invest in corporate debt securities. Corporate debt securities include corporate bonds, debentures, notes and other similar corporate debt instruments, including convertible securities. The investment return on a corporate debt security reflects interest earnings and changes in the market value of the security. The market value of a corporate debt security will generally increase when interest rates decline, and decrease when interest rates rise. There is also the risk that the issuer of a debt security will be unable to pay interest or principal at the time called for by the instrument. Investments in corporate debt securities that are rated below investment grade are described in "High Yield Securities" below. Debt obligations that are deemed investment grade carry a rating of at least Baa from Moody's or BBB from Standard and Poor's, or a comparable rating from another rating agency or, if not rated by an agency, are determined by the Investment Adviser to be of comparable quality. Bonds rated Baa or BBB have speculative characteristics and changes in economic circumstances are more likely to lead to a weakened capacity to make interest and principal payments than higher rated bonds. HIGH YIELD SECURITIES Balanced Fund and Convertible Fund may invest in high yield securities, which are debt securities that are rated lower than Baa by Moody's Investors Service or BBB by Standard & Poor's Corporation, or of comparable quality if unrated. High yield securities often are referred to as "junk bonds" and include certain corporate debt obligations, higher yielding preferred stock and mortgage-related securities, and securities convertible into the foregoing. Investments in high yield securities generally provide greater income and increased opportunity for capital appreciation than investments in higher quality debt securities, but they also typically entail greater potential price volatility and principal and income risk. High yield securities are not considered to be investment grade. They are regarded as predominantly speculative with respect to the issuing company's continuing ability to meet principal and interest payments. Also, their yields and market values tend to fluctuate more than higher-rated securities. Fluctuations in value do not affect the cash income from the securities, but are reflected in a Fund's net asset value. The greater risks and fluctuations in yield and value occur, in part, because investors generally perceive issuers of lower-rated and unrated securities to be less creditworthy. The yields earned on high yield securities generally are related to the quality ratings assigned by recognized rating agencies. The following are excerpts from Moody's description of its bond ratings: Ba -- judged to have speculative elements; their future cannot be considered as well assured. B -- generally lack characteristics of a desirable investment. Caa -- are of poor standing; such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca -- speculative in a high degree; often in default. C -- lowest rate class of bonds; regarded as having extremely poor prospects. Moody's also applies numerical indicators 1, 2 and 3 to rating categories. The modifier 1 indicates that the security is in the higher end of its rating category; 2 indicates a mid-range ranking; and 3 indicates a ranking towards the lower end of the category. The following are excerpts from S&P's description of its bond ratings: BB, B, CCC, CC, C -- predominantly speculative with respect to capacity to pay interest and repay principal in accordance with terms of the obligation; BB indicates the lowest degree of speculation and C the highest. D -- in payment default. S&P applies indicators "+," no character, and "-" to its rating categories. The indicators show relative standing within the major rating categories. Certain securities held by a Fund may permit the issuer at its option to call, or redeem, its securities. If an issuer were to redeem securities held by a Fund during a time of declining interest rates, the Fund may not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed. 36 RISKS ASSOCIATED WITH HIGH YIELD SECURITIES The medium- to lower-rated and unrated securities in which the Fund invests tend to offer higher yields than those of other securities with the same maturities because of the additional risks associated with them. These risks include: HIGH YIELD BOND MARKET. A severe economic downturn or increase in interest rates might increase defaults in high yield securities issued by highly leveraged companies. An increase in the number of defaults could adversely affect the value of all outstanding high yield securities, thus disrupting the market for such securities. SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. High yield securities are more sensitive to adverse economic changes or individual corporate developments but less sensitive to interest rate changes than are Treasury or investment grade bonds. As a result, when interest rates rise, causing bond prices to fall, the value of high yield debt bonds tend not to fall as much as Treasury or investment grade corporate bonds. Conversely when interest rates fall, high yield bonds tend to underperform Treasury and investment grade corporate bonds because high yield bond prices tend not to rise as much as the prices of these bonds. The financial stress resulting from an economic downturn or adverse corporate developments could have a greater negative effect on the ability of issuers of high yield securities to service their principal and interest payments, to meet projected business goals and to obtain additional financing than on more creditworthy issuers. Holders of high yield securities could also be at greater risk because high yield securities are generally unsecured and subordinate to senior debt holders and secured creditors. If the issuer of a high yield security owned by the Funds defaults, the Funds may incur additional expenses to seek recovery. In addition, periods of economic uncertainty and changes can be expected to result in increased volatility of market prices of high yield securities and the Funds' net asset value. Furthermore, in the case of high yield securities structured as zero coupon or pay-in-kind securities, their market prices are affected to a greater extent by interest rate changes and thereby tend to be more speculative and volatile than securities which pay in cash. PAYMENT EXPECTATIONS. High yield securities present risks based on payment expectations. For example, high yield securities may contain redemption or call provisions. If an issuer exercises these provisions in a declining interest rate market, the Funds may have to replace the security with a lower yielding security, resulting in a decreased return for investors. Also, the value of high yield securities may decrease in a rising interest rate market. In addition, there is a higher risk of non-payment of interest and/or principal by issuers of high yield securities than in the case of investment grade bonds. LIQUIDITY AND VALUATION RISKS. Lower-rated bonds are typically traded among a smaller number of broker-dealers rather than in a broad secondary market. Purchasers of high yield securities tend to be institutions, rather than individuals, a factor that further limits the secondary market. To the extent that no established retail secondary market exists, many high yield securities may not be as liquid as Treasury and investment grade bonds. The ability of a Fund's Board of Director/Trustees to value or sell high yield securities will be adversely affected to the extent that such securities are thinly traded or illiquid. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of high yield securities more than other securities, especially in a thinly-traded market. To the extent the Funds owns illiquid or restricted high yield securities, these securities may involve special registration responsibilities, liabilities and costs, and liquidity and valuation difficulties. At times of less liquidity, it may be more difficult to value high yield securities because this valuation may require more research, and elements of judgment may play a greater role in the valuation since there is less reliable, objective data available. 37 Taxation. Special tax considerations are associated with investing in high yield securities structured as zero coupon or pay-in-kind securities. The Pilgrim Funds report the interest on these securities as income even though it receives no cash interest until the security's maturity or payment date. LIMITATIONS OF CREDIT RATINGS. The credit ratings assigned to high yield securities may not accurately reflect the true risks of an investment. Credit ratings typically evaluate the safety of principal and interest payments, rather than the market value risk of high yield securities. In addition, credit agencies may fail to adjust credit ratings to reflect rapid changes in economic or company conditions that affect a security's market value. Although the ratings of recognized rating services such as Moody's and S&P are considered, the Investment Adviser primarily relies on its own credit analysis, which includes a study of existing debt, capital structure, ability to service debts and to pay dividends, the issuer's sensitivity to economic conditions, its operating history and the current trend of earnings. Thus, the achievement of the Funds' investment objective may be more dependent on the Investment Adviser's own credit analysis than might be the case for a fund which invests in higher quality bonds. The Investment Adviser continually monitors the investments in the Funds' portfolio and carefully evaluates whether to dispose of or retain high yield securities whose credit ratings have changed. The Funds may retain a security whose rating has been changed. BANKING INDUSTRY OBLIGATIONS Each Fund may invest in banking industry obligations, including certificates of deposit, bankers' acceptances, and fixed time deposits. The Funds will not invest in obligations issued by a bank unless (i) the bank is a U.S. bank and a member of the FDIC and (ii) the bank has total assets of at least $1 billion (U.S.) or, if not, the Fund's investment is limited to the FDIC-insured amount of $100,000. WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS In order to secure prices or yields deemed advantageous at the time, the Pilgrim Funds (except Growth and Income Fund) may purchase or sell securities on a when-issued or a delayed-delivery basis generally 15 to 45 days after the commitment is made. The Funds will enter into a when-issued transaction for the purpose of acquiring portfolio securities and not for the purpose of leverage. In such transactions, delivery of the securities occurs beyond the normal settlement periods, but no payment or delivery is made by, and no interest accrues to, the Fund prior to the actual delivery or payment by the other party to the transaction. Due to fluctuations in the value of securities purchased on a when-issued or a delayed-delivery basis, the yields obtained on such securities may be higher or lower than the yields available in the market on the dates when the investments are actually delivered to the buyers. Similarly, the sale of securities for delayed-delivery can involve the risk that the prices available in the market when delivery is made may actually be higher than those obtained in the transaction itself. Each Fund will establish a segregated account with the Custodian consisting of cash and/or liquid assets in an amount equal to the amount of its when-issued and delayed-delivery commitments which will be "marked to market" daily. Each Fund will only make commitments to purchase such securities with the intention of actually acquiring the securities, but the Fund may sell these securities before the settlement date if it is deemed advisable as a matter of investment strategy. A Fund may not purchase when issued securities or enter into firm commitments, if as a result, more than 15% of the Fund's net assets would be segregated to cover such securities. When the time comes to pay for the securities acquired on a delayed delivery basis, a Fund will meet its obligations from the available cash flow, sale of the securities held in the segregated account, sale of other securities or, although it would not normally expect to do so, from sale of the when-issued securities themselves (which may have a market value greater or less than the Fund's payment obligation). Depending on market conditions, the Funds could experience fluctuations in share price as a result of delayed delivery or when-issued purchases. 38 DERIVATIVES Each Fund (except Financial Services Fund) may invest in derivative instruments. Generally, derivatives can be characterized as financial instruments whose performance is derived, at least in part, from the performance of an underlying asset or assets. Types of derivatives include options, futures contracts, options on futures and forward contracts. Derivative Instruments may be used for a variety of reasons, including to enhance return, hedge certain market risks, or provide a substitute for purchasing or selling particular securities. Derivatives may provide a cheaper, quicker or more specifically focused way for the Fund to invest than "traditional" securities would. Derivatives can be volatile and involve various types and degrees of risk, depending upon the characteristics of the particular Derivative and the portfolio as a whole. Derivatives permit a Fund to increase or decrease the level of risk, or change the character of the risk, to which its portfolio is exposed in much the same way as the Fund can increase or decrease the level of risk, or change the character of the risk, of its portfolio by making investments in specific securities. Derivatives may be purchased on established exchanges or through privately negotiated transactions referred to as over-the-counter Derivatives. Exchange-traded Derivatives generally are guaranteed by the clearing agency which is the issuer or counterparty to such Derivatives. This guarantee usually is supported by a daily payment system (I.E., margin requirements) operated by the clearing agency in order to reduce overall credit risk. As a result, unless the clearing agency defaults, there is relatively little counterparty credit risk associated with Derivatives purchased on an exchange. By contrast, no clearing agency guarantees over-the-counter Derivatives. Therefore, each party to an over-the-counter Derivative bears the risk that the counterparty will default. Accordingly, the Funds will consider the creditworthiness of counterparties to over-the-counter Derivatives in the same manner as they would review the credit quality of a security to be purchased by a Fund. Over-the-counter Derivatives are less liquid than exchange-traded Derivatives since the other party to the transaction may be the only investor with sufficient understanding of the Derivative to be interested in bidding for it. In the case of Research Enhanced Index Fund, derivative investments generally will be limited to S&P 500 Index Options. REAL ESTATE SECURITIES The Funds that comprise the Pilgrim Funds Trust may invest in real estate investment trusts ("REITs") and other real estate industry operating companies ("REOCs"). For purposes of a Fund's investments, a REOC is a company that derives at least 50% of its gross revenues or net profits from either (1) the ownership, development, construction, financing, management or sale of commercial, industrial or residential real estate, or (2) products or services related to the real estate industry, such as building supplies or mortgage servicing. Investing in REITs involves certain unique risks in addition to those risks associated with investing in the real estate industry in general. Although a Fund will not invest directly in real estate, a fund may invest in equity securities of issuers primarily engaged in or related to the real estate industry. Therefore, an investment in REITs is subject to certain risks associated with the direct ownership of real estate and with the real estate industry in general. These risks include, among others: possible declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage funds; overbuilding; extended vacancies of properties; increases in competition, property taxes and operating expenses; changes in zoning laws; costs resulting from the clean-up of, and liability to third parties for damages resulting from, environmental problems; casualty or condemnation losses; uninsured damages from floods, earthquakes or other natural disasters; limitations on and variations in rents; and changes in interest rates. To the extent that assets underlying the REITs' investments are concentrated geographically, by property type or in certain other respects, the REITs may be subject to certain of the foregoing risks to a greater extent. 39 Equity REITs may be affected by changes in the value of the underlying property owned by the REITs, while mortgage REITs may be affected by the quality of any credit extended. REITs are dependent upon management skills, are not diversified, are subject to heavy cash flow dependency, default by borrowers and self-liquidation. REITs are also subject to the possibilities of failing to qualify for tax-free pass-through of income under the U.S. Internal Revenue Code and failing to maintain their exemptions from registration under the 1940 Act. REITs (especially mortgage REITs) are also subject to interest rate risks. When interest rates decline, the value of a REIT's investment in fixed rate obligations can be expected to rise. Conversely, when interest rates rise, the value of a REIT's investment in fixed rate obligations can be expected to decline. In contrast, as interest rates on adjustable rate mortgage loans are reset periodically, yields on a REIT's investment in such loans will gradually align themselves to reflect changes in market interest rates, causing the value of such investments to fluctuate less dramatically in response to interest rate fluctuations than would investments in fixed rate obligations. Investing in REITs involves risks similar to those associated with investing in small capitalization companies. REITs may have limited financial resources, may trade less frequently and in a limited volume and may be subject to more abrupt or erratic price movements than larger company securities. Investments in mortgage-related securities involve certain risks. In periods of declining interest rates, prices of fixed income securities tend to rise. However, during such periods, the rate of prepayment of mortgages underlying mortgage-related securities tends to increase, with the result that such prepayments must be reinvested by the issuer at lower rates. In addition, the value of such securities may fluctuate in response to the market's perception of the creditworthiness of the issuers of mortgage-related securities owned by the Fund. Because investments in mortgage-related securities are interest sensitive, the ability of the issuer to reinvest or to reinvest favorably in underlying mortgages may be limited by government regulation or tax policy. For example, action by the Board of Governors of the Federal Reserve System to limit the growth of the nation's money supply may cause interest rates to rise and thereby reduce the volume of new residential mortgages. Additionally, although mortgages and mortgage-related securities are generally supported by some form of government or private guarantees and/or insurance, there is no assurance that private guarantors or insurers will be able to meet their obligations. MORTGAGE-RELATED SECURITIES The Funds (except Financial Services Fund, Growth and Income Fund, and MagnaCap Fund) may invest in mortgage-related securities. These Funds may invest in U.S. Government agency mortgage-backed securities issued or guaranteed by the U.S. Government or one of its agencies or instrumentalities, including the Government National Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA"), and the Federal Home Loan Mortgage Association ("FHLMC"). These instruments might be considered derivatives. The primary risks associated with these instruments is the risk that their value will change with changes in interest rates and prepayment risk. One type of mortgage-related security includes certificates that represent pools of mortgage loans assembled for sale to investors by various governmental and private organizations. These securities provide a monthly payment, which consists of both an interest and a principal payment that is in effect a "pass-through" of the monthly payment made by each individual borrower on his or her residential mortgage loan, net of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale of the underlying residential property, refinancing, or foreclosure, net of fees or costs that may be incurred. "Pass-through" certificates, such as those issued by GNMA, entitle the holder to receive all interest and principal payments owed on the mortgage pool, net of certain fees, regardless of whether the mortgagor actually makes the 40 payment. A major governmental guarantor of pass-through certificates is GNMA. GNMA guarantees, with the full faith and credit of the United States government, the timely payments of principal and interest on securities issued by institutions approved by GNMA (such as savings and loan institutions, commercial banks and mortgage bankers). Certificates issued by GNMA are backed by pools of FHA-insured or VA-guaranteed mortgages. Other governmental include FNMA and FHLMC (though these certificates are not backed by the full faith and credit of the United States Government). FNMA purchases residential mortgages from a list of approved seller/services that include state and federally chartered savings and loan associations, mutual saving banks, commercial banks, credit unions and mortgage bankers. The prices of high coupon U.S. Government Agency mortgage-backed securities do not tend to rise as rapidly as those of traditional fixed-rate securities at times when interest rates are decreasing, and tend to decline more slowly at times when interest rates are increasing. The Funds indicated above may also purchase mortgage-backed securities issued by commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary market issuers that also create pass-through pools of conventional residential mortgage loans. Such issuers may in addition be the originators of the underlying mortgage loans as well as the guarantors of the pass-through certificates. Pools created by such non-governmental issuers generally offer a higher rate of return than governmental pools because there are no direct or indirect governmental guarantees of payments in the private pools. However, the timely payment of interest and principal of these pools may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance. The insurance and guarantees are issued by government entities, private insurers and the mortgage poolers. It is expected that governmental or private entities may create mortgage loan pools offering pass-through investments in addition to those described above. As new types of pass-through securities are developed and offered to investors, the Investment Adviser may, consistent with the Funds' investment objectives, policies and restrictions, consider making investments in such new types of securities. Other types of mortgage-related securities in which the Funds may invest include debt securities that are secured, directly or indirectly, by mortgages on commercial real estate or residential rental properties, or by first liens on residential manufactured homes (as defined in section 603(6) of the National Manufactured Housing Construction and Safety Standards Act of 1974), whether such manufactured homes are considered real or personal property under the laws of the states in which they are located. Securities in this investment category include, among others, standard mortgage-backed bonds and newer collateralized mortgage obligations ("CMOs"). Mortgage-backed bonds are secured by pools of mortgages, but unlike pass-through securities, payments to bondholders are not determined by payments on the mortgages. The bonds consist of a single class, with interest payable periodically and principal payable on the stated date of maturity. CMOs have characteristics of both pass-through securities and mortgage-backed bonds. CMOs are secured by pools of mortgages, typically in the form of "guaranteed" pass-through certificates such as GNMA, FNMA, or FHLMC securities. The payments on the collateral securities determine the payments to bondholders, but there is not a direct "pass-through" of payments. CMOs are structured into multiple classes, each bearing a different date of maturity. Monthly payments of principal received from the pool of underlying mortgages, including prepayments, is first returned to investors holding the shortest maturity class. Investors holding the longest maturity class receive principal only after the shorter maturity classes have been retired. CMOs are issued by entities that operate under order from the SEC exempting such issuers from the provisions of the 1940 Act. Until recently, the staff of the SEC had taken the position that such issuers were investment companies and that, accordingly, an investment by an investment company (such as the Funds) in the securities of such issuers was subject to the limitations imposed by Section 12 of the 1940 Act. However, in reliance on SEC staff interpretations, the Funds may invest in securities issued by certain "exempted issuers" without regard to the limitations of Section 12 of the 1940 Act. In its interpretation, the SEC staff defined "exempted issuers" as unmanaged, fixed asset issuers that: (a) invest primarily in mortgage-backed securities; (b) do not issue redeemable 41 securities as defined in Section 2(a)(32) of the 1940 Act; (c) operate under the general exemptive orders exempting them from all provisions of the 1940 Act; and (d) are not registered or regulated under the 1940 Act as investment companies. Stripped mortgage-backed securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by agencies or instrumentalities of the U.S. government, or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, investment banks and special purpose subsidiaries of the foregoing. SMBS are structured with two or more classes of securities that receive different proportions of the interest and principal distributions on a pool of mortgage assets. A common type of SMBS will have at least one class receiving only a small portion of the interest and a larger portion of the principal from the mortgage assets, while the other classes will receive primarily interest and only a small portion of the principal. In the most extreme case, one class will receive all of the interest (the Interest-Only or "IO" class), while the other class will receive all of the principal (the Principal-Only or "PO" class). The yield to maturity on an IO class is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on such security's yield to maturity. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Fund may fail to recoup fully its initial investment in these securities. The determination of whether a particular government-issued IO or PO backed by fixed-rate mortgages is liquid is made by Pilgrim or a Sub-Adviser under guidelines and standards established by the Board of Trustees. Such a security may be deemed liquid if it can be disposed of promptly in the ordinary course of business at a value reasonably close to that used in the calculation of net asset value per share. Growth + Value Fund, MidCap Opportunities Fund, and Research Enhanced Index Fund may invest up to 5% of its net assets in Privately Issued CMOs, IOs and POs when Pilgrim believes that such investments are consistent with the Fund's investment objective. The Funds (except Financial Services Fund, Growth and Income Fund, MagnaCap Fund and the funds that comprise Pilgrim Funds Trust) may invest in foreign mortgage-related securities. Foreign mortgage-related securities are interests in pools of mortgage loans made to residential home buyers domiciled in a foreign country. These include mortgage loans made by trust and mortgage loan companies, credit unions, chartered banks, and others. Pools of mortgage loans are assembled as securities for sale to investors by various governmental, government-related and private organizations (E.G., Canada Mortgage and Housing Corporation and First Australian National Mortgage Acceptance Corporation Limited). The mechanics of these mortgage-related securities are generally the same as those issued in the United States. However, foreign mortgage markets may differ materially from the U.S. mortgage market with respect to matters such as the sizes of loan pools, pre-payment experience, and maturities of loans. RISKS OF INVESTING IN MORTGAGE-RELATED SECURITIES Investments in mortgage-related securities involve certain risks. In periods of declining interest rates, prices of fixed income securities tend to rise. However, during such periods, the rate of prepayment of mortgages underlying mortgage-related securities tends to increase, with the result that such prepayments must be reinvested by the issuer at lower rates. The rate of prepayments on underlying mortgages will affect the price and volatility of a mortgage-related security, and may have the effect of shortening or extending the effective maturity of the security beyond what was anticipated at the time of the purchase. Unanticipated rates of prepayment on underlying mortgages can be expected to increase the volatility of such securities. In addition, the value of these securities may fluctuate in response to the market's perception of the creditworthiness of the issuers of mortgage-related securities owned by a Fund. Because investments in mortgage-related securities are interest rate sensitive, the ability of the issuer to reinvest favorably in underlying mortgages may be limited by government regulation or tax policy. For example, action by the Board of Governors of the Federal Reserve System to limit the 42 growth of the nation's money supply may cause interest rates to rise and thereby reduce the volume of new residential mortgages. Additionally, although mortgages and mortgage-related securities are generally supported by some form of government or private guarantees and/or insurance, there is no assurance that private guarantors or insurers will be able to meet their obligations. Further, stripped mortgage-backed securities are likely to experience greater price volatility than other types of mortgage securities. The yield to maturity on the interest only class is extremely sensitive, both to changes in prevailing interest rates and to the rate of principal payments (including prepayments) on the underlying mortgage assets. Similarly, the yield to maturity on CMO residuals is extremely sensitive to prepayments on the related underlying mortgage assets. In addition, if a series of a CMO includes a class that bears interest at an adjustable rate, the yield to maturity on the related CMO residual will also be extremely sensitive to changes in the level of the index upon which interest rate adjustments are made. A Fund could fail to fully recover its initial investment in a CMO residual or a stripped mortgage-backed security. GNMA GUARANTEE. The National Housing Act authorizes GNMA to guarantee the timely payment of principal and interest on securities backed by a pool of mortgages insured by the Federal Housing Administration ("FHA") or the Farmers' Home Administration ("FMHA") or guaranteed by the Veterans Administration ("VA"). GNMA is also empowered to borrow without limitation from the U.S. Treasury, if necessary, to make payments required under its guarantee. LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is likely to be substantially less than the stated maturity of the mortgages underlying the securities. Prepayments of principal by mortgagors and mortgage foreclosures will usually result in the return of the greater part of principal investment long before the maturity of the mortgages in the pool. Foreclosures impose no risk of loss of the principal balance of a certificate, because of the GNMA guarantee, but foreclosure may impact the yield to shareholders because of the need to reinvest proceeds of foreclosure. As prepayment rates of individual mortgage pools vary widely, it is not possible to predict accurately the average life of a particular issue of GNMA Certificates. However, statistics published by the FHA indicate that the average life of single family dwelling mortgages with 25 to 30-year maturities, the type of mortgages backing the vast majority of GNMA Certificates, is approximately 12 years. Prepayments are likely to increase in periods of falling interest rates. It is customary to treat GNMA Certificates as 30-year mortgage-backed securities that prepay fully in the twelfth year. YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of interest of GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or FHA-insured mortgages underlying the certificates, by the amount of the fees paid to GNMA and the issuer. The coupon rate by itself, however, does not indicate the yield that will be earned on GNMA Certificates. First, GNMA Certificates may be issued at a premium or discount rather than at par, and, after issuance, GNMA Certificates may trade in the secondary market at a premium or discount. Second, interest is earned monthly, rather than semi-annually as with traditional bonds; monthly compounding raises the effective yield earned. Finally, the actual yield of a GNMA Certificate is influenced by the prepayment experience of the mortgage pool underlying it. For example, if interest rates decline, prepayments may occur faster than had been originally projected and the yield to maturity and the investment income of the Fund would be reduced. ADJUSTABLE RATE MORTGAGE SECURITIES The Funds that comprise Pilgrim Funds Trust may invest in adjustable rate mortgage securities (ARMS), which are pass-through mortgage securities collateralized by mortgages with adjustable rather than fixed rates. Generally, ARMS have a specified maturity date and amortize principal over their life. In periods of declining interest rates, there is a reasonable likelihood that ARMS will experience increased rates of prepayment of principal. However, the major difference between ARMS and fixed rate mortgage securities is that the interest 43 rate and the rate of amortization of principal of ARMS can and do change in accordance with movements in a particular, pre-specified, published interest rate index. The amount of interest on an ARM is calculated by adding a specified amount, the "margin," to the index, subject to limitations on the maximum and minimum interest that can be charged to the mortgagor during the life of the mortgage or to maximum and minimum changes to that interest rate during a given period. Because the interest rates on ARMS generally move in the same direction as market interest rates, the market value of ARMS tends to be more stable than that of long-term fixed rate securities. There are two main categories of indices which serve as benchmarks for periodic adjustments to coupon rates on ARMS: those based on U.S. Treasury securities and those derived from a calculated measure such as a cost of funds index or a moving average of mortgage rates. Commonly utilized indices include the one-year and five-year constant maturity Treasury Note rates, the three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on longer-term Treasury securities, the 11th District Federal Home Loan Bank Cost of Funds, the National Median Cost of Funds, the one-month or three-month London Interbank Offered Rate (LIBOR), the prime rate of a specific bank, or commercial paper rates. Some indices, such as the one-year constant maturity Treasury Note rate, closely mirror changes in market interest rate levels. Others, such as the 11th District Home Loan Bank Cost of Funds index (often related to ARMS issued by FNMA), tend to lag changes in market rate levels and tend to be somewhat less volatile. ASSET BACKED SECURITIES The Funds are permitted to invest in asset-backed securities. Through the use of trusts and special purpose subsidiaries, various types of assets, primarily home equity loans and automobile and credit card receivables, are being securitized in pass-through structures similar to the mortgage pass-through structures described above. Consistent with the Funds' investment objectives, policies and quality standards, the Funds may invest in these and other types of asset-backed securities which may be developed in the future. Asset-backed securities involve certain risks that are not posed by mortgage-related securities, resulting mainly from the fact that asset-backed securities do not usually contain the benefit of a complete security interest in the related collateral. For example, credit card receivables generally are unsecured and the debtors are entitled to the protection of a number of state and Federal consumer credit laws, some of which may reduce the ability to obtain full payment. In the case of automobile receivables, due to various legal and economic factors, proceeds from repossessed collateral may not always be sufficient to support payments on these securities. The risks associated with asset-backed securities are often reduced by the addition of credit enhancements such as a letter of credit from a bank, excess collateral or a third-party guarantee. ZERO COUPON AND PAY-IN-KIND SECURITIES The Funds (except Growth and Income Fund, LargeCap Growth Fund, MagnaCap Fund, MidCap Growth Fund and Large Cap Growth Fund) may invest in zero coupon securities. Convertible Fund and Balanced Fund will limit their investments in such securities to 35% of their respective net assets. Zero coupon, or deferred interest securities are debt obligations that do not entitle the holder to any periodic payment of interest prior to maturity or a specified date when the securities begin paying current interest (the "cash payment date") and therefore are issued and traded at a discount from their face amounts or par value. The discount varies, depending on the time remaining until maturity or cash payment date, prevailing interest rates, liquidity of the security and the perceived credit quality of the issuer. The discount, in the absence of financial difficulties of the issuer, decreases as the final maturity or cash payment date of the security approaches. The market prices of zero coupon and delayed interest securities generally are more volatile than the market prices of securities that pay interest periodically and are likely to respond to changes in interest rates to a greater degree than do non-zero coupon securities having similar maturities and credit quality. Current federal income tax law requires 44 holders of zero coupon securities to report as interest income each year the portion of the original issue discount on such securities (other than tax-exempt original issue discount from a zero coupon security) that accrues that year, even though the holders receive no cash payments of interest during the year. Balanced Fund and Convertible Fund may also invest in pay-in-kind securities. Pay-in-kind securities are securities that pay interest or dividends through the issuance of additional securities. A Fund will be required to report as income annual inclusions of original issue discount over the life of such securities as if it were paid on a current basis, although no cash interest or dividend payments are received by the Funds until the cash payment date or the securities mature. Under certain circumstances, the Funds could also be required to include accrued market discount or capital gain with respect to its pay-in-kind securities. The risks associated with lower rated debt securities apply to these securities. Zero coupon and pay-in-kind securities are also subject to the risk that in the event of a default, the Fund may realize no return on its investment, because these securities do not pay cash interest. AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS The Funds that comprise Pilgrim Mutual Funds, Pilgrim Funds Trust, MagnaCap Fund, and Growth and Income Fund may invest in securities of foreign issuers in the form of American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") or other similar securities representing securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the securities they represent. ADRs are receipts typically issued by a United States bank or trust company evidencing ownership of the underlying foreign securities. EDRs are receipts issued by a European financial institution evidencing a similar arrangement. Generally, ADRs, in registered form, are designed for use in the United States securities markets, and EDRs, in bearer form, are designed for use in European securities markets. FOREIGN AND EMERGING MARKET SECURITIES Each Fund (except Financial Services Fund) may invest in foreign securities. The Funds that comprise Pilgrim Mutual Funds may invest in Emerging Markets Securities. The Funds that comprise Pilgrim Funds Trust may invest an unlimited amount in foreign securities and may also invest in emerging markets securities. Each Fund (except MagnaCap Fund) may invest up to 20% of its net assets in securities of foreign issuers, of which 10% of its net assets may be invested in foreign securities that are not listed on a U.S. securities exchange. MagnaCap Fund may invest up to 5% of its total assets, in certain foreign securities (including ADRs). Foreign financial markets, while growing in volume, have, for the most part, substantially less volume than United States markets, and securities of many foreign companies are less liquid and their prices more volatile than securities of comparable domestic companies. The foreign markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Delivery of securities may not occur at the same time as payment in some foreign markets. Delays in settlement could result in temporary periods when a portion of the assets of a Fund is uninvested and no return is earned thereon. The inability of the Funds to make intended security purchases due to settlement problems could cause the Funds to miss attractive investment opportunities. Inability to dispose of portfolio securities due to settlement problems could result either in losses to the Funds due to subsequent declines in value of the portfolio security or, if the Funds have entered into a contract to sell the security, could result in possible liability to the purchaser. As foreign companies are not generally subject to uniform accounting, auditing and financial reporting standards and practices comparable to those applicable to domestic companies, there may be less publicly available 45 information about certain foreign companies than about domestic companies. There is generally less government supervision and regulation of exchanges, financial institutions and issuers in foreign countries than there is in the United States. A foreign government may impose exchange control regulations that may have an impact on currency exchange rates, and there is the possibility of expropriation or confiscatory taxation, political or social instability, or diplomatic developments that could affect U.S. investments in those countries. Although the Funds will use reasonable efforts to obtain the best available price and the most favorable execution with respect to all transactions and the Investment Adviser or Sub-Adviser will consider the full range and quality of services offered by the executing broker or dealer when making these determinations, fixed commissions on many foreign stock exchanges are generally higher than negotiated commissions on U.S. exchanges. Certain foreign governments levy withholding taxes against dividend and interest income, or may impose other taxes. Although in some countries a portion of these taxes are recoverable, the non-recovered portion of foreign withholding taxes will reduce the income received by the Funds on these investments. However, these foreign withholding taxes are not expected to have a significant impact on a Fund with an investment objective of long-term capital appreciation because any income earned by the Fund should be considered incidental. The risks of investing in foreign securities may be intensified in the case of investments in issuers domiciled or doing substantial business in emerging markets or countries with limited or developing capital markets. Security prices in emerging markets can be significantly more volatile than in the more developed nations of the world, reflecting the greater uncertainties of investing in less established markets and economies. In particular, countries with emerging markets may have relatively unstable governments, present the risk of sudden adverse government action and even nationalization of businesses, restrictions on foreign ownership, or prohibitions of repatriation of assets, and may have less protection of property rights than more developed countries. The economies of countries with emerging markets may be predominantly based on only a few industries, may be highly vulnerable to changes in local or global trade conditions, and may suffer from extreme and volatile debt burdens or inflation rates. Local securities markets may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of substantial holdings difficult or impossible at times. Transaction settlement and dividend collection procedures may be less reliable in emerging markets than in developed markets. Securities of issuers located in countries with emerging markets may have limited marketability and may be subject to more abrupt or erratic price movements. INTERNATIONAL DEBT SECURITIES. The Funds indicated above may invest in debt obligations (which may be denominated in U.S. dollar or in non-U.S. currencies) of any rating issued or guaranteed by foreign corporations, certain supranational entities (such as the World Bank) and foreign governments (including political subdivisions having taxing authority) or their agencies or instrumentalities, including American Depository Receipts. These investments may include debt obligations such as bonds (including sinking fund and callable bonds), debentures and notes, together with preferred stocks, pay-in-kind securities, and zero coupon securities. In determining whether to invest in debt obligations of foreign issuers, the Fund will consider the relative yields of foreign and domestic high yield securities, the economies of foreign countries, the condition of such countries' financial markets, the interest rate climate of such countries and the relationship of such countries' currency to the U.S. Dollar. These factors are judged on the basis of fundamental economic criteria (e.g., relative inflation levels and trends, growth rate forecasts, balance of payments status and economic policies) as well as technical and political data. Subsequent foreign currency losses may result in the Fund having previously distributed more income in a particular period than was available from investment income, which could result in a return of capital to shareholders. The Fund's portfolio of foreign securities may include those of a number of foreign countries, or, depending upon market conditions, those of a single country. 46 Investments in securities of issuers in non-industrialized countries generally involve more risk and may be considered highly speculative. Although a portion of the Fund's investment income may be received or realized in foreign currencies, the Fund will be required to compute and distribute its income in U.S. dollars and absorb the cost of currency fluctuations and the cost of currency conversions. Investment in foreign securities involves considerations and risks not associated with investment in securities of U.S. issuers. For example, foreign issuers are not required to use generally accepted accounting principles. If foreign securities are not registered under the Securities Act of 1933, as amended, the issuer does not have to comply with the disclosure requirements of the Securities Exchange Act of 1934, as amended. The values of foreign securities investments will be affected by incomplete or inaccurate information available to the Investment Adviser as to foreign issuers, changes in currency rates, exchange control regulations or currency blockage, expropriation or nationalization of assets, application of foreign tax laws (including withholding taxes), changes in governmental administration or economic or monetary policy. In addition, it is generally more difficult to obtain court judgments outside the United States. RESTRICTIONS ON FOREIGN INVESTMENTS. Some developing countries prohibit or impose substantial restrictions on investments in their capital markets, particularly their equity markets, by foreign entities such as a Fund. As illustrations, certain countries may require governmental approval prior to investments by foreign persons or limit the amount of investment by foreign persons in a particular company or limit the investment by foreign persons to only a specific class of securities of a company that may have less advantageous terms (including price) than securities of the company available for purchase by nationals. Certain countries may restrict investment opportunities in issuers or industries deemed important to national interests. The manner in which foreign investors may invest in companies in certain developing countries, as well as limitations on such investments, also may have an adverse impact on the operations of a Fund that invests in such countries. For example, the Fund may be required in certain of such countries to invest initially through a local broker or other entity and then have the shares purchased re-registered in the name of the Fund. Re-registration may in some instances not be able to occur on timely basis, resulting in a delay during which a Fund may be denied certain of its rights as an investor, including rights as to dividends or to be made aware of certain corporate actions. There also may be instances where a Fund places a purchase order but is subsequently informed, at the time of re-registration, that the permissible allocation of the investment to foreign investors has been filled, depriving the Fund of the ability to make its desired investment at that time. Substantial limitations may exist in certain countries with respect to a Fund's ability to repatriate investment income, capital or the proceeds of sales of securities by foreign investors. A Fund could be adversely affected by delays in, or a refusal to grant, any required governmental approval for repatriation of capital, as well as by the application to the Fund of any restrictions on investments. No more than 15% of a Fund's net assets may be comprised, in the aggregate, of assets that are (i) subject to material legal restrictions on repatriation or (ii) invested in illiquid securities. Even where there is no outright restriction on repatriation of capital, the mechanics of repatriation may affect certain aspects of the operations of the Fund. For example, funds may be withdrawn from the People's Republic of China only in U.S. or Hong Kong dollars and only at an exchange rate established by the government once each week. In certain countries, banks or other financial institutions may be among the leading companies or have actively traded securities. The 1940 Act restricts each Fund's investments in any equity securities of an issuer that, in its most recent fiscal year, derived more than 15% of its revenues from "securities related activities," as defined by the rules thereunder. The provisions may restrict the Fund's investments in certain foreign banks and other financial institutions. FOREIGN CURRENCY RISKS. Currency risk is the risk that changes in foreign exchange rates will affect, favorably or unfavorably, the U.S. dollar value of foreign securities. In a period when the U.S. dollar generally rises against 47 foreign currencies, the returns on foreign stocks for a U.S. investor will be diminished. By contrast, in a period when the U.S. dollar generally declines, the returns on foreign securities will be enhanced. Unfavorable changes in the relationship between the U.S. dollar and the relevant foreign currencies, therefore, will adversely affect the value of a Fund's shares. FOREIGN CURRENCY EXCHANGE TRANSACTIONS. Because the Funds that invest in foreign securities may buy and sell securities denominated in currencies other than the U.S. Dollar, and receive interest, dividends and sale proceeds in currencies other than the U.S. Dollar, the Funds may enter into foreign currency exchange transactions to convert to and from different foreign currencies and to convert foreign currencies to and from the U.S. Dollar. The Funds either enter into these transactions on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or uses forward foreign currency contracts to purchase or sell foreign currencies. A forward foreign currency exchange contract is an agreement to exchange one currency for another -- for example, to exchange a certain amount of U.S. Dollars for a certain amount of Korean Won -- at a future date. Forward foreign currency contracts are included in the group of instruments that can be characterized as derivatives. Neither spot transactions nor forward foreign currency exchange contracts eliminate fluctuations in the prices of the Fund's portfolio securities or in foreign exchange rates, or prevent loss if the prices of these securities should decline. Although these transactions tend to minimize the risk of loss due to a decline in the value of the hedged currency, at the same time they tend to limit any potential gain that might be realized should the value of the hedged currency increase. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible because the future value of these securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. The projection of currency market movements is extremely difficult, and the successful execution of a hedging strategy is highly uncertain. Use of currency hedging techniques may also be limited by management's need to protect the status of the Fund as a regulated investment company under the Code. SOVEREIGN DEBT SECURITIES Certain Funds may invest in sovereign debt securities issued by governments of foreign countries. The sovereign debt in which the Funds may invest may be rated below investment grade. These securities usually offer higher yields than higher rated securities but are also subject to greater risk than higher rated securities. BRADY BONDS Brady bonds represent a type of sovereign debt. These obligations were created under a debt restructuring plan introduced by former U.S. Secretary of the Treasury, Nicholas F. Brady, in which foreign entities issued these obligations in exchange for their existing commercial bank loans. Brady Bonds have been issued by Argentina, Brazil, Costa Rica, the Dominican Republic, Mexico, the Philippines, Uruguay and Venezuela, and may be issued by other emerging countries. SECURITIES SWAPS The Funds that comprise Pilgrim Mutual Funds and Pilgrim Funds Trust may enter into securities swaps, a technique primarily used to indirectly participate in the securities market of a country from which a Fund would otherwise be precluded for lack of an established securities custody and safekeeping system. The Fund deposits an amount of cash with its custodian (or the broker, if legally permitted) in an amount equal to the selling price of the underlying security. Thereafter, the Fund pays or receives cash from the broker equal to the change in the value of the underlying security. 48 OPTIONS ON SECURITIES AND SECURITIES INDICES PURCHASING PUT AND CALL OPTIONS Each Fund (other than Financial Services Fund, Growth and Income Fund, and MagnaCap Fund) is authorized to purchase put and call options with respect to securities which are otherwise eligible for purchase by the Fund and with respect to various stock indices subject to certain restrictions. Put and call options are derivative securities traded on United States and foreign exchanges, including the American Stock Exchange, Chicago Board Options Exchange, Philadelphia Stock Exchange, Pacific Stock Exchange and New York Stock Exchange. Except as indicated in "Non-Hedging Strategic Transactions," the Funds will engage in trading of such derivative securities exclusively for hedging purposes. If a Fund purchases a put option, the Fund acquires the right to sell the underlying security at a specified price at any time during the term of the option (for "American-style" options) or on the option expiration date (for "European-style" options). Purchasing put options may be used as a portfolio investment strategy when the Investment Adviser or Sub-Adviser perceives significant short-term risk but substantial long-term appreciation for the underlying security. The put option acts as an insurance policy, as it protects against significant downward price movement while it allows full participation in any upward movement. If the Fund holds a stock which the Investment Adviser or Sub-Adviser believes has strong fundamentals, but for some reason may be weak in the near term, the Fund may purchase a put option on such security, thereby giving itself the right to sell such security at a certain strike price throughout the term of the option. Consequently, the Fund will exercise the put only if the price of such security falls below the strike price of the put. The difference between the put's strike price and the market price of the underlying security on the date the Fund exercises the put, less transaction costs, is the amount by which the Fund hedges against a decline in the underlying security. If during the period of the option the market price for the underlying security remains at or above the put's strike price, the put will expire worthless, representing a loss of the price the Fund paid for the put, plus transaction costs. If the price of the underlying security increases, the premium paid for the put option less any amount for which the put may be sold reduces the profit the Fund realizes on the sale of the securities. If a Fund purchases a call option, it acquires the right to purchase the underlying security at a specified price at any time during the term of the option. The purchase of a call option is a type of insurance policy to hedge against losses that could occur if the Fund has a short position in the underlying security and the security thereafter increases in price. The Fund will exercise a call option only if the price of the underlying security is above the strike price at the time of exercise. If during the option period the market price for the underlying security remains at or below the strike price of the call option, the option will expire worthless, representing a loss of the price paid for the option, plus transaction costs. If a Fund purchases the call option to hedge a short position in the underlying security and the price of the underlying security thereafter falls, the premium paid for the call option less any amount for which such option may be sold reduces the profit the Fund realizes on the cover of the short position in the security. Prior to exercise or expiration, an option may be sold when it has remaining value by a purchaser through a "closing sale transaction," which is accomplished by selling an option of the same series as the option previously purchased. The Funds generally will purchase only those options for which the Investment Adviser or Sub-Adviser believes there is an active secondary market to facilitate closing transactions. WRITING CALL OPTIONS Each Fund (other than Financial Services Fund, Growth and Income Fund, and MagnaCap Fund) may write covered call options. A call option is "covered" if a Fund owns the security underlying the call or has an absolute right to acquire the security without additional cash consideration (or, if additional cash consideration is required, cash or cash equivalents in such amount as are held in a segregated account by the Custodian). The writer of a call option receives 49 a premium and gives the purchaser the right to buy the security underlying the option at the exercise price. The writer has the obligation upon exercise of the option to deliver the underlying security against payment of the exercise price during the option period. If the writer of an exchange-traded option wishes to terminate his obligation, he may effect a "closing purchase transaction." This is accomplished by buying an option of the same series as the option previously written. A writer may not effect a closing purchase transaction after it has been notified of the exercise of an option. Effecting a closing transaction in the case of a written call option will permit a Fund to write another call option on the underlying security with either a different exercise price, expiration date or both. Also, effecting a closing transaction allows the cash or proceeds from the concurrent sale of any securities subject to the option to be used for other investments of the Fund. If the Fund desires to sell a particular security from its portfolio on which it has written a call option, it will effect a closing transaction prior to or concurrent with the sale of the security. A Fund realizes a gain from a closing transaction if the cost of the closing transaction is less than the premium received from writing the option or if the proceeds from the closing transaction are more than the premium paid to purchase the option. A Fund realizes a loss from a closing transaction if the cost of the closing transaction is more than the premium received from writing the option or if the proceeds from the closing transaction are less than the premium paid to purchase the option. However, because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, appreciation of the underlying security owned by the Fund generally offsets, in whole or in part, any loss to the Fund resulting from the repurchase of a call option. The staff of the SEC has taken the position that purchased over-the-counter options ("OTC Options") and the assets used as cover for written OTC Options are illiquid securities. A Fund will write OTC Options only with primary U.S. Government Securities dealers recognized by the Board of Governors of the Federal Reserve System or member banks of the Federal Reserve System ("primary dealers"). In connection with these special arrangements, the Fund intends to establish standards for the creditworthiness of the primary dealers with which it may enter into OTC Option contracts and those standards, as modified from time to time, will be implemented and monitored by the Investment Adviser. Under these special arrangements, the Fund will enter into contracts with primary dealers that provide that the Fund has the absolute right to repurchase an option it writes at any time at a repurchase price which represents the fair market value, as determined in good faith through negotiation between the parties, but that in no event will exceed a price determined pursuant to a formula contained in the contract. Although the specific details of the formula may vary between contracts with different primary dealers, the formula will generally be based on a multiple of the premium received by the Fund for writing the option, plus the amount, if any, by which the option is "in-the-money." The formula will also include a factor to account for the difference between the price of the security and the strike price of the option if the option is written "out-of-the-money." "Strike price" refers to the price at which an option will be exercised. "Cover assets" refers to the amount of cash or liquid assets that must be segregated to collateralize the value of the futures contracts written by the Fund. Under such circumstances, the Fund will treat as illiquid that amount of the cover assets equal to the amount by which the formula price for the repurchase of the option is greater than the amount by which the market value of the security subject to the option exceeds the exercise price of the option (the amount by which the option is "in-the-money"). Although each agreement will provide that the Fund's repurchase price shall be determined in good faith (and that it shall not exceed the maximum determined pursuant to the formula), the formula price will not necessarily reflect the market value of the option written. Therefore, the Fund might pay more to repurchase the OTC Option contract than the Fund would pay to close out a similar exchange traded option. STOCK INDEX OPTIONS Each Fund (other than Financial Services Fund, Growth and Income Fund, and MagnaCap Fund) may also purchase put and call options with respect to the S&P 500 and other stock indices. The Funds may purchase such options as a hedge 50 against changes in the values of portfolio securities or securities which it intends to purchase or sell, or to reduce risks inherent in the ongoing management of the Fund. The distinctive characteristics of options on stock indices create certain risks not found in stock options generally. Because the value of an index option depends upon movements in the level of the index rather than the price of a particular stock, whether the Fund will realize a gain or loss on the purchase or sale of an option on an index depends upon movements in the level of stock prices in the stock market generally rather than movements in the price of a particular stock. Accordingly, successful use by a Fund of options on a stock index depends on the Investment Adviser's or Sub-Adviser's ability to predict correctly movements in the direction of the stock market generally. This requires different skills and techniques than predicting changes in the price of individual stocks. Index prices may be distorted if circumstances disrupt trading of certain stocks included in the index, such as if trading were halted in a substantial number of stocks included in the index. If this happens, the Fund could not be able to close out options which it had purchased, and if restrictions on exercise were imposed, the Fund might be unable to exercise an option it holds, which could result in substantial losses to the Fund. The Funds purchase put or call options only with respect to an index which the Investment Adviser or Sub-Adviser believes includes a sufficient number of stocks to minimize the likelihood of a trading halt in the index. DEALER OPTIONS Each Fund (other than Financial Services Fund, Growth and Income Fund, and MagnaCap Fund) may engage in transactions involving dealer options as well as exchange-traded options. Certain risks are specific to dealer options. While the Funds might look to a clearing corporation to exercise exchange-traded options, if a Fund purchases a dealer option it must rely on the selling dealer to perform if the Fund exercises the option. Failure by the dealer to do so would result in the loss of the premium paid by the Fund as well as loss of the expected benefit of the transaction. Exchange-traded options generally have a continuous liquid market while dealer options may not. Consequently, a Fund can realize the value of a dealer option it has purchased only by exercising or reselling the option to the issuing dealer. Similarly, when a Fund writes a dealer option, the Fund can close out the option prior to its expiration only by entering into a closing purchase transaction with the dealer. While the Fund seeks to enter into dealer options only with dealers who will agree to and can enter into closing transactions with the Fund, no assurance exists that the Fund will at any time be able to liquidate a dealer option at a favorable price at any time prior to expiration. Unless the Fund, as a covered dealer call option writer, can effect a closing purchase transaction, it will not be able to liquidate securities (or other assets) used as cover until the option expires or is exercised. In the event of insolvency of the other party, the Fund may be unable to liquidate a dealer option. With respect to options written by the Fund, the inability to enter into a closing transaction may result in material losses to the Fund. For example, because a Fund must maintain a secured position with respect to any call option on a security it writes, the Fund may not sell the assets which it has segregated to secure the position while it is obligated under the option. This requirement may impair the Fund's ability to sell portfolio securities at a time when such sale might be advantageous. The Staff of the Securities and Exchange Commission (the "Commission") takes the position that purchased dealer options are illiquid securities. A Fund may treat the cover used for written dealer options as liquid if the dealer agrees that the Fund may repurchase the dealer option it has written for a maximum price to be calculated by a predetermined formula. In such cases, the dealer option would be considered illiquid only to the extent the maximum purchase price under the formula exceeds the intrinsic value of the option. With that exception, however, the Fund will treat dealer options as subject to the Fund's limitation on illiquid securities. If the Commission changes its position on the liquidity of dealer options, the Fund will change its treatment of such instruments accordingly. 51 LIMITS ON USE OF OPTIONS The Funds that comprise Pilgrim Mutual Funds may not purchase or sell options if more than 25% of its net assets would be hedged. The Funds may write covered call options and secured put options to seek to generate income or lock in gains on up to 25% of their net assets. RISKS OF INVESTING IN OPTIONS ON SECURITIES AND INDICES There are several risks associated with transactions in options on securities and indices. Options may be more volatile than the underlying instruments and, therefore, on a percentage basis, an investment in options may be subject to greater fluctuation than an investment in the underlying instruments themselves. There are also significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objective. In addition, a liquid secondary market for particular options may be absent for reasons which include the following: there may be insufficient trading interest in certain options; restrictions may be imposed by an exchange on opening transactions or closing transactions or both; trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of option of underlying securities; unusual or unforeseen circumstances may interrupt normal operations on an exchange; the facilities of an exchange or clearing corporation may not at all times be adequate to handle current trading volume; or one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options that had been issued by a clearing corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events. The extent to which a Fund may enter into options transactions may be limited by the Internal Revenue Code requirements for qualification of the Fund as a regulated investment company. See "Dividends, Distributions and Taxes." In addition, foreign option exchanges do not afford to participants many of the protections available in United States option exchanges. For example, there may be no daily price fluctuation limits in such exchanges or markets, and adverse market movements could therefore continue to an unlimited extent over a period of time. Although the purchaser of an option cannot lose more than the amount of the premium plus related transaction costs, this entire amount could be lost. Moreover, a Fund as an option writer could lose amounts substantially in excess of its initial investment, due to the margin and collateral requirements typically associated with such option writing. See "Dealer Options" below. FOREIGN CURRENCY CONTRACTS FOREIGN CURRENCY OPTIONS. Pilgrim MagnaCap Fund and the Funds that comprise Pilgrim Mutual Funds and Pilgrim Funds Trust may buy or sell put and call options on foreign currencies. A put or call option on a foreign currency gives the purchaser of the option the right to sell or purchase a foreign currency at the exercise price until the option expires. The Funds use foreign currency options separately or in combination to control currency volatility. Among the strategies employed to control currency volatility is an option collar. An option collar involves the purchase of a put option and the simultaneous sale of call option on the same currency with the same expiration date but with different exercise (or "strike") prices. Generally, the put option will have an out-of-the-money strike price, while the call option will have either an at-the-money strike price or an in-the-money strike price. Foreign currency options are derivative securities. 52 Currency options traded on U.S. or other exchanges may be subject to position limits which may limit the ability of the Funds to reduce foreign currency risk using such options. As with other kinds of option transactions, writing options on foreign currency constitutes only a partial hedge, up to the amount of the premium received. The Funds could be required to purchase or sell foreign currencies at disadvantageous exchange rates, thereby incurring losses. The purchase of an option on foreign currency may constitute an effective hedge against exchange rate fluctuations; however, in the event of exchange rate movements adverse to a Fund's position, the Fund may forfeit the entire amount of the premium plus related transaction costs. FORWARD CURRENCY CONTRACTS The Funds that comprise Pilgrim Mutual Funds and Pilgrim Funds Trust may enter into forward currency contracts in anticipation of changes in currency exchange rates. A forward currency contract is an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. For example, a Fund might purchase a particular currency or enter into a forward currency contract to preserve the U.S. dollar price of securities it intends to or has contracted to purchase. Alternatively, it might sell a particular currency on either a spot or forward basis to hedge against an anticipated decline in the dollar value of securities it intends to or has contracted to sell. Although this strategy could minimize the risk of loss due to a decline in the value of the hedged currency, it could also limit any potential gain from an increase in the value of the currency. FINANCIAL FUTURES CONTRACTS AND RELATED OPTIONS Each Fund (except Financial Services Fund and MagnaCap Fund) may use financial futures contracts and related options to hedge against changes in the market value of its portfolio securities or securities that it intends to purchase. The Funds that comprise Pilgrim Funds Trust and Growth and Income Fund may invest in interest rate futures. The Fund could purchase a financial futures contract (such as an interest rate futures contract or securities index futures contract) to protect against a decline in the value of its portfolio or to gain exposure to securities which the Fund otherwise wishes to purchase. Hedging is accomplished when an investor takes a position in the futures market opposite to his cash market position. There are two types of hedges -- long (or buying) and short (or selling) hedges. Historically, prices in the futures market have tended to move in concert with cash market prices, and prices in the futures market have maintained a fairly predictable relationship to prices in the cash market. Thus, a decline in the market value of securities in the Fund's portfolio may be protected against to a considerable extent by gains realized on futures contracts sales. Similarly, it is possible to protect against an increase in the market price of securities that the Fund may wish to purchase in the future by purchasing futures contracts. A Fund may purchase or sell any financial futures contracts which are traded on a recognized exchange or board of trade. Financial futures contracts consist of interest rate futures contracts and securities index futures contracts. A public market presently exists in interest rate futures contracts covering long-term U.S. Treasury bonds, U.S. Treasury notes, three-month U.S. Treasury bills and GNMA certificates. Securities index futures contracts are currently traded with respect to the Standard & Poor's 500 Composite Stock Price Index and such other broad-based stock market indices as the New York Stock Exchange Composite Stock Index and the Value Line Composite Stock Price Index. A clearing corporation associated with the exchange or board of trade on which a financial futures contract trades assumes responsibility for the completion of transactions and also guarantees that open futures contracts will be performed. An interest rate futures contract obligates the seller of the contract to deliver, and the purchaser to take delivery of, the interest rate securities called for in the contract at a specified future time and at a specified price. 53 A stock index assigns relative values to the common stocks included in the index, and the index fluctuates with changes in the market values of the common stocks so included. A stock index futures contract is an agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to a specified dollar amount times the difference between the stock index value at the close of the last trading day of the contract and the price at which the futures contract is originally struck. An option on a financial futures contract gives the purchaser the right to assume a position in the contract (a long position if the option is a call and short position if the option is a put) at a specified exercise price at any time during the period of the option. In contrast to the situation when a Fund purchases or sells a security, no security is delivered or received by the Fund upon the purchase or sale of a financial futures contract. Initially, the Fund will be required to segregate with its custodian bank an amount of cash and/or liquid assets. This amount is known as initial margin and is in the nature of a performance bond or good faith deposit on the contract. The current initial margin deposit required per contract is approximately 5% of the contract amount. Brokers may establish deposit requirements higher than this minimum. Subsequent payments, called variation margin, will be made to and from the account on a daily basis as the price of the futures contract fluctuates. This process is known as marking to market. At the time of purchase of a futures contract or a call option on a futures contract, an amount of cash, U. S. Government securities or other appropriate high-grade securities equal to the market value of the futures contract minus the Fund's initial margin deposit with respect thereto will be segregated with the Fund's custodian bank to collateralize fully the position and thereby ensure that it is not leveraged. The extent to which the Fund may enter into financial futures contracts and related options may also be limited by the requirements of the Internal Revenue Code for qualification as a regulated investment company. The writer of an option on a futures contract is required to deposit margin pursuant to requirements similar to those applicable to futures contracts. Upon exercise of an option on a futures contract, the delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery of the accumulated balance in the writer's margin account. This amount will be equal to the amount by which the market price of the futures contract at the time of exercise exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract. Although financial futures contracts by their terms call for actual delivery or acceptance of securities, in most cases the contracts are closed out before the settlement date without the making or taking of delivery. Closing out is accomplished by effecting an offsetting transaction. A futures contract sale is closed out by effecting a futures contract purchase for the same aggregate amount of securities and the same delivery date. If the sale price exceeds the offsetting purchase price, the seller immediately would be paid the difference and would realize a gain. If the offsetting purchase price exceeds the sale price, the seller immediately would pay the difference and would realize a loss. Similarly, a futures contract purchase is closed out by effecting a futures contract sale for the same securities and the same delivery date. If the offsetting sale price exceeds the purchase price, the purchaser would realize a gain, whereas if the purchase price exceeds the offsetting sale price, the purchaser would realize a loss. The Fund will pay commissions on financial futures contracts and related options transactions. These commissions may be higher than those that would apply to purchases and sales of securities directly. LIMITATIONS ON FUTURES CONTRACTS AND RELATED OPTIONS The Funds may not engage in transactions in financial futures contracts or related options for speculative purposes but only as a hedge against anticipated changes in the market value of its portfolio securities or securities that it intends to purchase. None of the Funds that comprise Pilgrim Mutual Funds may purchase or sell futures or purchase related options if, immediately thereafter, more than 25% of its net assets would be hedged. Those Funds also may not purchase or sell futures or purchase related options if, immediately thereafter, 54 the sum of the amount of margin deposits on the Fund's existing futures positions and premiums paid for such options would exceed 5% of the market value of the Fund's net assets. At the time of purchase of a futures contract or a call option on a futures contract, an amount of cash, U.S. Government securities or other appropriate high-grade debt obligations equal to the market value of the futures contract minus the Fund's initial margin deposit with respect thereto will be segregated with the Fund's custodian bank to collateralize fully the position and thereby ensure that it is not leveraged. The extent to which a Fund may enter into financial futures contracts and related options also may be limited by the requirements of the Internal Revenue Code for qualification as a regulated investment company. RISKS RELATING TO OPTIONS AND FUTURES CONTRACTS The purchase of options involves certain risks. If a put option purchased by a Fund is not sold when it has remaining value, and if the market price of the underlying security remains equal to or greater than the exercise price, the Fund will lose its entire investment in the option. Also, where a put option is purchased to hedge against price movements in a particular security, the price of the put option may move more or less than the price of the related security. There can be no assurance that a liquid market will exist when a Fund seeks to close out an option position. Furthermore, if trading restrictions or suspensions are imposed on the options markets, a Fund may be unable to close out a position. Positions in futures contracts and related options may be closed out only on an exchange that provides a secondary market for such contracts or options. A Fund will enter into an option or futures position only if there appears to be a liquid secondary market. However, there can be no assurance that a liquid secondary market will exist for any particular option or futures contract at any specific time. Thus, it may not be possible to close out a futures or related option position. In the case of a futures position, in the event of adverse price movements the Fund would continue to be required to make daily margin payments. In this situation, if the Fund has insufficient cash to meet daily margin requirements it may have to sell portfolio securities at a time when it may be disadvantageous to do so. In addition, the Fund may be required to take or make delivery of the securities underlying the futures contracts it holds. The inability to close out futures positions also could have an adverse impact on the Fund's ability to hedge its portfolio effectively. There are several risks in connection with the use of futures contracts as a hedging device. While hedging can provide protection against an adverse movement in market prices, it can also preclude a hedger's opportunity to benefit from a favorable market movement. In addition, investing in futures contracts and options on futures contracts will cause the Funds to incur additional brokerage commissions and may cause an increase in the Fund's portfolio turnover rate. The successful use of futures contracts and related options also depends on the ability of the Investment Adviser to forecast correctly the direction and extent of market movements within a given time frame. To the extent market prices remain stable during the period a futures contract or option is held by the Fund or such prices move in a direction opposite to that anticipated, the Fund may realize a loss on the hedging transaction that is not offset by an increase in the value of its portfolio securities. As a result, the return of the Fund for the period may be less than if it had not engaged in the hedging transaction. The use of futures contracts involves the risk of imperfect correlation in movements in the price of futures contracts and movements in the price of the securities that are being hedged. If the price of the futures contract moves more or less than the price of the securities being hedged, a Fund will experience a gain or loss that will not be completely offset by movements in the price of the securities. It is possible that, where a Fund has sold futures contracts to hedge its portfolio against a decline in the market, the market may advance and the value of securities held in the Fund's portfolio may decline. If this occurred, the Fund would lose money on the futures contract and would also experience a decline in value in its portfolio securities. Where futures are purchased to hedge against a possible increase in the prices of securities before the Fund is able to invest its cash (or cash equivalents) in securities (or options) in an orderly fashion, it is possible that the market may decline; 55 if the Fund then determines not to invest in securities (or options) at that time because of concern as to possible further market decline or for other reasons, the Fund will realize a loss on the futures that would not be offset by a reduction in the price of the securities purchased. The market prices of futures contracts may be affected if participants in the futures market elect to close out their contracts through off-setting transactions rather than to meet margin deposit requirements. In such a case, distortions in the normal relationship between the cash and futures markets could result. Price distortions could also result if investors in futures contracts opt to make or take delivery of the underlying securities rather than to engage in closing transactions due to the resultant reduction in the liquidity of the futures market. In addition, due to the fact that, from the point of view of speculators, the deposit requirements in the futures markets are less onerous than margin requirements in the cash market, increased participation by speculators in the futures market could cause temporary price distortions. Due to the possibility of price distortions in the futures market and because of the imperfect correlation between movements in the prices of securities and movements in the prices of futures contracts, a correct forecast of market trends may still not result in a successful transaction. Compared to the purchase or sale of futures contracts, the purchase of put or call options on futures contracts involves less potential risk for a Fund because the maximum amount at risk is the premium paid for the options plus transaction costs. However, there may be circumstances when the purchase of an option on a futures contract would result in a loss to a Fund while the purchase or sale of the futures contract would not have resulted in a loss, such as when there is no movement in the price of the underlying securities. INDEX WARRANTS Research Enhanced Index Fund may purchase put warrants and call warrants whose values vary depending on the change in the value of one or more specified securities indices ("Index Warrants"). Index Warrants are generally issued by banks or other financial institutions and give the holder the right, at any time during the term of the warrant, to receive upon exercise of the warrant a cash payment from the issuer, based on the value of the underlying index at the time of exercise. In general, if the value of the underlying index rises above the exercise price of the Index Warrant, the holder of a call warrant will be entitled to receive a cash payment from the issuer upon exercise, based on the difference between the value of the index and the exercise price of the warrant; if the value of the underlying index falls, the holder of a put warrant will be entitled to receive a cash payment from the issuer upon exercise, based on the difference between the 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 Research Enhanced Index Fund were not to exercise an Index Warrant prior to its expiration, then the Fund would lose the amount of the purchase price paid by it for the warrant. Research Enhanced Index Fund will normally use Index Warrants in a manner similar to its use of options on securities indices. The risks of the Fund's use of Index Warrants are generally similar to those relating to its use of index options. Unlike most index options, however, Index Warrants are issued in limited amounts and are not obligations of a regulated clearing agency, but are backed only by the credit of the bank or other institution that issues the warrant. Also, Index Warrants generally have longer terms than index options. Although Research Enhanced Index Fund will normally invest only in exchange-listed warrants, Index Warrants are not likely to be as liquid as certain index options backed by a recognized clearing agency. In addition, the terms of Index Warrants may limit the Fund's ability to exercise the warrants at such time, or in such quantities, as the Fund would otherwise wish to do. FOREIGN CURRENCY FUTURES CONTRACTS Each Fund (other than Financial Services Fund, Growth and Income Fund, and MagnaCap Fund) may use foreign currency future contracts for hedging purposes. A foreign currency futures contract provides for the future sale by one party and 56 purchase by another party of a specified quantity of a foreign currency at a specified price and time. A public market exists in futures contracts covering several foreign currencies, including the Australian dollar, the Canadian dollar, the British pound, the Japanese yen, the Swiss franc, and certain multinational currencies such as the European euro. Other foreign currency futures contracts are likely to be developed and traded in the future. The Funds will only enter into futures contracts and futures options which are standardized and traded on a U.S. or foreign exchange, board of trade, or similar entity, or quoted on an automated quotation system. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS There are several risks related to the use of futures as a hedging device. One risk arises because of the imperfect correlation between movements in the price of the futures contract and movements in the price of the securities which are the subject of the hedge. The price of the future may move more or less than the price of the securities being hedged. If the price of the future moves less than the price of the securities which are the subject of the hedge, the hedge will not be fully effective, but if the price of the securities being hedged has moved in an unfavorable direction, a Fund would be in a better position than if it had not hedged at all. If the price of the securities being hedged has moved in a favorable direction, this advantage will be partially offset by the loss on the future. If the price of the future moves more than the price of the hedged securities, the Fund will experience either a loss or a gain on the future which will not be completely offset by movements in the price of the securities which are subject to the hedge. To compensate for the imperfect correlation of movements in the price of securities being hedged and movements in the price of the futures contract, a Fund may buy or sell futures contracts in a greater dollar amount than the dollar amount of securities being hedged if the historical volatility of the prices of such securities has been greater than the historical volatility over such time period of the future. Conversely, the Fund may buy or sell fewer futures contracts if the historical volatility of the price of the securities being hedged is less than the historical volatility of the futures contract being used. It is possible that, when the Fund has sold futures to hedge its portfolio against a decline in the market, the market may advance while the value of securities held in the Fund's portfolio may decline. If this occurs, the Fund will lose money on the future and also experience a decline in value in its portfolio securities. However, the Investment Adviser or Sub-Adviser believes that over time the value of a diversified portfolio will tend to move in the same direction as the market indices upon which the futures are based. When futures are purchased to hedge against a possible increase in the price of securities before a Fund is able to invest its cash (or cash equivalents) in securities (or options) in an orderly fashion, it is possible that the market may decline instead. If the Fund then decides not to invest in securities or options at that time because of concern as to possible further market decline or for other reasons, it will realize a loss on the futures contract that is not offset by a reduction in the price of securities purchased. In addition to the possibility that there may be an imperfect correlation, or no correlation at all, between movements in the futures and the securities being hedged, the price of futures may not correlate perfectly with movement in the stock index or cash market due to certain market distortions. All participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions, which could distort the normal relationship between the index or cash market and futures markets. In addition, the deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may also cause temporary price distortions. As a result of price distortions in the futures market and the imperfect correlation between movements in the cash market and the price of securities and movements in the price of futures, a correct forecast of general trends by the Investment Adviser or Sub-Adviser may still not result in a successful hedging transaction over a very short time frame. 57 Positions in futures may be closed out only on an exchange or board of trade which provides a secondary market for such futures. Although the Funds intend to purchase or sell futures only on exchanges or boards of trade where there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange or board of trade will exist for any particular contract or at any particular time. In such event, it may not be possible to close a futures position, and in the event of adverse price movements, the Funds would continue to be required to make daily cash payments of variation margin. When futures contracts have been used to hedge portfolio securities, such securities will not be sold until the futures contract can be terminated. In such circumstances, an increase in the price of the securities, if any, may partially or completely offset losses on the futures contract. However, as described above, there is no guarantee that the price of the securities will in fact correlate with the price movements in the futures contract and thus provide an offset to losses on a futures contract. Most United States futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of futures contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some futures traders to substantial losses. Successful use of futures by a Fund depends on the Investment Adviser's or Sub-Adviser's ability to predict correctly movements in the direction of the market. For example, if the Fund hedges against the possibility of a decline in the market adversely affecting stocks held in its portfolio and stock prices increase instead, the Fund will lose part or all of the benefit of the increased value of the stocks which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Fund has insufficient cash, it may have to sell securities to meet daily variation margin requirements. Such sales of securities may be, but will not necessarily be, at increased prices which reflect the rising market. The Fund may have to sell securities at a time when it may be disadvantageous to do so. In the event of the bankruptcy of a broker through which a Fund engages in transactions in futures contracts or options, the Fund could experience delays and losses in liquidating open positions purchased or sold through the broker, and incur a loss of all or part of its margin deposits with the broker. INTEREST RATE AND CURRENCY SWAPS The Funds that comprise Pilgrim Mutual Funds and Pilgrim Funds Trust may enter into interest rate and currency swap transactions and purchase or sell interest rate and currency caps and floors, and may enter into currency swap cap transactions. An interest rate or currency swap involves an agreement between a Fund and another party to exchange payments calculated as if they were interest on a specified ("notional") principal amount (e.g., an exchange of floating rate payments by one party for fixed rate payments by the other). An interest rate cap or floor entitles the purchaser, in exchange for a premium, to receive payments of interest on a notional principal amount from the seller of the cap or floor, to the extent that a specified reference rate exceeds or falls below a predetermined level. A Fund usually enters into such transactions on a "net" basis, with the Fund receiving or paying, as the case may be, only the net amount of the two payment streams. The net amount of the excess, if any, of a Fund's obligations over its entitlements with respect to each swap is accrued on a daily basis, and an amount of cash or high-quality liquid securities having an aggregate net asset value at least equal to the accrued excess is maintained in a segregated account by the Trust's custodian. If a Fund enters into a swap on other than a net basis, or sells caps or floors, the Fund maintains a segregated account in the full amount accrued on a daily basis of the Fund's obligations with respect to the transaction. Such segregated accounts are maintained in accordance with applicable regulations of the Commission. 58 A Fund will not enter into any of these derivative transactions unless the unsecured senior debt or the claims paying ability of the other party to the transaction is rated at least "high quality" at the time of purchase by at least one of the established rating agencies (e.g., AAA or AA by S&P). The swap market has grown substantially in recent years, with a large number of banks and investment banking firms acting both as principals and agents utilizing standard swap documentation, and the Investment Adviser or Sub-Adviser has determined that the swap market has become relatively liquid. Swap transactions do not involve the delivery of securities or other underlying assets or principal, and the risk of loss with respect to such transactions is limited to the net amount of payments that the Fund is contractually obligated to make or receive. Caps and floors are more recent innovations for which standardized documentation has not yet been developed; accordingly, they are less liquid than swaps, and caps and floors purchased by a Fund are considered to be illiquid assets. INTEREST RATE SWAPS As indicated above, an interest rate swap is a contract between two entities ("counterparties") to exchange interest payments (of the same currency) between the parties. In the most common interest rate swap structure, one counterparty agrees to make floating rate payments to the other counterparty, which in turn makes fixed rate payments to the first counterparty. Interest payments are determined by applying the respective interest rates to an agreed upon amount, referred to as the "notional principal amount." In most such transactions, the floating rate payments are tied to the London Interbank Offered Rate, which is the offered rate for short-term Eurodollar deposits between major international banks. As there is no exchange of principal amounts, an interest rate swap is not an investment or a borrowing. CROSS-CURRENCY SWAPS A cross-currency swap is a contract between two counterparties to exchange interest and principal payments in different currencies. A cross-currency swap normally has an exchange of principal at maturity (the final exchange); an exchange of principal at the start of the swap (the initial exchange) is optional. An initial exchange of notional principal amounts at the spot exchange rate serves the same function as a spot transaction in the foreign exchange market (for an immediate exchange of foreign exchange risk). An exchange at maturity of notional principal amounts at the spot exchange rate serves the same function as a forward transaction in the foreign exchange market (for a future transfer of foreign exchange risk). The currency swap market convention is to use the spot rate rather than the forward rate for the exchange at maturity. The economic difference is realized through the coupon exchanges over the life of the swap. In contrast to single currency interest rate swaps, cross-currency swaps involve both interest rate risk and foreign exchange risk. SWAP OPTIONS The Growth Opportunities Fund, MidCap Opportunities Fund, SmallCap Opportunities Fund and the Funds that comprise Pilgrim Mayflower Trust may invest in swap options. A swap option is a contract that gives a counterparty the right (but not the obligation) to enter into a new swap agreement or to shorten, extend, cancel or otherwise change an existing swap agreement, at some designated future time on specified terms. It is different from a forward swap, which is a commitment to enter into a swap that starts at some future date with specified rates. A swap option may be structured European-style (exercisable on the pre-specified date) or American-style (exercisable during a designated period). The right pursuant to a swap option must be exercised by the right holder. The buyer of the right to a swap option is said to own a call. 59 CAPS AND FLOORS The Funds indicated above may invest in interest rate caps and floors and currency swap cap transactions. An interest rate cap is a right to receive periodic cash payments over the life of the cap equal to the difference between any higher actual level of interest rates in the future and a specified strike (or "cap") level. The cap buyer purchases protection for a floating rate move above the strike. An interest rate floor is the right to receive periodic cash payments over the life of the floor equal to the difference between any lower actual level of interest rates in the future and a specified strike (or "floor") level. The floor buyer purchases protection for a floating rate move below the strike. The strikes are typically based on the three-month LIBOR (although other indices are available) and are measured quarterly. Rights arising pursuant to both caps and floors are exercised automatically if the strike is in the money. Caps and floors eliminate the risk that the buyer fails to exercise an in-the-money option. RISKS ASSOCIATED WITH SWAPS, CAPS AND FLOORS The risks associated with interest rate and currency swaps and interest rate caps and floors are similar to those described above with respect to dealer options. In connection with such transactions, a Fund relies on the other party to the transaction to perform its obligations pursuant to the underlying agreement. If there were a default by the other party to the transaction, the Fund would have contractual remedies pursuant to the agreement, but could incur delays in obtaining the expected benefit of the transaction or loss of such benefit. In the event of insolvency of the other party, the Fund might be unable to obtain its expected benefit. In addition, while each Fund will seek to enter into such transactions only with parties which are capable of entering into closing transactions with the Fund, there can be no assurance that a Fund will be able to close out such a transaction with the other party, or obtain an offsetting position with any other party, at any time prior to the end of the term of the underlying agreement. This may impair a Fund's ability to enter into other transactions at a time when doing so might be advantageous. NON-HEDGING STRATEGIC TRANSACTIONS A Fund's options, futures and swap transactions will generally be entered into for hedging purposes to protect against possible changes in the market values of securities held in or to be purchased for the Fund's portfolio resulting from securities markets, currency or interest rate fluctuations, to protect the Fund's unrealized gains in the values of its portfolio securities, to facilitate the sale of such securities for investment purposes, to manage the effective maturity or duration of the Fund's portfolio, or to establish a position in the derivatives markets as a temporary substitute for purchase or sale of particular securities. Each Fund's net loss exposure resulting from transactions entered into for each purposes will not exceed 5% of the Fund's net assets at any one time and, to the extent necessary, the Fund will close out transactions in order to comply with this limitation. Such transactions are subject to the limitations described above under "Options," "Futures Contracts," and "Interest Rate and Currency Swaps." RESTRICTED AND ILLIQUID SECURITIES Each Fund may invest in illiquid, restricted, or not readily marketable securities, except MagnaCap Fund, MidCap Opportunities, Growth Opportunities, SmallCap Opportunities and the Funds that comprise Mayflower Trust may not invest in restricted securities (Mayflower Trust is also not permitted to invest in illiquid securities), if the Investment Adviser or Sub-Adviser believes that it presents an attractive investment opportunity. Generally, a security is considered illiquid if it cannot be disposed of within seven days. Its illiquidity might prevent the sale of such a security at a time when the Investment Adviser or a Sub-Adviser might wish to sell, and these securities could have the effect of decreasing the overall level of a Fund's liquidity. Further, the lack of an established secondary market may make it more difficult to value illiquid securities, requiring the Funds to rely on 60 judgments that may be somewhat subjective in determining value, which could vary from the amount that a Fund could realize upon disposition. Because of the nature of these securities, a considerable period of time may elapse between the Funds' decision to dispose of these securities and the time when the Funds are able to dispose of them, during which time the value of the securities could decline. The expenses of registering restricted securities (excluding securities that may be resold by the Funds pursuant to Rule 144A) may be negotiated at the time such securities are purchased by the Funds. When registration is required before the securities may be resold, a considerable period may elapse between the decision to sell the securities and the time when the Funds would be permitted to sell them. Thus, the Funds may not be able to obtain as favorable a price as that prevailing at the time of the decision to sell. The Funds may also acquire securities through private placements. Such securities may have contractual restrictions on their resale, which might prevent their resale by the Funds at a time when such resale would be desirable. Securities that are not readily marketable will be valued by the Funds in good faith pursuant to procedures adopted by the Company's Board of Directors/Trustees. Restricted securities, including private placements, are subject to legal or contractual restrictions on resale. They can be eligible for purchase without SEC registration by certain institutional investors known as "qualified institutional buyers," and under the Funds' procedures, restricted securities could be treated as liquid. However, some restricted securities may be illiquid and restricted securities that are treated as liquid could be less liquid than registered securities traded on established secondary markets. The Funds may not invest more than 15% of its net assets in illiquid securities, measured at the time of investment. Each Fund will adhere to a more restrictive investment limitation on its investments in illiquid or restricted securities as required by the securities laws of those jurisdictions where shares of the Funds are registered for sale. OTHER INVESTMENT COMPANIES Each Fund except MagnaCap Fund and the Funds that comprise Pilgrim Mayflower Trust may invest in other investment companies ("Underlying Funds"). Each Fund may not (i) invest more than 10% of its total assets in Underlying Funds, (ii) invest more than 5% of its total assets in any one Underlying Fund, or (iii) purchase greater than 3% of the total outstanding securities of any one Underlying Fund. The Funds may also make indirect foreign investments through other investment companies that have comparable investment objectives and policies as the Funds. In addition to the advisory and operational fees a Fund bears directly in connection with its own operation, the Fund would also bear its pro rata portions of each other investment company's advisory and operational expenses. INVESTMENT COMPANIES THAT INVEST IN SENIOR LOANS. Balanced Fund may invest in investment companies that invest primarily in interests in variable or floating rate loans or notes ("Senior Loans"). Senior Loans in most circumstances are fully collateralized by assets of a corporation, partnership, limited liability company, or other business entity. Senior Loans vary from other types of debt in that they generally hold a senior position in the capital structure of a borrower. Thus, Senior Loans are generally repaid before unsecured bank loans, corporate bonds, subordinated debt, trade creditors, and preferred or common stockholders. Substantial increases in interest rates may cause an increase in loan defaults as borrowers may lack resources to meet higher debt service requirements. The value of a Fund's assets may also be affected by other uncertainties such as economic developments affecting the market for Senior Loans or affecting borrowers generally. Senior Loans usually include restrictive covenants which must be maintained by the borrower. Under certain interests in Senior Loans, an investment company investing in a Senior Loan may have an obligation to make additional loans upon demand by the borrower. Senior Loans, unlike certain bonds, usually do not have call protection. This means that interests, while having a stated one to ten-year term, may be prepaid, often without penalty. The rate of such 61 prepayments may be affected by, among other things, general business and economic conditions, as well as the financial status of the borrower. Prepayment would cause the actual duration of a Senior Loan to be shorter than its stated maturity. CREDIT RISK. Information about interests in Senior Loans generally is not in the public domain, and interests are generally not currently rated by any nationally recognized rating service. Senior Loans are subject to the risk of nonpayment of scheduled interest or principal payments. Issuers of Senior Loans generally have either issued debt securities that are rated lower than investment grade, or, if they had issued debt securities, such debt securities would likely be rated lower than investment grade. However, unlike other types of debt securities, Senior Loans are generally fully collateralized. In the event of a failure to pay scheduled interest or principal payments on Senior Loans, an investment company investing in that Senior Loan could experience a reduction in its income, and would experience a decline in the market value of the particular Senior Loan so affected, and may experience a decline in the NAV or the amount of its dividends. In the event of a bankruptcy of the borrower, the investment company could experience delays or limitations with respect to its ability to realize the benefits of the collateral securing the Senior Loan. COLLATERAL. Senior Loans typically will be secured by pledges of collateral from the borrower in the form of tangible assets and intangible assets. In some instances, an investment company may invest in Senior Loans that are secured only by stock of the borrower or its subsidiaries or affiliates. The value of the collateral may decline below the principal amount of the Senior Loan subsequent to an investment in such Senior Loan. In addition, to the extent that collateral consists of stock of the borrower or its subsidiaries or affiliates, there is a risk that the stock may decline in value, be relatively illiquid, or may lose all or substantially all of its value, causing the Senior Loan to be undercollateralized. LIMITED SECONDARY MARKET. Although it is growing, the secondary market for Senior Loans is currently limited. There is no organized exchange or board of trade on which Senior Loans may be traded; instead, the secondary market for Senior Loans is an unregulated inter-dealer or inter-bank market. Accordingly, Senior Loans may be illiquid. In addition, Senior Loans generally require the consent of the borrower prior to sale or assignment. These consent requirements may delay or impede a fund's ability to sell Senior Loans. In addition, because the secondary market for Senior Loans may be limited, it may be difficult to value Senior Loans. Market quotations may not be available and valuation may require more research than for liquid securities. In addition, elements of judgment may play a greater role in the valuation, because there is less reliable, objective data available. HYBRID LOANS. The growth of the syndicated loan market has produced loan structures with characteristics similar to Senior Loans but which resemble bonds in some respects, and generally offer less covenant or other protections than traditional Senior Loans while still being collateralized ("Hybrid Loans"). With Hybrid Loans, a fund may not possess a senior claim to all of the collateral securing the Hybrid Loan. Hybrid Loans also may not include covenants that are typical of Senior Loans, such as covenants requiring the maintenance of minimum interest coverage ratios. As a result, Hybrid Loans present additional risks besides those associated with traditional Senior Loans, although they may provide a relatively higher yield. Because the lenders in Hybrid Loans waive or forego certain loan covenants, their negotiating power or voting rights in the event of a default may be diminished. As a result, the lenders' interests may not be represented as significantly as in the case of a conventional Senior Loan. In addition, because an investment company's security interest in some of the collateral may be subordinate to other creditors, the risk of nonpayment of interest or loss of principal may be greater than would be the case with conventional Senior Loans. SUBORDINATED AND UNSECURED LOANS. Certain investment companies may invest in subordinated and unsecured loans. The primary risk arising from a holder's subordination is the potential loss in the event of default by the issuer of the 62 loans. Subordinated loans in an insolvency bear an increased share, relative to senior secured lenders, of the ultimate risk that the borrower's assets are insufficient to meet its obligations to its creditors. Unsecured loans are not secured by any specific collateral of the borrower. They do not enjoy the security associated with collateralization and may pose a greater risk of nonpayment of interest or loss of principal than do secured loans. GUARANTEED INVESTMENT CONTRACTS The Funds that comprise the Pilgrim Funds Trust may invest in Guaranteed Investment Contracts ("GICs") issued by insurance companies. Pursuant to such contracts, the Fund makes cash contributions to a deposit fund of the insurance company's general account. The insurance company then credits to the Fund on a monthly basis guaranteed interest which is based on an index. The GICs provide that this guaranteed interest will not be less than a certain minimum rate. The insurance company may assess periodic charges against a GIC for expense and service costs allocable to it, and the charges will be deducted from the value of the deposit fund. In addition, because the Funds may not receive the principal amount of a GIC from the insurance company on seven days' notice or less, the GIC is considered an illiquid investment, and, together with other instruments invested in by a Fund which are not readily marketable, will not exceed 15% (10% in the case of Money Market Funds) of a Fund's net assets. The term of a GIC will be one year or less. In determining average weighted portfolio maturity, a GIC will be deemed to have a maturity equal to the period of time remaining until the next readjustment of the guaranteed interest rate. PRIVATE FUNDS The funds that comprise the Pilgrim Funds Trust may invest in U.S. or foreign private limited partnerships or other investment funds ("Private Funds"). Investments in Private Funds may be highly speculative and volatile. Because Private Funds generally are investment companies for purposes of the 1940 Act, the Fund's ability to invest in them will be limited. In addition, Fund shareholders will remain subject to the Fund's expenses while also bearing their pro rata share of the operating expenses of the Private Funds. The ability of the Fund to dispose of interests in Private Funds is very limited and involves risks, including loss of the Fund's entire investment in the Private Fund. REPURCHASE AGREEMENTS Each Fund may enter into repurchase agreements with respect to its portfolio securities. Such agreements may be considered to be loans by the Funds for purposes of the 1940 Act. Each repurchase agreement must be collateraltized fully, in accordance with the provisions of Rule 5b-3 under the 1940 Act, at all times. Pursuant to such repurchase agreements, the Fund acquires securities from financial institutions such as brokers, dealers and banks, subject to the seller's agreement to repurchase and the Fund's agreement to resell such securities at a mutually agreed upon date and price. The term of such an agreement is generally quite short, possibly overnight or for a few days, although it may extend over a number of months (up to one year) from the date of delivery. The repurchase price generally equals the price paid by the Fund plus interest negotiated on the basis of current short-term rates (which may be more or less than the rate on the underlying portfolio security). The securities underlying a repurchase agreement will be marked to market every business day so that the value of the collateral is at least equal to the value of the loan, including the accrued interest thereon, and the Investment Adviser or Sub-Adviser will monitor the value of the collateral. Securities subject to repurchase agreements will be held by the Custodian or in the Federal Reserve/Treasury Book-Entry System or an equivalent foreign system. If the seller defaults on its repurchase obligation, the Fund holding the repurchase agreement will suffer a loss to the extent that the proceeds from a sale of the underlying securities is less than the repurchase price under the agreement. Bankruptcy or insolvency of such a defaulting seller may cause the Fund's rights with respect to such securities to be delayed or limited. To mitigate this risk, each Fund may only enter into repurchase agreements that qualify for an exclusion from any automatic stay of creditors' rights against the counterparty under applicable insolvency law in the event of the counterparty's insolvency. 63 Pursuant to an Exemptive Order under Section 17(d) and Rule 17d-1 obtained by SmallCap Opportunities and Growth Opportunities Funds, on March 5, 1991, such Funds may deposit uninvested cash balances into a single joint account to be used to enter into repurchase agreements. As an alternative to using repurchase agreements, each of the funds which comprise Mayflower Trust, MidCap Opportunities Fund, SmallCap Opportunities Fund, and Growth Opportunities 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 TRANSACTIONS The Funds (except Financial Services Fund and MagnaCap Fund) may enter into reverse repurchase agreement transactions. Such transactions involve the sale of U.S. Government securities held by the Fund, with an agreement that the Fund will repurchase such securities at an agreed upon price and date. The Fund may employ reverse repurchase agreements when necessary to meet unanticipated net redemptions so as to avoid liquidating other portfolio investments during unfavorable market conditions. At the time it enters into a reverse repurchase agreement, the Fund will place in a segregated custodial account cash and/or liquid assets having a dollar value equal to the repurchase price. Reverse repurchase agreements are considered to be borrowings under the Investment Company Act of 1940 (the "1940 Act"). Reverse repurchase agreements, together with other permitted borrowings, may constitute up to 33 1/3% of the Fund's total assets. Under the 1940 Act, the Fund is required to maintain continuous asset coverage of 300% with respect to borrowings and to sell (within three days) sufficient portfolio holdings to restore such coverage if it should decline to less than 300% due to market fluctuations or otherwise, even if such liquidations of the Fund's holdings may be disadvantageous from an investment standpoint. Leveraging by means of borrowing may exaggerate the effect of any increase or decrease in the value of portfolio securities or the Fund's net asset value, and money borrowed will be subject to interest and other costs (which may include commitment fees and/or the cost of maintaining minimum average balances) which may or may not exceed the income received from the securities purchased with borrowed funds. In order to enhance portfolio returns and manage prepayment risks, the Funds (except Financial Services Fund, Growth and Income Fund, and MagnaCap Fund) may engage in dollar roll transactions with respect to mortgage securities issued by GNMA, FNMA and FHLMC. In a dollar roll transaction, a Fund sells a mortgage security held in the portfolio to a financial institution such as a bank or broker-dealer, and simultaneously agrees to repurchase a substantially similar security (same type, coupon and maturity) from the institution at a later date at an agreed upon price. The mortgage securities that are repurchased will bear the same interest rate as those sold, but generally will be collateralized by different pools of mortgages with different prepayment histories. During the period between the sale and repurchase, the Fund will not be entitled to receive interest and principal payments on the securities sold. Proceeds of the sale will be invested in short-term instruments, and the income from these investments, together with any additional fee income received on the sale, could generate income for the Fund exceeding the yield on the sold security. When a Fund enters into a dollar roll transaction, cash and/or liquid assets of the Fund, in a dollar amount sufficient to make payment for the obligations to be repurchased, are segregated with its custodian at the trade date. These securities are marked daily and are maintained until the transaction is settled. Whether a reverse repurchase agreement or dollar-roll transaction produces a gain for a Fund depends upon the "costs of the agreements" (e.g., a function of the difference between the amount received upon the sale of its securities and the amount to be spent upon the purchase of the same or "substantially the same" security) and the income and gains of the securities purchased with the proceeds received from the sale of the mortgage security. If the income and 64 gains on the securities purchased with the proceeds of the agreements exceed the costs of the agreements, then a Fund's net asset value will increase faster than otherwise would be the case; conversely, if the income and gains on such securities purchased fail to exceed the costs of the structure, net asset value will decline faster than otherwise would be the case. Reverse repurchase agreements and dollar-roll transactions, as leveraging techniques, may increase a Fund's yield in the manner described above; however, such transactions also increase a Fund's risk to capital and may result in a shareholder's loss of principal. LENDING OF PORTFOLIO SECURITIES In order to generate additional income, each Fund except Financial Services Fund and Growth and Income Fund may lend portfolio securities in an amount up to 33-1/3% of total Fund assets to broker-dealers, major banks, or other recognized domestic institutional borrowers of securities. No lending may be made with any companies affiliated with the Investment Adviser. The Funds may lend securities only to financial institutions such as banks, broker/ dealers and other recognized institutional investors in amounts up to 30% of the Fund's total assets. These loans earn income for the Funds and are collateralized by cash, securities or letters of credit. The Funds might experience a loss if the financial institution defaults on the loan. The borrower at all times during the loan must maintain with the Fund cash or cash equivalent collateral or provide to the Funds an irrevocable letter of credit equal in value to at least 100% of the value of the securities loaned. During the time portfolio securities are on loan, the borrower pays the Funds any interest paid on such securities, and the Funds may invest the cash collateral and earn additional income, or it may receive an agreed-upon amount of interest income from the borrower who has delivered equivalent collateral or a letter of credit. Loans are subject to termination at the option of the Funds or the borrower at any time. The Funds may pay reasonable administrative and custodial fees in connection with a loan and may pay a negotiated portion of the income earned on the cash to the borrower or placing broker. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the collateral should the borrower fail financially. LOAN PARTICIPATION AND ASSIGNMENTS Growth Opportunities, MidCap Opportunities, SmallCap Opportunities and the Funds that comprise Pilgrim Mayflower Trust may invest in loan participation and loan assignments. A Fund's investment in loan participation 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 participation and only upon receipt by the lender of the payments from the borrower. In connection with purchasing participation, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, nor any right of set-off against the borrower, and the Fund may not directly benefit from any collateral supporting the loan in which it has purchased the participation. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the participation. In the event of the insolvency of the lender selling a participation, the Fund may be treated as a general creditor of the lender and may not benefit from any set-off between the lender and the borrower. When a Fund purchases a loan assignment from lenders, it will acquire direct rights against the borrowers on the loan. Because Assignments are arranged through private negotiations between potential assignees and potential assignors, however, the rights and obligations acquired by the Fund as the purchaser of an Assignment may differ from, and be more limited than, those held by the assigning lender. Because there is no liquid market for such securities, the Fund anticipates that such securities could be sold only to a limited number of institutional investors. The lack of a liquid secondary market may have an adverse impact on the value of such securities and a Fund's ability to dispose of particular assignments or participations when necessary to meet redemptions of Fund shares, to meet the Fund's liquidity needs or when necessary in response 65 to a specific economic event, such as deterioration in the creditworthiness of the borrower. The lack of a liquid secondary market for assignments and participations also may make it more difficult for a Fund to value these securities for purposes of calculating its net asset value. TO BE ANNOUNCED SALE COMMITMENTS The funds that comprise Pilgrim Mutual Funds, Mayflower Trust and MidCap Opportunities Fund, may enter into To Be Announced ("TBA") sale commitments wherein the unit price and the estimated principal amount are established upon entering into the contract, with the actual principal amount being within a specified range of the estimate. A Fund will enter into TBA sale commitments to hedge its portfolio positions or to sell mortgage-backed securities it owns under delayed delivery arrangements. Proceeds of TBA sale commitments are not received until the contractual settlement date. During the time a TBA sale commitment is outstanding, the Fund will maintain, in a segregated account, cash or marketable securities in an amount sufficient to meet the purchase price. Unsettled TBA sale commitments are valued at current market value of the underlying securities. If the TBA sale commitment is closed through the acquisition of an offsetting purchase commitment, the Fund realizes a gain or loss on the commitment without regard to any unrealized gain or loss on the underlying security. If the Fund delivers securities under the commitment, the Fund realizes a gain or loss from the sale of the securities, based upon the unit price established at the date the commitment was entered into. FLOATING OR VARIABLE RATE INSTRUMENTS The Funds that comprise Mayflower Trust, MidCap Opportunities Fund, Pilgrim Funds Trust, Pilgrim Mutual Funds, SmallCap Opportunities Fund, and Growth Opportunities 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.). A Fund would anticipate using these bonds as cash equivalents, pending longer term investment of its funds. Other longer term fixed-rate bonds, with a right of the holder to request redemption at certain times (often annually, after the lapse of an intermediate term), may also be purchased by a Fund. These bonds are more defensive than conventional long-term bonds (protecting to some degree against a rise in interest rates), while providing greater opportunity than comparable intermediate term bonds since the Fund may retain the bond if interest rates decline. By acquiring these kinds of bonds, a Fund obtains the contractual right to require the issuer of the security, or some other person (other than a broker or dealer), to purchase the security at an agreed upon price, which right is contained in the obligation itself rather than in a separate agreement with the seller or some other person. A Fund will purchase securities on a when-issued, forward commitment or delayed settlement basis only with the intention of completing the transaction. If deemed advisable as a matter of investment strategy, however, a Fund may dispose of or renegotiate a commitment after it is entered into, and may sell securities it has committed to purchase before those securities are delivered to the Fund on the settlement date. In these cases the Fund may realize a taxable capital gain or loss. When a Fund engages in when-issued, forward commitment and delayed settlement transactions, it relies on the other party to consummate the trade. Failure of such party to do so may result in a Fund's incurring a loss or missing an opportunity to obtain a price credited to be advantageous. The market value of the securities underlying a when-issued purchase, forward commitment to purchase securities, or a delayed settlement and any subsequent fluctuations in their market value is taken into account when determining the market value of a Fund starting on the day the Fund agrees to purchase the securities. A Fund does not earn interest on the securities it has committed to purchase until they are paid for and delivered on the settlement date. 66 SHORT SALES The Funds that comprise Mayflower Trust, MidCap Growth Fund, SmallCap Growth Fund, MidCap Opportunities Fund, SmallCap Opportunities Fund, and Growth Opportunities Fund may make short sales of securities they own or have the right to acquire at no added cost through conversion or exchange of other securities they own (referred to as short sales "against the box"). MidCap Growth Fund and SmallCap Growth Fund may also make short sales of securities which they do not own or have the right to acquire. In a short sale that is not "against the box," a Fund sells a security which it does not own, in anticipation of a decline in the market value of the security. To complete the sale, the Fund must borrow the security generally from the broker through which the short sale is made) in order to make delivery to the buyer. The Fund must replace the security borrowed by purchasing it at the market price at the time of replacement. The Fund is said to have a "short position" in the securities sold until it delivers them to the broker. The period during which the Fund has a short position can range from one day to more than a year. Until the Fund replaces the security, the proceeds of the short sale are retained by the broker, and the Fund must pay to the broker a negotiated portion of any dividends or interest which accrue during the period of the loan. To meet current margin requirements, the Fund must deposit with the broker additional cash or securities so that it maintains with the broker a total deposit equal to 150% of the current market value of the securities sold short (100% of the current market value if a security is held in the account that is convertible or exchangeable into the security sold short within 90 days without restriction other than the payment of money). Short sales by a Fund that are not made "against the box" create opportunities to increase the Fund's return but, at the same time, involve specific risk considerations and may be considered a speculative technique. Since the Fund in effect profits from a decline in the price of the securities sold short without the need to invest the full purchase price of the securities on the date of the short sale, the Fund's net asset value per share tends to increase more when the securities it has sold short decrease in value, and to decrease more when the securities it has sold short increase in value, than would otherwise be the case if it had not engaged in such short sales. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium, dividends or interest the Fund may be required to pay in connection with the short sale. Short sales theoretically involve unlimited loss potential, as the market price of securities sold short may continually increase, although a Fund may mitigate such losses by replacing the securities sold short before the market price has increased significantly. Under adverse market conditions the Fund might have difficulty purchasing securities to meet its short sale delivery obligations, and might have to sell portfolio securities to raise the capital necessary to meet its short sale obligations at a time when fundamental investment considerations would not favor such sales. If a Fund makes a short sale "against the box," the Fund would not immediately deliver the securities sold and would not receive the proceeds from the sale. The seller is said to have a short position in the securities sold until it delivers the securities sold, at which time it receives the proceeds of the sale. To secure its obligation to deliver securities sold short, a Fund will deposit in escrow in a separate account with the Custodian an equal amount of the securities sold short or securities convertible into or exchangeable for such securities. The Fund can close out its short position by purchasing and delivering an equal amount of the securities sold short, rather than by delivering securities already held by the Fund, because the Fund might want to continue to receive interest and dividend payments on securities in its portfolio that are convertible into the securities sold short. A Fund's decision to make a short sale "against the box" may be a technique to hedge against market risks when the Investment Adviser or Sub-Adviser believes that the price of a security may decline, causing a decline in the value of a security owned by the Fund or a security convertible into or exchangeable for such security. In such case, any future losses in the Fund's long position would be reduced by a gain in the short position. The extent to 67 which such gains or losses in the long position are reduced will depend upon the amount of securities sold short relative to the amount of the securities the Fund owns, either directly or indirectly, and, in the case where the Fund owns convertible securities, changes in the investment values or conversion premiums of such securities. In the view of the Commission, a short sale involves the creation of a "senior security" as such term is defined in the Investment Company Act, unless the sale is "against the box" and the securities sold short are placed in a segregated account (not with the broker), or unless the Fund's obligation to deliver the securities sold short is "covered" by placing in a segregated account (not with the broker) cash, U.S. Government securities or other liquid debt or equity securities in an amount equal to the difference between the market value of the securities sold short at the time of the short sale and any such collateral required to be deposited with a broker in connection with the sale (not including the proceeds from the short sale), which difference is adjusted daily for changes in the value of the securities sold short. The total value of the cash, U.S. Government securities or other liquid debt or equity securities deposited with the broker and otherwise segregated may not at any time be less than the market value of the securities sold short at the time of the short sale. Each Fund will comply with these requirements. In addition, as a matter of policy, the Trust's Board of Directors/Trustees has determined that no Fund will make short sales of securities or maintain a short position if to do so could create liabilities or require collateral deposits and segregation of assets aggregating more than 25% of the Fund's total assets, taken at market value. The extent to which a Fund may enter into short sales transactions may be limited by the Internal Revenue Code requirements for qualification of the Fund as a regulated investment company. See "Dividends, Distributions and Taxes." DIVERSIFICATION Each Fund except Internet Fund is "diversified" within the meaning of the Investment Company Act. In order to qualify as diversified, a Fund must diversify its holdings so that at all times at least 75% of the value of its total assets is represented by cash and cash items (including receivables), securities issued or guaranteed as to principal or interest by the United States or its agencies or instrumentalities, securities of other investment companies, and other securities (for this purpose other securities of any one issuer are limited to an amount not greater than 5% of the value of the total assets of the Fund and to not more than 10% of the outstanding voting securities of the issuer). The equity securities of each issuer that are included in the investment portfolio of a Fund are purchased by the Investment Adviser or Sub-Adviser in approximately equal amounts, and the Investment Adviser or Sub-Adviser attempts to stay fully invested within the applicable percentage limitations set forth in the Prospectus. In addition, for each issuer whose securities are added to an investment portfolio, the Investment Adviser or Sub-Adviser sells the securities of one of the issuers currently included in the portfolio. Internet Fund is classified as a non-diversified investment company under the 1940 Act, which means that it is not limited by the 1940 Act in the proportion of its assets that it may invest in the obligations of a single issuer. The investment of a large percentage of the Fund's assets in the securities of a small number of issuers may cause the Fund's share price to fluctuate more than that of a diversified investment company. The Fund "concentrates" (for purposes of the 1940 Act) its assets in securities related to a particular sector or industry, which means that at least 25% of its assets will be invested in these assets at all times. As a result, the Fund may be subject to greater market fluctuation than a fund which has securities representing a broader range of investment alternatives. 68 BORROWING The Funds that comprise Pilgrim Mutual Funds may each borrow up to 20% of their total net assets for temporary, extraordinary, or emergency purposes. MagnaCap Fund may borrow from banks solely for temporary or emergency purposes, but not in an amount exceeding 5% of the value of its total assets. Financial Services Fund may borrow, only in an amount up to 15% of its total assets to obtain such short-term credits as are necessary for the clearance of securities transactions. Growth Opportunities and SmallCap Opportunities Fund may borrow up to 5% of total assets from a bank as a temporary measure for extraordinary or emergency purposes. MidCap Opportunities may borrow, only in an amount up to 10% of its total assets to obtain such short-term credits as are necessary for the clearance of securities transactions. Growth + Value Fund may not borrow any amount in excess of 10% of their respective assets other than for temporary emergency or administrative purposes. In addition, the Fund will not make additional investments when its borrowings exceed 5% of total assets. As part of its fundamental policies, the Research Enhanced Index Fund may not borrow any amount in excess of 33 1/3% of the Fund's assets, other than for temporary emergency or administrative purposes. As an operating policy, the Research Enhanced Index Fund does not intend to borrow any amount in excess of 10% of its assets, and would do so only for temporary emergency or administrative purposes. In addition, to avoid the potential leveraging of assets, this Fund will not make additional investments when its borrowings, including those investment techniques which are regarded as a form of borrowing, are in excess of 5% of total assets. If the Research Enhanced Index Fund should determine to expand its ability to borrow beyond the current operating policy, the Fund's Prospectus would be amended and shareholders would be notified. Growth and Income may borrow money from a bank not in excess of the lesser of: (a) 5% of the gross assets of the Fund at the current market value at the time of such borrowing; or (b) 10% of the gross assets of the Fund taken at cost. The Funds that comprise Pilgrim Funds Trust may borrow from banks up to 33 1/3% of the current value of its net assets to purchase securities and for temporary or emergency purposes and those borrowings may be secured by the pledge of not more than 33 1/3% of the current value of that Fund's net assets. Under the Investment Company Act of 1940, each Fund is required to maintain continuous asset coverage of 300% with respect to such borrowings and to sell (within three days) sufficient portfolio holdings to restore such coverage if it should decline to less than 300% due to market fluctuations or otherwise, even if such liquidations of the Fund's holdings may be disadvantageous from an investment standpoint. When a Fund borrows money, its share price may be subject to greater fluctuation until the borrowing is paid off. If a Fund makes additional investments while borrowings are outstanding, this may be construed as a form of leverage. Leveraging by means of borrowing may exaggerate the effect of any increase or decrease in the value of portfolio securities or the Fund's net asset value, and money borrowed will be subject to interest and other costs (which may include commitment fees and/or the cost of maintaining minimum average balances) which may or may not exceed the income received from the securities purchased with borrowed funds. INVESTMENT RESTRICTIONS All percentage limitations set forth below apply immediately after a purchase or initial investment, and any subsequent change in any applicable percentage resulting from market fluctuations will not require elimination of any security from the relevant portfolio. INVESTMENT RESTRICTIONS -- FINANCIAL SERVICES FUND The Fund has adopted the following investment restrictions as fundamental policies that cannot be changed without approval by the holders of a majority of its outstanding shares, which means the lesser of (1) 67% of the Fund's shares present at a meeting at which the holders of more than 50% of the outstanding shares are present in person or by proxy, or (2) more than 50% of the Fund's outstanding shares. The Fund may not: (1) Invest more than 25% of its total assets in any industry or group of related industries other than financial services industries, except for temporary or defensive positions. 69 (2) Borrow, except that it may borrow in an amount up to 15% of its total assets to obtain such short-term credits as are necessary for the clearance of securities transactions. (3) Invest more than 5% of the value of its net assets in marketable warrants to purchase common stock. (4) Purchase securities of any one issuer, other than U.S. Government securities, if immediately after such purchase more than 5% of the value of the Fund's total assets would be invested in such issuer or the Fund would own more than 10% of the outstanding voting securities of an issuer or more than 10% of any class of securities of an issuer, except that up to 25% of the Fund's total assets may be invested without regard to the restrictions in this Item 6. For this purpose, all outstanding bonds and other evidences of indebtedness shall be deemed within a single class regardless of maturities, priorities, coupon rates, series, designations, conversion rights, security or other differences. (5) Act as an underwriter of securities of other issuers, except, to the extent that it may be deemed to act as an underwriter in certain cases when disposing of restricted securities (See also Item 4 above.). (6) Purchase or sell real estate, commodities, commodity futures contracts, or oil or gas exploration or development programs; or sell short, or write, purchase, or sell straddles, spreads or combinations thereof. (7) Make loans, except that the Fund may purchase or hold Debt Securities in accordance with its investment policies and objectives. (8) Purchase securities on margin or hypothecate, mortgage or pledge any of its assets except for the purpose of securing borrowings permitted by Item 2 above and then only in an amount up to 15% of the value of the Fund's total assets at the time of borrowing. (9) Issue senior securities, except (1) insofar as the Fund may be deemed to have issued a senior security by reason of borrowing money in accordance with the Fund's fundamental restriction on borrowing and (2) as permitted by the Investment Company Act of 1940, as amended, and the rules and regulations promulgated thereunder or an exemption therefrom. The Fund is also subject to the following investment restrictions and policies that are not fundamental and may be changed by the Board of Directors/Trustees without shareholder approval. The Fund may not: (10) Invest in illiquid securities if, as a result, more than 15% of the Fund's net assets would be invested in such securities. INVESTMENT RESTRICTIONS -- GROWTH + VALUE FUND The Fund has adopted the following investment restrictions as fundamental policies that cannot be changed without approval by the holders of a majority (as defined in the 1940 Act) of such Fund's outstanding voting shares. The Fund may not: (1) Borrow money, issue senior securities, or pledge, mortgage or hypothecate its assets, except that it may: (a) borrow from banks but only if, immediately after such borrowing there is asset coverage of 300%, and (b) enter into transactions in options, futures, and options on futures and other transactions not deemed to involve the issuance of senior securities; 70 (2) Underwrite the securities of others; (3) Purchase or sell real property, including real estate limited partnerships (each of these Funds may purchase marketable securities of companies that deal in real estate or interests therein, including real estate investment trusts); (4) Deal in commodities or commodity contracts, except in the manner described in the current Prospectus and SAI of the Fund; (5) Make loans to other persons (but the Fund may, however, lend portfolio securities, up to 33% of net assets at the time the loan is made, to brokers or dealers or other financial institutions not affiliated with the Fund or Pilgrim, subject to conditions established by Pilgrim) (See "Lending Portfolio Securities" in this SAI), and may purchase or hold participations in loans, in accordance with the investment objectives and policies of the Fund, as described in the cur-rent Prospectus and SAI of the Fund; (6) Purchase on margin (except that for purposes of this restriction, the deposit or payment of initial or variation margin in connection with futures contracts will not be deemed to be purchases of securities on margin); (7) Sell short, except that these Funds may enter into short sales against the box; (8) Invest more than 25% of its assets in any one industry or related group of industries; (9) With respect to 75% of the Fund's assets, purchase a security (other than U.S. government obligations) if, as a result, more than 5% of the value of total assets of the Fund would be invested in securities of a single issuer; (10) Purchase a security if, as a result, more than 10% of any class of securities, or more than 10% of the outstanding voting securities of an issuer, would be held by the Fund; (11) Borrow money except to the extent permitted under the 1940 Act; The Funds are also subject to the following restrictions and policies that are not fundamental and may, therefore, be changed by the Board of Trustees (without shareholder approval). Unless otherwise indicated, a Fund may not: (1) Purchase securities of other investment companies, except in connection with a merger, consolidation or sale of assets, and except that these Funds may purchase shares of other investment companies, subject to such restrictions as may be imposed by the 1940 Act and rules thereunder or by any state in which shares of the Fund are registered; (2) Invest more than 15% of its net assets in illiquid securities; or (3) Borrow any amount in excess of 10% of their respective assets, other than for temporary emergency or administrative purposes. In addition, the Fund will not make additional investments when its borrowings exceed 5% of total assets. 71 FUNDAMENTAL INVESTMENT RESTRICTIONS -- GROWTH AND INCOME FUND The Fund has adopted the following investment restrictions that cannot be changed without shareholder approval. The Fund shareholder vote required for modification of the investment policies or restrictions listed below is the lesser of: (a) 67% or more of the voting securities present at a meeting if the holders of more than 50% are present or represented by proxy; or (b) more than 50% of the voting securities. The Fund may not: (1) Issue senior securities; (2) Underwrite securities of other issuers; (3) Purchase or sell real estate, commodity contracts or commodities (however, the Fund may purchase interests in real estate investment trusts whose securities are registered under the Securities Act of 1933 and are readily marketable); (4) Make loans to other persons except (a) through the purchase of a portion or portions of publicly distributed bonds, notes, debentures and evidences of indebtedness authorized by its investment policy, or (b) through investments in "repurchase agreements" (which are arrangements under which the Fund acquires a debt security subject to an obligation of the seller to repurchase it at a fixed price within a short period), provided that no more than 10% of the Fund's assets may be invested in repurchase agreements which mature in more than seven days; (5) Purchase the securities of another investment company or investment trust except in the open market where no profit results to a sponsor or dealer, other than the customary broker's commission; (6) Purchase any security on margin or effect a short sale of a security; (7) Buy securities from or sell securities to any of its officers and directors/trustees or those of the investment adviser or principal distributor as principal; (8) Contract to sell any security or evidence of interest therein except to the extent that the same shall be owned by the Fund; (9) Retain securities of an issuer when one or more of the officers and directors/trustees of the Fund or the investment adviser or a person owning more than 10% of the stock of either, own beneficially more than 0.5% of the securities of such issuer and the persons owning more than 0.5% of such securities together own beneficially more than 5% of the securities of such issuer; (10) Invest more than 5% of the value of its total assets in the securities of any one issuer nor acquire more than 10% of the outstanding voting securities of any one issuer; (11) Invest in companies for the purpose of exercising management or control; or (12) Concentrate its investments in a particular industry; thus the Fund will not purchase a security if the immediate effect of such purchase would be to increase the Fund's holdings in such industry above 25% of the Fund's assets. In addition to the above fundamental investment restrictions, the Fund has also adopted the following non-fundamental restrictions. The Fund has authority to borrow money from a bank not in excess of the lesser of: (a) 5% of the gross assets of the Fund at the current market value at the time of such borrowing; or 72 (b) 10% of the gross assets of the Fund taken at cost. Any such borrowing may be undertaken only as a temporary measure for extraordinary or emergency purposes. This borrowing power has not been exercised by the Fund's management. The 5% diversification limitation set forth in subparagraph (x) above does not apply to obligations issued or guaranteed as to principal and interest by the United States Government, nor does it apply to bank certificates of deposit, which are not classified by the Fund as securities for the purposes of this limitation. The Fund may not use more than 5% of its net assets to purchase illiquid securities. The Fund treats any securities subject to restrictions on repatriation for more than seven days, and securities issued in connection with foreign debt conversion programs that are restricted as to remittance of invested capital or profit, as illiquid. The Fund also treats repurchase agreements with maturities in excess of seven days as illiquid. Illiquid securities do not include securities that are restricted from trading on formal markets for some period of time but for which an active informal market exists, or securities that meet the requirements of Rule 144A under the Securities Act of 1933 and that, subject to the review by the Board of Directors/Trustees and guidelines adopted by the Board of Directors/Trustees, the Investment Adviser has determined to be liquid. INVESTMENT RESTRICTIONS -- MAGNACAP FUND The Fund has adopted the following investment restrictions as fundamental policies that cannot be changed without approval by the holders of a majority of its outstanding shares, which means the lesser of (1) 67% of the Fund's shares present at a meeting at which the holders of more than 50% of the outstanding shares are present in person or by proxy, or (2) more than 50% of the Fund's outstanding shares. The Fund may not: (1) Engage in the underwriting of securities of other issuers. (2) Invest in "restricted securities" which cannot in the absence of an exemption be sold without an effective registration statement under the Securities Act of 1933, as amended. (3) Engage in the purchase and sale of interests in real estate, commodities or commodity contracts (although this does not preclude marketable securities of companies engaged in these activities). (4) Engage in the making of loans to other persons, except (a) through the purchase of a portion of an issue of publicly distributed bonds, debentures or other evidences of indebtedness customarily purchased by institutional investors or (b) by the loan of its portfolio securities in accordance with the policies described under "Lending of Portfolio Securities." (5) Borrow money except from banks for temporary or emergency purposes, and then not in excess of 5% of the value of its total assets. (6) Mortgage, pledge or hypothecate its assets in any manner, except in connection with any authorized borrowings and then not in excess of 10% of the value of its total assets. (7) Purchase securities on margin, except that it may obtain such short-term credits as may be necessary for the clearance of its portfolio transactions. (8) Effect short sales, or purchase or sell puts, calls, spreads or straddles. 73 (9) Buy or sell oil, gas, or other mineral leases, rights or royalty contracts, or participate on a joint or joint and several basis in any securities trading account. (10) Invest in securities of other investment companies, except as they may be acquired as part of a merger, consolidation or acquisition of assets. (11) Invest more than 25% of the value of its total assets in any one industry. (12) Purchase or retain in its portfolio any security if an Officer or Director/Trustee of the Fund or its investment Adviser owns beneficially more than 1/2 of 1% of the outstanding securities of such issuer, and in the aggregate such persons own beneficially more than 5% of the outstanding securities of such issuer. (13) Issue senior securities, except insofar as the Fund may be deemed to have issued a senior security by reason of borrowing money in accordance with the Fund's borrowing policies or investment techniques, and except for purposes of this investment restriction, collateral, escrow, or margin or other deposits with respect to the making of short sales, the purchase or sale of futures contracts or related options, purchase or sale of forward foreign currency contracts, and the writing of options on securities are not deemed to be an issuance of a senior security. INVESTMENT RESTRICTIONS -- MIDCAP OPPORTUNITIES FUND The Fund has adopted the following investment restrictions as fundamental policies that cannot be changed without approval by the holders of a majority (as defined in the 1940 Act) of the Fund's outstanding voting shares. The Fund may not: (1) Borrow money, issue senior securities, or pledge, mortgage or hypothecate its assets, except that it may: (a) borrow from banks up to 10% of its net assets for temporary purposes but only if, immediately after such borrowing there is asset coverage of 300%, and (b) enter into transactions in options, futures, and options on futures and other transactions not deemed to involve the issuance of senior securities; (2) Underwrite the securities of others; (3) Purchase or sell real property, including real estate limited partnerships (the Fund may purchase marketable securities of companies that deal in real estate or interests therein, including real estate investment trusts); (4) Deal in commodities or commodity contracts, except in the manner described in the current Prospectus and SAI of the Fund; (5) Make loans to other persons (but the Fund may, however, lend portfolio securities, up to 33% of net assets at the time the loan is made, to brokers or dealers or other financial institutions not affiliated with the Fund or Pilgrim, subject to conditions established by Pilgrim), and may purchase or hold participations in loans, in accordance with the investment objectives and policies of the Fund, as described in the current Prospectus and SAI of the Fund; (6) Purchase on margin (except that for purposes of this restriction, the deposit or payment of initial or variation margin in connection with futures contracts will not be deemed to be purchases of securities on margin); 74 (7) Sell short, except that the Fund may enter into short sales against the box; (8) Invest more than 25% of its assets in any one industry or related group of industries; (9) With respect to 75% of the Fund's assets, purchase a security (other than U.S. government obligations) if, as a result, more than 5% of the value of total assets of the Fund would be invested in securities of a single issuer; (10) Purchase a security if, as a result, more than 10% of any class of securities, or more than 10% of the outstanding voting securities of an issuer, would be held by the Fund; (11) Borrow money in excess of 10% of its net assets for temporary purposes; The Funds are also subject to the following restrictions and policies that are not fundamental and may, therefore, be changed by the Board of Trustees (without shareholder approval). Unless otherwise indicated, a Fund may not: (1) Purchase securities of other investment companies, except in connection with a merger, consolidation or sale of assets, and except that the Fund may purchase shares of other investment companies, subject to such restrictions as may be imposed by the 1940 Act and rules thereunder or by any state in which shares of the Fund are registered; (2) Invest more than 15% of its net assets in illiquid securities; or (3) Borrow any amount in excess of 10% of the Fund's assets, other than for temporary emergency or administrative purposes. In addition, the Fund will not make additional investments when its borrowings exceed 5% of total assets. FUNDAMENTAL INVESTMENT RESTRICTIONS -- PILGRIM FUNDS TRUST The Funds have adopted the following investment restrictions that cannot be changed without approval by the holders of a majority (as defined in the 1940 Act) of a Fund's outstanding voting shares. The Funds, except as indicated, may not: (1) Borrow money, except to the extent permitted under the 1940 Act (which currently limits borrowing to no more than 33-1/3% of the value of a Fund's total assets). For purposes of this Investment Restriction, the entry into reverse repurchase agreements, options, forward contracts, futures contracts, including those relating to indices, and options on futures contracts or indices shall not constitute borrowing. (2) Issue senior securities, except insofar as a Fund may be deemed to have issued a senior security in connection with any repurchase agreement or any permitted borrowing; (3) Make loans, except loans of portfolio securities and except that a Fund may enter into repurchase agreements with respect to its portfolio securities and may purchase the types of debt instruments described in its Prospectus or this SAI; (4) Invest in companies for the purpose of exercising control or management; 75 (5) Purchase, hold or deal in real estate, or oil, gas or other mineral leases or exploration or development programs, but a Fund may purchase and sell securities that are secured by real estate or issued by companies that invest or deal in real estate or real estate investment trusts. (6) Engage in the business of underwriting securities of other issuers, except to the extent that the disposal of an investment position may technically cause it to be considered an underwriter as that term is defined under the Securities Act of 1933; (7) Purchase securities on margin, except that a Fund may obtain such short-term credits as may be necessary for the clearance of purchases and sales of securities; (8) Purchase a security if, as a result, more than 25% of the value of its total assets would be invested in securities of one or more issuers conducting their principal business activities in the same industry, provided that (a) this limitation shall not apply to obligations issued or guaranteed by the U.S. Government or its agencies and instrumentalities; (b) wholly-owned finance companies will be considered to be in the industries of their parents; (c) utilities will be divided according to their services. For example, gas, gas transmission, electric and gas, electric, and telephone will each be considered a separate industry; and (d) Pilgrim Global Information Technology Fund, and Pilgrim Global Communications Fund will concentrate their investments as described in the Prospectus. The Funds are also subject to the following restrictions and policies that are not fundamental and may, therefore, be changed by the Board of Trustees (without shareholder approval). Unless otherwise indicated, a Fund may not: (9) Invest more than 15%, 10% in the case of the ING Money Market Funds, of the value of its net assets in investments which are illiquid (including repurchase agreements having maturities of more than seven calendar days, variable and floating rate demand and master demand notes not requiring receipt of principal note amount within seven days' notice and securities of foreign issuers which are not listed on a recognized domestic or foreign securities exchange). In addition, Tax Efficient Equity Fund is a diversified fund. As such, it will not, with respect to 75% of its total assets, invest more than 5% of its total assets in the securities of any one issuer (except for U.S. Government securities) or purchase more than 10% of the outstanding voting securities of any one issuer. Each Fund will only purchase fixed income securities that are rated investment grade, i.e., rated at least BBB by S&P or Baa by Moody's, or have an equivalent rating from another NRSRO, or if unrated, are determined to be of comparable quality by the Sub-Adviser. Money market securities, certificates of deposit, banker's acceptance and commercial paper purchased by the Stock Funds must be rated in one of the two top rating categories by an NRSRO or, if not rated, determined to be of comparable quality by the Stock Fund's Sub-Adviser. INVESTMENT RESTRICTIONS -- PILGRIM MUTUAL FUNDS The Funds have adopted the following fundamental policies that cannot be changed without the affirmative vote of a majority of the outstanding shares of the appropriate Fund (are defined in the 1940 Act). The investment objective of each Fund is a fundamental policy. In addition, the Funds may not: (1) Invest in securities of any one issuer if more than 5% of the market value of its total assets would be invested in the securities of such issuer, except that up to 25% of a Fund's total assets may be invested 76 without regard to this restriction and a Fund will be permitted to invest all or a portion of its assets in another diversified, open-end management investment company with substantially the same investment objective, policies and restrictions as the Fund. This restriction also does not apply to investments by a Fund in securities of the U.S. Government or any of its agencies and instrumentalities. (2) Purchase more than 10% of the outstanding voting securities, or of any class of securities, of any one issuer, or purchase the securities of any issuer for the purpose of exercising control or management, except that a Fund will be permitted to invest all or a portion of its assets in another diversified, open-end management investment company with substantially the same investment objective, policies and restrictions as the Fund. (3) Invest 25% or more of the market value of its total assets in the securities of issuers any one particular industry, except that a Fund will be permitted to invest all or a portion of its assets in another diversified, open-end management investment company with substantially the same investment objective, policies and restrictions as the Fund. This restriction does not apply to investments by a Fund in securities of the U.S. Government or its agencies and instrumentalities or to investments by the Money Market Fund in obligations of domestic branches of U.S. banks and U.S. branches of foreign banks which are subject to the same regulation as U.S. banks. (4) Purchase or sell real estate. However, a Fund may invest in securities secured by, or issued by companies that invest in, real estate or interests in real estate. (5) Make loans of money, except that a Fund may purchase publicly distributed debt instruments and certificates of deposit and enter into repurchase agreements. Each Fund reserves the authority to make loans of its portfolio securities in an aggregate amount not exceeding 30% of the value of its total assets. This restriction does not apply to the Money Market Fund. (6) Borrow money on a secured or unsecured basis, except for temporary, extraordinary or emergency purposes or for the clearance of transactions in amounts not exceeding 20% of the value of its total assets at the time of the borrowing, provided that, pursuant to the Investment Company Act, a Fund may borrow money if the borrowing is made from a bank or banks and only to the extent that the value of the Fund's total assets, less its liabilities other than borrowings, is equal to at least 300% of all borrowings (including proposed borrowings), and provided, further that the borrowing may be made only for temporary, extraordinary or emergency purposes or for the clearance of transactions in amounts not exceeding 20% of the value of the Fund's total assets at the time of the borrowing. If such asset coverage of 300% is not maintained, the Fund will take prompt action to reduce its borrowings as required by applicable law. (7) Pledge or in any way transfer as security for indebtedness any securities owned or held by it, except to secure indebtedness permitted by restriction 6 above. This restriction shall not prohibit the Funds from engaging in options, futures and foreign currency transactions, and shall not apply to the Money Market Fund. (8) Underwrite securities of other issuers, except insofar as it may be deemed an underwriter under the Securities Act in selling portfolio securities. (9) Invest more than 15% of the value of its net assets in securities that at the time of purchase are illiquid. 77 (10) Purchase securities on margin, except for initial and variation margin on options and futures contracts, and except that a Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of securities. (11) Engage in short sales (other than MidCap Growth, and SmallCap Growth), except that a Fund may use such short-term credits as are necessary for the clearance of transactions. (12) Invest in securities of other investment companies, except (a) that a Fund will be permitted to invest all or a portion of its assets in another diversified, open-end management investment company with substantially the same investment objective, policies and restrictions as the Fund; (b) in compliance with the Investment Company Act and applicable state securities laws, or (c) as part of a merger, consolidation, acquisition or reorganization involving the Fund. (13) Issue senior securities, except that a Fund may borrow money as permitted by restrictions 6 and 7 above. This restriction shall not prohibit the Funds from engaging in short sales, options, futures and foreign currency transactions. (14) Enter into transactions for the purpose of arbitrage, or invest in commodities and commodities contracts, except that a Fund may invest in stock index, currency and financial futures contracts and related options in accordance with any rules of the Commodity Futures Trading Commission. (15) Purchase or write options on securities, except for hedging purposes and then only if (i) aggregate premiums on call options purchased by a Fund do not exceed 5% of its net assets, (ii) aggregate premiums on put options purchased by a Fund do not exceed 5% of its net assets, (iii) not more than 25% of a Fund's net assets would be hedged, and (iv) not more than 25% of a Fund's net assets are used as cover for options written by the Fund. For purposes of investment restriction number 5, the Trust considers the restriction to prohibit the Funds from entering into instruments that have the character of a loan, I.E., instruments that are negotiated on a case-by-case basis between a lender and a borrower. The Trust considers the phrase "publicly distributed debt instruments" in that investment restriction to include, among other things, registered debt securities and unregistered debt securities that are offered pursuant to Rule 144A under the Securities Act of 1933. As a result, the Funds may invest in such securities. Further, the Trust does not consider investment restriction number 5 to prevent the Funds from investing in investment companies that invest in loans. INVESTMENT RESTRICTIONS -- RESEARCH ENHANCED INDEX FUND The Fund has adopted the following investment restrictions as fundamental policies that cannot be changed without approval by the holders of a majority (as defined in the 1940 Act) of the Fund's outstanding voting shares. The Fund may not: (1) Borrow money, issue senior securities, or pledge, mortgage or hypothecate its assets, except that it may: (a) borrow from banks up to 33 1/3% of its net assets for temporary purposes but only if, immediately after such borrowing there is asset coverage of 300%, and (b) enter into transactions in options, futures, and options on futures and other transactions not deemed to involve the issuance of senior securities; (2) Underwrite the securities of others; 78 (3) Purchase or sell real estate, including real estate limited partnerships (the Fund may purchase marketable securities of companies that deal in real estate or interests therein, including real estate investment trusts); (4) Deal in commodities or commodity contracts, except in the manner described in the current Prospectus and SAI of the Fund; (5) Make loans to other persons (but the Fund may, however, lend portfolio securities, up to 33 1/3% of net assets at the time the loan is made, to brokers or dealers or other financial institutions not affiliated with the Fund or Pilgrim, subject to conditions established by Pilgrim) (See "Lending Portfolio Securities" in this SAI), and may purchase or hold participations in loans, in accordance with the investment objectives and policies of the Fund, as described in the current Prospectus and SAI of the Fund; (6) Invest more than 25% of its assets in any one industry; (7) With respect to 75% of the Fund's assets, purchase a security (other than U.S. government obligations) if, as a result, more than 5% of the value of total assets of the Fund would be invested in securities of a single issuer; (8) Purchase a security if, as a result, more than 10% of any class of securities, or more than 10% of the outstanding voting securities of an issuer, would be held by the Fund; The Funds are also subject to the following restrictions and policies that are not fundamental and may, therefore, be changed by the Board of Trustees (without shareholder approval). Unless otherwise indicated, a Fund may not: (1) Purchase securities of other investment companies, except in connection with a merger, consolidation or sale of assets, and except that the Fund may purchase shares of other investment companies, subject to such restrictions as may be imposed by the 1940 Act, rules thereunder or any order pursuant thereto or by any state in which shares of the Fund are registered; (2) Invest more than 15% of its net assets in illiquid securities; or (3) Borrow any amount in excess of 33 1/3% of the Fund's assets, other than for temporary emergency or administrative purposes. As a fundamental policy, this Fund may borrow money from banks to the extent permitted under the 1940 Act. As an operating (non-fundamental) policy, this Fund does not intend to borrow any amount in excess of 10% of its assets, and would do so only for temporary emergency or administrative purposes. In addition, to avoid the potential leveraging of assets, this Fund will not make additional investments when its borrowings, including those investment techniques which are regarded as a form of borrowing, are in excess of 5% of total assets. If this Fund should determine to expand its ability to borrow beyond the current operating policy, the Fund's Prospectus would be amended and shareholders would be notified. In addition to the above noted investment policies, Research Enhanced Index Fund's Sub-Adviser intends to manage the Fund so that it closely approximates Index. 79 INVESTMENT RESTRICTIONS -- SMALLCAP OPPORTUNITIES FUND AND GROWTH OPPORTUNITIES FUNDS The Funds have adopted the following investment restrictions as fundamental policies that cannot be changed without approval by holders of a majority (as defined in the 1940 Act) of such Fund's outstanding voting shares. The Funds may not: (1) Borrow money, except from a bank and as a temporary measure for extraordinary or emergency purposes, provided the Fund maintains asset coverage of 300% for all borrowings; (2) Purchase securities of any one issuer (except U.S. government securities) if, as a result, more than 5% of the Fund's total assets would be invested in that issuer, or the Fund would own or hold more than 10% of the outstanding voting securities of the issuer; PROVIDED, HOWEVER, that up to 25% of the Fund's total assets may be invested without regard to these limitations; (3) Underwrite the securities of other issuers, except to the extent that, in connection with the disposition of portfolio securities, the Fund may be deemed to be an underwriter; (4) Concentrate its assets in the securities of issuers all of which conduct their principal business activities in the same industry (this restriction does not apply to obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities); (5) Make any investment in real estate, commodities or commodities contracts, except that these Funds may: (a) purchase or sell readily marketable securities that are secured by interest in real estate or issued by companies that deal in real estate, including real estate investment and mortgage investment trusts; and (b) engage in financial futures contracts and related options, as described herein and in the Fund's Prospectus; (6) Make loans, except that each of these Funds may: (a) invest in repurchase agreements, and (b) loan its portfolio securities in amounts up to one-third of the market or other fair value of its total assets; (7) Issue senior securities, except as appropriate to evidence indebtedness that it is permitted to incur, provided that the deposit or payment by the Fund of initial or maintenance margin in connection with futures contracts and related options is not considered the issuance of senior securities; (8) Borrow money in excess of 5% of its total assets (taken at market value); (9) Pledge, mortgage or hypothecate in excess of 5% of its total assets (the deposit or payment by a Fund of initial or maintenance margin in connection with futures contracts and related options is not considered a pledge or hypothecation of assets); (10) Purchase more than 10% of the voting securities of any one issuer, except U.S. government securities; (11) Invest more than 15% of its net assets in illiquid securities, including repurchase agreements maturing in more than 7 days, that cannot be disposed of within the normal course of business at approximately the amount at which the Fund has valued the securities, excluding restricted securities that have been determined by the Trustees of the Fund (or the persons designated by them to make such determinations) to be readily marketable; (12) Purchase securities of any issuer with a record of less than 3 years of continuous operations, including predecessors, except U.S. government securities and obligations issued or guaranteed by any 80 foreign government or its agencies or instrumentalities, if such purchase would cause the investments of a Fund in all such issuers to exceed 5% of the total assets of the Fund taken at market value; The Funds are also subject to the following restrictions and policies that are not fundamental and may, therefore, be changed by the Board of Trustees (without shareholder approval). Unless otherwise indicated, the Funds may not: (1) 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; (2) 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; PORTFOLIO TRANSACTIONS Each Investment Management Agreement and Portfolio Management Agreement or Sub-Advisory Agreement authorizes each Investment Adviser or Sub-Adviser to select the brokers or dealers that will execute the purchase and sale of investment securities for their respective Fund. In all purchases and sales of securities for the portfolio of a Fund, the primary consideration is to obtain the most favorable price and execution available. Pursuant to the Investment Management Agreements and Portfolio Management Agreements or Sub-Advisory Agreements, each Investment Adviser or Sub-Adviser determines, subject to the instructions of and review by the Board of Directors/Trustees of a Fund, which securities are to be purchased and sold by a Fund and which brokers are to be eligible to execute portfolio transactions of the Fund. Purchases and sales of securities in the over-the-counter market will generally be executed directly with a "market-maker," unless in the opinion of the Investment Adviser or a Sub-Adviser, a better price and execution can otherwise be obtained by using a broker for the transaction. In placing portfolio transactions, each Investment Adviser or Sub-Adviser will use its best efforts to choose a broker capable of providing the brokerage services necessary to obtain the most favorable price and execution available. The full range and quality of brokerage services available will be considered in making these determinations, such as the size of the order, the difficulty of execution, the operational facilities of the firm involved, the firm's risk in positioning a block of securities, and other factors. With respect to Financial Services Fund, such other factors would include the firm's ability to engage in transactions in shares of banks, thrifts and other issuers involved in the financial services industry that are not listed on an organized stock exchange. The Investment Adviser or Sub-Adviser will seek to obtain the best commission rate available from brokers that are believed to be capable of providing efficient execution and handling of the orders. In those instances where it is reasonably determined that more than one broker can offer the brokerage services needed to obtain the most favorable price and execution available, consideration may be given to those brokers that supply research and statistical information to a Fund, the Investment Adviser, and/or the Sub-Adviser, and provide other services in addition to execution services. The Investment Adviser or Sub-Adviser considers such information, which is in addition to and not in lieu of the services required to be performed by the Investment Adviser or Sub-Adviser to be useful in varying degrees, but of indeterminable value. Consistent with this policy, portfolio transactions may be executed by brokers affiliated with the Pilgrim Group or the Investment Adviser or Sub-Advisers, so long as the commission paid to the affiliated broker is reasonable and fair compared to the commission that would be charged by an unaffiliated broker in a comparable transaction. The placement of portfolio brokerage with broker-dealers who have sold shares of a Fund is subject to rules adopted by the National Association of Securities Dealers, Inc. ("NASD"). Provided the Fund's officers 81 are satisfied that the Fund is receiving the most favorable price and execution available, the Fund may also consider the sale of the Fund's shares as a factor in the selection of broker-dealers to execute its portfolio transactions. While it will continue to be the Pilgrim Funds' general policy to seek first to obtain the most favorable price and execution available, in selecting a broker to execute portfolio transactions for a Fund, the Fund may also give weight to the ability of a broker to furnish brokerage and research services to the Fund, the Investment Adviser or the Sub-Adviser, even if the specific services were not imputed to the Fund and were useful to the Investment Adviser and/or Sub-Adviser in advising other clients. In negotiating commissions with a broker, the Fund may therefore pay a higher commission than would be the case if no weight were given to the furnishing of these supplemental services, provided that the amount of such commission has been determined in good faith by the Investment Adviser or Sub-Adviser to be reasonable in relation to the value of the brokerage and research services provided by such broker. Purchases of securities for a Fund also may be made directly from issuers or from underwriters. Where possible, purchase and sale transactions will be effected through dealers which specialize in the types of securities which the Fund will be holding, unless better executions are available elsewhere. Dealers and underwriters usually act as principals for their own account. Purchases from underwriters will include a concession paid by the issuer to the underwriter and purchases from dealers will include the spread between the bid and the asked price. If the execution and price offered by more than one dealer or underwriter are comparable, the order may be allocated to a dealer or underwriter which has provided such research or other services as mentioned above. Some securities considered for investment by a Fund may also be appropriate for other clients served by that Fund's Investment Adviser or Sub-Adviser. If the purchase or sale of securities consistent with the investment policies of a Fund and one or more of these other clients serviced by the Investment Adviser or Sub-Adviser is considered at or about the same time, transactions in such securities will be allocated among the Fund and the Investment Adviser's or Sub-Adviser's other clients in a manner deemed fair and reasonable by the Investment Adviser or Sub-Adviser. Although there is no specified formula for allocating such transactions, the various allocation methods used by the Investment Adviser or Sub-Adviser, and the results of such allocations, are subject to periodic review by the Board of Directors/Trustees. To the extent any of the Pilgrim Funds seek to acquire the same security at the same time, one or more of the Funds may not be able to acquire as large a portion of such security as it desires, or it may have to pay a higher price for such security. Insofar as a specific Fund is concerned, this system could have a detrimental effect on the price or value of the security. Purchases and sales of fixed income securities will usually be principal transactions. Such securities often will be purchased or sold from or to dealers serving as market makers for the securities at a net price. Each Fund may also purchase such securities in underwritten offerings and will, on occasion, purchase securities directly from the issuer. Generally, fixed income securities are traded on a net basis and do not involve brokerage commissions. The cost of executing fixed income securities transactions consists primarily of dealer spreads and underwriting commissions. In purchasing and selling fixed income securities, it is the policy of each Fund to obtain the best results, while taking into account the dealer's general execution and operational facilities, the type of transaction involved and other factors, such as the dealer's risk in positioning the securities involved. While the Investment Adviser or Sub-Adviser generally seeks reasonably competitive spreads or commissions, the Pilgrim Funds will not necessarily pay the lowest spread or commission available. Brokerage commissions paid by each Fund for previous fiscal years/periods are as follows: 82 JUNE 30, MAY 31, -------------------------- 2001(1) 2000 1999(2) ---------- ---------- ---------- Balanced Fund(3) $ 99,792 $ 102,510 $ 38,023 Convertible Fund $ 74,457 $ 134,086 $ 15,340 Financial Services Fund $ 586,016 $359,31 $ 584,160 LargeCap Growth Fund(3) $2,929,479 $1,017,307 $ 58,467 MagnaCap Fund $ 956,037 $ 301,665 $ 300,524 MidCap Growth Fund(4) $1,907,930 $ 677,532 $ 344,683 SmallCap Growth Fund(4) $ 857,577 $ 545,288 $ 156,586 ---------- (1) For the eleven month period from July 1, 2001 through May 31, 2001. (2) For the three month period from April 1, 1999 through June 30, 1999. (3) The increase in brokerage commissions paid by the Fund during the most recent fiscal year in comparison to the two preceding fiscal years is due to the substantial increase in the sale of shares held by the Funds during 2000. (4) The decrease in brokerage commissions paid by the Fund during the most recent fiscal year in comparison to the two preceding fiscal years is due to the decrease in the sale of shares held by the Funds. OCTOBER 31, MAY 31, --------------------- 2001(1) 2000 1999 -------- -------- -------- Growth + Value Fund(2) $737,205 $731,028 $374,786 Research Enhanced Index Fund(2)(3) 93,805 $165,557 $103,616 Tax-Efficient Equity Fund(4) 15,297 $ 32,736 $ 53,629 Pilgrim Internet Fund(5) 30,291 $ 29,897 $ 3,208 ---------- (1) For the seven month period from November 1, 2001 through May 31, 2001. (2) The increase in brokerage commissions paid by the Fund during the most recent fiscal year in comparison to the two preceding fiscal years is due to the substantial increase in the sale of shares held by the Fund during 2000. (3) The Research Enhanced Index Fund commenced operations on December 30, 1998. (4) The Tax Efficient Equity Fund commenced operations on December 15, 1998. (5) The Internet Fund commenced operations on July 1, 1999. DECEMBER 31, MAY 31, ------------------------ 2001(1) 2000 1999 ---------- ---------- ---------- SmallCap Opportunities Fund(2) $ 591,077 $1,042,831 $ 429,651 MidCap Opportunities Fund(2) $ 433,856 $ 393,763 $ 144,341 Growth Opportunities Fund(2) $1,764,125 $3,193,870 $1,091,033 Growth and Income Fund $ 322,404 $ 592,997 $ 482,487 ---------- (1) For the five month period from January 1, 2001 through May 31, 2001. (2) The increase in brokerage commissions paid by the Fund during the most recent fiscal year in comparison to the two preceding fiscal years is due to the substantial increase in the sale of shares held by the Funds during 2000. Of the total commissions, $854,951 paid during the fiscal year ended May 31, 2001, was paid to firms which provided research, statistical or other services to the Investment Adviser. The Investment Adviser has not separately identified a portion of such commissions as applicable to the provision of such research, statistical or otherwise. 83 During the fiscal year ended May 31, 2001, the following Funds paid affiliated persons of the Fund brokerage commissions as follows: PILGRIM MIDCAP GROWTH FUND
AFFILIATED AFFILIATED TOTAL FUND % OF AFFILIATED FUND TOTAL % OF BROKER PRINCIPAL PRINCIPAL PRINCIPAL COMMISSION COMMISSION COMMISSION ------ --------- --------- --------- ---------- ---------- ---------- ING Barings LLC $1,541,045 $1,092,319,230 0.14% $3,756 $1,907,930 0.20% PILGRIM SMALLCAP GROWTH FUND AFFILIATED AFFILIATED TOTAL FUND % OF AFFILIATED FUND TOTAL % OF BROKER PRINCIPAL PRINCIPAL PRINCIPAL COMMISSION COMMISSION COMMISSION ------ --------- --------- --------- ---------- ---------- ---------- ING Barings LLC $2,768,573 $405,644,351 0.68% $4,806 $857,577 0.56%
During the year ended May 31, 2001, the following Funds (or their predecessor master funds) acquired securities of their regular brokers or dealers (as defined in Rule 10b-1 under the 1940 Act) or their parents: The holdings of securities of such brokers and dealers were as follows as of May 31, 2001. FUND SECURITY DESCRIPTION MARKET VALUE ---- -------------------- ------------ PILGRIM FINANCIAL SERVICES FUND JP Morgan Chase & Co. $ 7,618,250 Lehman Brothers Holdings, Inc. $11,099,550 Merrill Lynch & Co. $10,395,200 PILGRIM GROWTH & INCOME FUND Instinet Group, Inc. $ 2,425,704 The Bear Stearns Co., Inc. $ 4,440,395 J.D. Edwards & Co. $ 3,371,760 PILGRIM GROWTH + VALUE FUND - NONE PILGRIM GROWTH OPPORTUNITIES FUND Instinet Group, Inc. $ 5,560,812 PILGRIM INTERNET FUND - NONE PILGRIM LARGECAP GROWTH FUND Goldman Sachs Group, Inc. $12,572,220 Instinet Group, Inc. $ 5,385,368 Morgan Stanley Dean Witter & Co. $ 8,152,254 PILGRIM MAGNACAP FUND J.P. Morgan Chase & Co. $10,417,343 PILGRIM MIDCAP GROWTH FUND Instinet Group, Inc. $ 3,684,324 PILGRIM MIDCAP OPPORTUNITIES FUND Instinet Group, Inc. $ 1,319,644 84 FUND SECURITY DESCRIPTION MARKET VALUE ---- -------------------- ------------ PILGRIM RESEARCHED ENHANCED INDEX FUND AG Edwards, Inc. $ 93,544 The Bear Stearns Cos., Inc. $ 43,480 Goldman Sachs Group, Inc. $ 599,130 Merrill Lynch & Co. $ 246,886 Morgan Stanley Dean Witter & Co. $ 780,120 Charles Schwab Corp. $ 584,680 E*trade Group, Inc. $ 121,500 TD Waterhouse Group, Inc. $ 217,221 PILGRIM SMALLCAP GROWTH FUND - NONE PILGRIM SMALLCAP OPPORTUNITIES FUND - NONE PILGRIM TAX EFFICIENT EQUITY FUND J.P. Morgan Chase & Co. $ 663,525 Merrill Lynch & Co. $ 428,802 PILGRIM BALANCED FUND J. P. Morgan Chase & Co. $ 2,462,415 PILGRIM CONVERTIBLE FUND Merrill Lynch & Co. $ 1,042,500 ADDITIONAL PURCHASE AND REDEMPTION INFORMATION A complete description of the manner in which shares may be purchased, redeemed or exchanged appears in the Prospectus under "Shareholder Guide." Shares of the Pilgrim Funds are offered at the net asset value next computed following receipt of the order by the dealer (and/or the Distributor) or by the Company's transfer agent, DST Systems, Inc. ("Transfer Agent"), plus, for Class A and Class M Shares, a varying sales charge depending upon the class of shares purchased and the amount of money invested, as set forth in the Prospectus. Shares subject to a CDSC will continue to age from the date that the original shares were purchased. Certain investors may purchase shares of the Funds with liquid assets with a value which is readily ascertainable by reference to a domestic exchange price and which would be eligible for purchase by a Fund consistent with the Fund's investment policies and restrictions. These transactions will only be effected if the Investment Adviser or Sub-Adviser intends to retain the security in the Fund as an investment. Assets so purchased by a Fund will be valued in generally the same manner as they would be valued for purposes of pricing the Fund's shares, if such assets were included in the Fund's assets at the time of purchase. Each Company reserves the right to amend or terminate this practice at any time. SPECIAL PURCHASES AT NET ASSET VALUE Class A or Class M Shares of the Funds may be purchased at net asset value, without a sales charge, by persons who have redeemed their Class A or Class M Shares of a Fund (or shares of other funds managed by the Investment Adviser in accordance with the terms of such privileges established for such funds) within the previous 90 days. The amount that may be so reinvested in the Fund is limited to an amount up to, but not exceeding, the redemption proceeds (or to the nearest full share if fractional shares are not purchased). In order to exercise this privilege, a written order for the purchase of shares must be received by the Transfer Agent, or be postmarked, within 90 days after the date of redemption. This privilege may only be used once per calendar year. Payment must accompany the request and the purchase will be made at the then current net asset value of the Fund. Such purchases may also be handled by a securities dealer who may charge a shareholder for this service. If the shareholder has realized a gain on the redemption, the transaction is taxable and any reinvestment will not alter any applicable Federal capital gains tax. If there has been a loss on the redemption and a subsequent reinvestment pursuant to this privilege, some or all of the loss may not be allowed as a tax deduction depending upon the amount reinvested, although such disallowance is added to the tax basis of the shares acquired upon the reinvestment. Class A Shares of the Funds may also be purchased at net asset value by any person who can document that Fund shares were purchased with proceeds from the redemption (within the previous 90 days) of shares from any unaffiliated mutual fund on which a sales charge was paid or which were subject at any time to a CDSC, and the Distributor has determined in its discretion that the unaffiliated fund invests primarily in the same types of securities as the Pilgrim Fund purchased. 85 Additionally, Class A or Class M Shares of the Funds may also be purchased at net asset value by any charitable organization or any state, county, or city, or any instrumentality, department, authority or agency thereof that has determined that a Fund is a legally permissible investment and that is prohibited by applicable investment law from paying a sales charge or commission in connection with the purchase of shares of any registered management investment company ("an eligible governmental authority"). If an investment by an eligible governmental authority at net asset value is made though a dealer who has executed a selling group agreement with respect to the Company (or the other open-end Pilgrim Funds) the Distributor may pay the selling firm 0.25% of the Offering Price. Shareholders of Pilgrim General Money Market shares who acquired their Shares by using all or a portion of the proceeds from the redemption of Class A or Class M Shares of other open-end Pilgrim Funds distributed by the Distributor may reinvest such amount plus any shares acquired through dividend reinvestment in Class A or Class M Shares of a Fund at its current net asset value, without a sales charge. The officers, directors/trustees and bona fide full-time employees of each Company and the officers, directors and full-time employees of the Investment Adviser, any Sub-Adviser, the Distributor, any service provider to a Fund or affiliated corporations thereof or any trust, pension, profit-sharing or other benefit plan for such persons, broker-dealers, for their own accounts or for members of their families (defined as current spouse, children, parents, grandparents, uncles, aunts, siblings, nephews, nieces, step-relations, relations at-law, and cousins) employees of such broker-dealers (including their immediate families) and discretionary advisory accounts of the Investment Adviser or any Sub-Adviser, may purchase Class A or Class M Shares of a Fund at net asset value without a sales charge. Such purchaser may be required to sign a letter stating that the purchase is for his own investment purposes only and that the securities will not be resold except to the Fund. Each Company may, under certain circumstances, allow registered investment advisers to make investments on behalf of their clients at net asset value without any commission or concession. Class A or M Shares may also be purchased at net asset value by certain fee based registered investment advisers, trust companies and bank trust departments under certain circumstances making investments on behalf of their clients and by shareholders who have authorized the automatic transfer of dividends from the same class of another open-end fund managed by the Investment Adviser. Class A or Class M Shares may also be purchased without a sales charge by (i) shareholders who have authorized the automatic transfer of dividends from the same class of another Pilgrim Fund distributed by the Distributor or from Pilgrim Prime Rate Trust; (ii) registered investment advisors, trust companies and bank trust departments investing in Class A Shares on their own behalf or on behalf of their clients, provided that the aggregate amount invested in any one or more Funds, during the 13 month period starting with the first investment, equals at least $1 million; (iii) broker-dealers, who have signed selling group agreements with the Distributor, and registered representatives and employees of such broker-dealers, for their own accounts or for members of their families (defined as current spouse, children, parents, grandparents, uncles, aunts, siblings, nephews, nieces, step relations, relations-at-law and cousins); (iv) broker-dealers using third party administrators for qualified retirement plans who have entered into an agreement with the Pilgrim Funds or an affiliate, subject to certain operational and minimum size requirements specified from time-to-time by the Pilgrim Funds; (v) accounts as to which a banker or broker-dealer charges an account management fee ("wrap accounts"); and (vi) any registered investment company for which ING Pilgrim Investments serves as adviser. Shares of MagnaCap Fund are acquired at net asset value by State Street Bank & Trust, Kansas City, Missouri, as Custodian for Pilgrim Investment Plans, a unit investment trust for the accumulation of shares of the Fund. As of June 30, 1999, less than 2% of the Fund's then total outstanding shares were held by said Custodian for the account of such plan holders. The Funds may terminate or amend the terms of these sales charge waivers at any time. 86 LETTERS OF INTENT AND RIGHTS OF ACCUMULATION An investor may immediately qualify for a reduced sales charge on a purchase of Class A or Class M Shares of any of the Funds which offers Class A Shares, Class M Shares or shares with front-end sales charges, by completing the Letter of Intent section of the Shareholder Application in the Prospectus (the "Letter of Intent" or "Letter"). By completing the Letter, the investor expresses an intention to invest during the next 13 months a specified amount which if made at one time would qualify for the reduced sales charge. At any time within 90 days after the first investment which the investor wants to qualify for the reduced sales charge, a signed Shareholder Application, with the Letter of Intent section completed, may be filed with the Fund. After the Letter of Intent is filed, each additional investment made will be entitled to the sales charge applicable to the level of investment indicated on the Letter of Intent as described above. Sales charge reductions based upon purchases in more than one investment in the Pilgrim Funds will be effective only after notification to the Distributor that the investment qualifies for a discount. The shareholder's holdings in the Investment Adviser's funds acquired within 90 days before the Letter of Intent is filed will be counted towards completion of the Letter of Intent but will not be entitled to a retroactive downward adjustment of sales charge until the Letter of Intent is fulfilled. Any redemptions made by the shareholder during the 13-month period will be subtracted from the amount of the purchases for purposes of determining whether the terms of the Letter of Intent have been completed. If the Letter of Intent is not completed within the 13-month period, there will be an upward adjustment of the sales charge as specified below, depending upon the amount actually purchased (less redemption) during the period. An investor acknowledges and agrees to the following provisions by completing the Letter of Intent section of the Shareholder Application in the Prospectus. A minimum initial investment equal to 25% of the intended total investment is required. An amount equal to the maximum sales charge or 5.75% of the total intended purchase will be held in escrow at Pilgrim Funds, in the form of shares, in the investor's name to assure that the full applicable sales charge will be paid if the intended purchase is not completed. The shares in escrow will be included in the total shares owned as reflected on the monthly statement; income and capital gain distributions on the escrow shares will be paid directly by the investor. The escrow shares will not be available for redemption by the investor until the Letter of Intent has been completed, or the higher sales charge paid. If the total purchases, less redemptions, equal the amount specified under the Letter, the shares in escrow will be released. If the total purchases, less redemptions, exceed the amount specified under the Letter and is an amount which would qualify for a further quantity discount, a retroactive price adjustment will be made by the Distributor and the dealer with whom purchases were made pursuant to the Letter of Intent (to reflect such further quantity discount) on purchases made within 90 days before, and on those made after filing the Letter. The resulting difference in offering price will be applied to the purchase of additional shares at the applicable offering price. If the total purchases, less redemptions, are less than the amount specified under the Letter, the investor will remit to the Distributor an amount equal to the difference in dollar amount of sales charge actually paid and the amount of sales charge which would have applied to the aggregate purchases if the total of such purchases had been made at a single account in the name of the investor or to the investor's order. If within 10 days after written request such difference in sales charge is not paid, the redemption of an appropriate number of shares in escrow to realize such difference will be made. If the proceeds from a total redemption are inadequate, the investor will be liable to the Distributor for the difference. In the event of a total redemption of the account prior to fulfillment of the Letter of Intent, the additional sales charge due will be deducted from the proceeds of the redemption and the balance will be forwarded to the Investor. By completing the Letter of Intent section of the Shareholder Application, an investor grants to the Distributor a security interest in the shares in escrow and agrees to irrevocably appoint the Distributor as his attorney-in-fact with full power of substitution to surrender for redemption any or all shares for the purpose of paying any additional sales charge due and authorizes the Transfer Agent or Sub-Transfer Agent to receive and redeem shares and pay the proceeds as directed by the Distributor. The investor or the securities dealer must inform the Transfer Agent or the Distributor that this Letter is in effect each time a purchase is made. 87 If at any time prior to or after completion of the Letter of Intent the investor wishes to cancel the Letter of Intent, the investor must notify the Distributor in writing. If, prior to the completion of the Letter of Intent, the investor requests the Distributor to liquidate all shares held by the investor, the Letter of Intent will be terminated automatically. Under either of these situations, the total purchased may be less than the amount specified in the Letter of Intent. If so, the Distributor will redeem at NAV to remit to the Distributor and the appropriate authorized dealer an amount equal to the difference between the dollar amount of the sales charge actually paid and the amount of the sales charge that would have been paid on the total purchases if made at one time. The value of shares of the Fund plus shares of the other open-end funds distributed by the Distributor (excluding Pilgrim General Money Market shares) can be combined with a current purchase to determine the reduced sales charge and applicable offering price of the current purchase. The reduced sales charge applies to quantity purchases made at one time or on a cumulative basis over any period of time by (i) an investor, (ii) the investor's spouse and children under the age of majority, (iii) the investor's custodian accounts for the benefit of a child under the Uniform gift to Minors Act, (iv) a trustee or other fiduciary of a single trust estate or a single fiduciary account (including a pension, profit-sharing and/or other employee benefit plans qualified under Section 401 of the Code), by trust companies' registered investment advisors, banks and bank trust departments for accounts over which they exercise exclusive investment discretionary authority and which are held in a fiduciary, agency, advisory, custodial or similar capacity. The reduced sales charge also applies on a non-cumulative basis, to purchases made at one time by the customers of a single dealer, in excess of $1 million. The Letter of Intent option may be modified or discontinued at any time. Shares of the Fund and other open-end Pilgrim Funds (excluding Pilgrim General Money Market shares) purchased and owned of record or beneficially by a corporation, including employees of a single employer (or affiliates thereof), including shares held by its employees under one or more retirement plans, can be combined with a current purchase to determine the reduced sales charge and applicable offering price of the current purchase, provided such transactions are not prohibited by one or more provisions of the Employee Retirement Income Security Act or the Internal Revenue Code. Individuals and employees should consult with their tax advisors concerning the tax rules applicable to retirement plans before investing. For the purposes of Rights of Accumulation and the Letter of Intent Privilege, shares held by investors in the Pilgrim Funds which impose a CDSC may be combined with Class A or Class M Shares for a reduced sales charge but will not affect any CDSC which may be imposed upon the redemption of shares of a Fund which imposes a CDSC. REDEMPTIONS Payment to shareholders for shares redeemed will be made within seven days after receipt by the Fund's Transfer Agent of the written request in proper form, except that a Fund may suspend the right of redemption or postpone the date of payment during any period when (a) trading on the New York Stock Exchange is restricted as determined by the SEC or such exchange is closed for other than weekends and holidays; (b) an emergency exists as determined by the SEC making disposal of portfolio series or valuation of net assets of a Fund not reasonably practicable; or (c) for such other period as the SEC may permit for the protection of a Fund's shareholders. At various times, a Fund may be requested to redeem shares for which it has not yet received good payment. Accordingly, the Fund may delay the mailing of a redemption check until such time as it has assured itself that good payment has been collected for the purchase of such shares, which may take up to 15 days or longer. Each Fund intends to pay in cash for all shares redeemed, but under abnormal conditions that make payment in cash unwise, a Fund may make payment wholly or partly in securities at their then current market value equal to the redemption price. In such case, an investor may incur brokerage costs in converting such securities to cash. However, each Company has elected to be governed by the provisions of Rule 18f-1 under the 1940 Act, which contain a formula for determining the minimum amount of cash to be paid as part of any redemption. In the event a Fund must liquidate portfolio securities to meet redemptions, it reserves the right to reduce the redemption price by an amount equivalent to the pro-rated cost of such liquidation not to exceed one percent of the net asset value of such shares. 88 Due to the relatively high cost of handling small investments, each Company reserves the right, upon 30 days written notice, to redeem, at net asset value (less any applicable deferred sales charge), the shares of any shareholder whose account has a value of less than $1,000 in the Fund, other than as a result of a decline in the net asset value per share. Before the Fund redeems such shares and sends the proceeds to the shareholder, it will notify the shareholder that the value of the shares in the account is less than the minimum amount and will allow the shareholder 30 days to make an additional investment in an amount that will increase the value of the account to at least $1,000 before the redemption is processed. This policy will not be implemented where a Fund has previously waived the minimum investment requirements. The value of shares on redemption or repurchase may be more or less than the investor's cost, depending upon the market value of the portfolio securities at the time of redemption or repurchase. Certain purchases of Class A Shares and most Class B and Class C Shares may be subject to a CDSC. Shareholders will be charged a CDSC if certain of those shares are redeemed within the applicable time period as stated in the prospectus. No CDSC is imposed on any shares subject to a CDSC to the extent that those shares (i) are no longer subject to the applicable holding period, (ii) resulted from reinvestment of distributions on CDSC shares, or (iii) were exchanged for shares of another fund managed by the Investment Adviser, provided that the shares acquired in such exchange and subsequent exchanges will continue to remain subject to the CDSC, if applicable, until the applicable holding period expires. The CDSC or redemption fee will be waived for certain redemptions of shares upon (i) the death or permanent disability of a shareholder, or (ii) in connection with mandatory distributions from an Individual Retirement Account ("IRA") or other qualified retirement plan. The CDSC or redemption fee will be waived in the case of a redemption of shares following the death or permanent disability of a shareholder if the redemption is made within one year of death or initial determination of permanent disability. The waiver is available for total or partial redemptions of shares owned by an individual or an individual in joint tenancy (with rights of survivorship), but only for redemptions of shares held at the time of death or initial determination of permanent disability. The CDSC or redemption fee will also be waived in the case of a total or partial redemption of shares in connection with any mandatory distribution from a tax-deferred retirement plan or an IRA. The waiver does not apply in the case of a tax-free rollover or transfer of assets, other than one following a separation from services, except that a CDSC or redemption fee may be waived in certain circumstances involving redemptions in connection with a distribution from a qualified employer retirement plan in connection with termination of employment or termination of the employer's plan and the transfer to another employer's plan or to an IRA. The shareholder must notify the Fund either directly or through the Distributor at the time of redemption that the shareholder is entitled to a waiver of CDSC or redemption fee. The waiver will then be granted subject to confirmation of the shareholder's entitlement. The CDSC or redemption fee, which may be imposed on Class A Shares purchased in excess of $1 million, will also be waived for registered investment advisors, trust companies and bank trust departments investing on their own behalf or on behalf of their clients. These waivers may be changed at any time. REINSTATEMENT PRIVILEGE If you sell Class B, Class C or Class T Shares of a Pilgrim Fund, you may reinvest some or all of the proceeds in the same share class within 90 days without a sales charge. Reinstated Class B, Class C and Class T Shares will retain their original cost and purchase date for purposes of the CDSC. The amount of any CDSC also will be reinstated. To exercise this privilege, the written order for the purchase of shares must be received by the Transfer Agent or be postmarked within 90 days after the date of redemption. This privilege can be used only once per calendar year. If a loss is incurred on the redemption and the reinstatement privilege is used, some or all of the loss may not be allowed as a tax deduction. CONVERSION OF CLASS B SHARES A shareholder's Class B Shares will automatically convert to Class A Shares of the Fund on the first business day of the month in which the eighth anniversary of the issuance of the Class B Shares occurs, together with a pro rata portion of all Class B Shares representing dividends and other distributions paid in additional Class B Shares, except that Class B Shares acquired initially through Funds that were part of the Nicholas-Applegate Mutual Funds at the time of purchase will convert after seven years from the date of original purchase. The conversion of Class B Shares into Class A Shares is subject to the continuing availability of an opinion of counsel or an Internal Revenue Service ("IRS") ruling, if the Investment Adviser deems it advisable to obtain such advice, to the effect that (1) such conversion will not constitute taxable events for federal tax purposes; and (2) the payment of different dividends on Class A and Class B Shares does not result in the Fund's dividends 89 or distributions constituting "preferential dividends" under the Internal Revenue Code of 1986. The Class B Shares so converted will no longer be subject to the higher expenses borne by Class B Shares. The conversion will be effected at the relative net asset values per share of the two Classes. CDSC SCHEDULE FOR SHARES OF EQUITY TRUST, SMALLCAP OPPORTUNITIES FUND, GROWTH OPPORTUNITIES FUND, AND MAYFLOWER TRUST PURCHASED BEFORE NOVEMBER 1, 1999 Effective November 1, 1999, the Funds listed above adopted a new CDSC schedule, as set forth in the prospectus. Class B Shares of those Funds purchased before November 1, 1999 are subject to the following contingent sales deferred change schedule: YEARS AFTER YOU CDSC AS A PERCENTAGE BOUGHT THE SHARES OF AMOUNT REDEEMED ----------------- ------------------ 1st Year 5.00% 2nd Year 4.00% 3rd Year 3.00% 4th Year 2.00% 5th Year 2.00% After 5 Years -- Prior to November 6, 2000, the contingent deferred sales charge on purchases of Class A shares of the Funds that comprise Pilgrim Funds Trust in excess of $1 million was different that the contingent deferred sales charge on similar purchases of the other Pilgrim Funds. Shareholders of the Funds that comprise Pilgrim Funds Trust that purchased Class A shares subject to a contingent deferred sales charge prior to November 6, 2000 will continue to be subject to the contingent deferred sales charge in place when those shares were purchased. The contingent deferred sales charge on such purchases before November 6, 2000 were as follows: TIME PERIOD DURING WHICH CDSC CDSC APPLIES -------- ------------ CDSC on Purchase of: BEFORE BEFORE 11/06/00 11/06/99 -------- -------- $1,000,000 to $2,499,999 1.00% 12 Months $2,500,000 to $4,999,999 1.00% 12 Months $5,000,000 and over 1.00% 12 Months DEALER COMMISSIONS AND OTHER INCENTIVES In connection with the sale of shares of the Funds, the Distributor may pay Authorized Dealers of record a sales commission as a percentage of the purchase price. In connection with the sale of Class A and Class M Shares, the Distributor will reallow the following amounts to Authorized Dealers of record from the sales charge on such sales: EQUITY FUNDS DEALERS' REALLOWANCE AS A PERCENTAGE OF OFFERING PRICE ------------------------------------------------------ AMOUNT OF TRANSACTION CLASS A CLASS M --------------------- ------- ------- Less than $50,000 5.00% 3.00% $50,000 - $99,999 3.75% 2.00% $100,000 - $249,999 2.75% 1.00% $250,000 - $499,000 2.00% 1.00% $500,000 - $999,999 1.75% None $1,000,000 and over See below None The Distributor may pay to Authorized Delaers out of its own assets commissions on shares sol in Classes A, B, and C, at net asset value, which at the time of investment would have been subject to the imposition of a contingent deferred sales charge ("CDSC") if redeemed. There is no sales charge on purchases of $1,000,000 or more of Class A Shares. However, such purchases may be subject to a CDSC, as disclosed in the Prospectus. The Distributor will pay Authorized Dealers or record commissions at the rates shown in the table below for purchases of Class A Shares that are subject to a CDSC: DEALER COMMISSION AS A PERCENTAGE OF AMOUNT OF TRANSACTION AMOUNT INVESTED --------------------- --------------- $1,000,000 to $2,499,000 1.00% $2,500,000 to $4,999,999 0.50% $5,000,000 and over 0.25% Also, the Distributor will pay out of its own assets a commission of 1% of the amount invested for purchases of Class A Shares of less than $1 million by qualified employer retirement plans with 50 or more participants. The Distributor will pay out of its own assets a commission of 4% of the amount invested for purchases of Class B Shares subject to a CDSC. For purchases of Class C Shares subject to a CDSC, the Distributor may pay out of its own assets a commission of 1% of the amount invested of each Fund. The Distributor may, from time to time, at its discretion, allow a selling dealer to retain 100% of a sales charge, and such dealer may therefore be deemed an "underwriter" under the Securities Act of 1933, as amended. The Distributor, at its expense, may also provide additional promotional incentives to dealers. The incentives may include payment for travel expenses, including lodging, incurred in connection with trips taken by qualifying registered representatives and members of their families to locations within or outside of the United States, merchandise or other items. For more information on incentives, see "Management of the Funds -- 12b-1 Plans" in this Statement of Additional Information. DETERMINATION OF SHARE PRICE As noted in the Prospectus, the net asset value and offering price of each class of each Fund's shares will be determined once daily as of the close of regular trading on the New York Stock Exchange (normally 4:00 p.m. New York time) during each day on which that Exchange is open for trading. As of the date of this SAI, the New York Stock Exchange is closed on the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Portfolio securities listed or traded on a national securities exchange or included in the NASDAQ National Market System will be valued at the last reported sale price on the valuation day. Securities traded on an exchange or NASDAQ for which there has been no sale that day and other securities traded in the over-the-counter market will be valued at the mean between the last reported bid and asked prices on the valuation day. In cases in which securities are traded on more than one exchange, the securities are valued on the exchange designated by or under the authority of the Board of Directors/Trustees as the primary market. Short-term obligations maturing in less than 60 days will 90 generally be valued at amortized cost. This involves valuing a security at cost on the date of acquisition and thereafter assuming a constant accretion of a discount or amortization of a premium to maturity, regardless of the impact of fluctuating interest rates on the market value of the instrument. While this method provides certainty in valuation, it may result in periods during which value, as determined by amortized cost, is higher or lower than the price a Fund would receive if it sold the instrument. See "How Net Asset Value is Determined" in the Prospectus. The Long-term debt obligations held in a Fund's portfolio will be valued at the mean between the most recent bid and asked prices as obtained from one or more dealers that make markets in the securities when over-the counter market quotations are readily available. Securities and assets for which market quotations are not readily available (including restricted securities which are subject to limitations as to their sale) are valued at their fair values as determined in good faith by or under the supervision of each Fund's Board of Directors/Trustees, in accordance with methods that are specifically authorized by the Board of Directors/Trustees. The valuation procedures applied in any specific instance are likely to vary from case to case. However, consideration is generally given to the financial position of the issuer and other fundamental analytical data relating to the investment and to the nature of the restrictions on disposition of the securities (including any registration expenses that might be borne by the Funds in connection with such disposition). In addition, specific factors also are generally considered, such as the cost of the investment, the market value of any unrestricted securities of the same class (both at the time of purchase and at the time of valuation), the size of the holding, the prices of any recent transactions or offers with respect to such securities and any available analysts' reports regarding the issuer. The fair value of other assets is added to the value of all securities positions to arrive at the value of a Fund's total assets. The Fund's liabilities, including accruals for expenses, are deducted from its total assets. Once the total value of the Fund's net assets is so determined, that value is then divided by the total number of shares outstanding (excluding treasury shares), and the result, rounded to the nearest cent, is the net asset value per share. Options on currencies purchased by the Pilgrim Funds are valued at their last bid price in the case of listed options or at the average of the last bid prices obtained from dealers in the case of OTC options. The value of each security denominated in a currency other than U.S. dollars will be translated into U.S. dollars at the prevailing market rate as determined by the Investment Adviser on that day. The value of the foreign securities traded on exchanges outside the United States is based upon the price on the exchange as of the close of business of the exchange preceding the time of valuation (or, if earlier, at the time of a Fund's valuation). Quotations of foreign securities in foreign currency are converted to U.S. dollar equivalents using the foreign exchange quotation in effect at the time net asset value is computed. The calculation of net asset value of a Fund may not take place contemporaneously with the determination of the prices of certain portfolio securities of foreign issuers used in such calculation. Further, the prices of foreign securities are determined using information derived from pricing services and other sources. Information that becomes known to a Fund or its agents after the time that net asset value is calculated on any business day may be assessed in determining net asset value per share after the time of receipt of the information, but will not be used to retroactively adjust the price of the security so determined earlier or on a prior day. Events affecting the values of portfolio securities that occur between the time their prices are determined and the time when the Fund's net asset value is determined may not be reflected in the calculation of net asset value. If events materially affecting the value of such securities occur during such period, then these securities may be valued at fair value as determined by the management and approved in good faith by the Board of Directors/Trustees. Foreign securities markets may close before a Fund determines its net asset value. European, Far Eastern or Latin American securities trading may not take place on all days on which the NYSE is open. Further, trading takes place in 91 Japanese markets on certain Saturdays and in various foreign markets on days on which the NYSE is not open. Consequently, the calculation of a Fund's respective net asset values may not take place contemporaneously with the determination of the prices of securities held by the Fund. Events affecting the values of portfolio securities that occur between the time their prices are determined and the close of regular trading on the NYSE will not be reflected in a Fund's net asset value unless the Investment Adviser, under the supervision of the Fund's Board of Directors/Trustees, determines that the particular event would materially affect net asset value. As a result, the Fund's net asset value may be significantly affected by such trading on days when a shareholder cannot purchase or redeem shares of the Fund. In computing a class of a Fund's net asset value, all class-specific liabilities incurred or accrued are deducted from the class' net assets. The resulting net assets are divided by the number of shares of the class outstanding at the time of the valuation and the result (adjusted to the nearest cent) is the net asset value per share. The per share net asset value of Class A Shares generally will be higher than the per share net asset value of shares of the other classes, reflecting daily expense accruals of the higher distribution fees applicable to Class B and Class C. It is expected, however, that the per share net asset value of the classes will tend to converge immediately after the payment of dividends or distributions that will differ by approximately the amount of the expense accrual differentials between the classes. Orders received by dealers prior to the close of regular trading on the New York Stock Exchange will be confirmed at the offering price computed as of the close of regular trading on the Exchange provided the order is received by the Distributor prior to its close of business that same day (normally 4:00 P.M. Pacific time). It is the responsibility of the dealer to insure that all orders are transmitted timely to the Fund. Orders received by dealers after the close of regular trading on the New York Stock Exchange will be confirmed at the next computed offering price as described in the Prospectus. SHAREHOLDER INFORMATION Certificates representing shares of a particular Fund will not normally be issued to shareholders. The Transfer Agent will maintain an account for each shareholder upon which the registration and transfer of shares are recorded, and any transfers shall be reflected by bookkeeping entry, without physical delivery. The Transfer Agent will require that a shareholder provide requests in writing, accompanied by a valid signature guarantee form, when changing certain information in an account (i.e., wiring instructions, telephone privileges, etc.). Each Company reserves the right, if conditions exist that make cash payments undesirable, to honor any request for redemption or repurchase order with respect to shares of a Fund by making payment in whole or in part in readily marketable securities chosen by the Fund and valued as they are for purposes of computing the Fund's net asset value (redemption-in-kind). If payment is made in securities, a shareholder may incur transaction expenses in converting theses securities to cash. Each Company has elected, however, to be governed by Rule 18f-1 under the 1940 Act as a result of which a Fund is obligated to redeem shares with respect to any one shareholder during any 90-day period solely in cash up to the lesser of $250,000 or 1% of the net asset value of the Fund at the beginning of the period. SHAREHOLDER SERVICES AND PRIVILEGES As discussed in the Prospectus, the Pilgrim Funds provide a Pre-Authorized Investment Program ("Program") for the convenience of investors who wish to purchase shares of a Fund on a regular basis. Such a Program may be started with an initial investment ($1,000 minimum) and subsequent voluntary purchases ($100 minimum) with no obligation to continue. The Program may be terminated without penalty at any time by the investor or the Pilgrim Funds. The minimum investment 92 requirements may be waived by the Fund for purchases made pursuant to (i) employer-administered payroll deduction plans, (ii) profit-sharing, pension, or individual or any employee retirement plans, or (iii) purchases made in connection with plans providing for periodic investments in Fund shares. For investors purchasing shares of a Fund under a tax-qualified individual retirement or pension plan or under a group plan through a person designated for the collection and remittance of monies to be invested in shares of a Fund on a periodic basis, the Fund may, in lieu of furnishing confirmations following each purchase of Fund shares, send statements no less frequently than quarterly pursuant to the provisions of the Securities Exchange Act of 1934, as amended, and the rules thereunder. Such quarterly statements, which would be sent to the investor or to the person designated by the group for distribution to its members, will be made within five business days after the end of each quarterly period and shall reflect all transactions in the investor's account during the preceding quarter. All shareholders will receive a confirmation of each new transaction in their accounts, which will also show the total number of Fund shares owned by each shareholder, the number of shares being held in safekeeping by the Fund's Transfer Agent for the account of the shareholder and a cumulative record of the account for the entire year. Shareholders may rely on these statements in lieu of certificates. Certificates representing shares of a fund will not be issued unless the shareholder requests them in writing. SELF-EMPLOYED AND CORPORATE RETIREMENT PLANS For self-employed individuals and corporate investors that wish to purchase shares of a Fund, there is available through the Fund a Prototype Plan and Custody Agreement. The Custody Agreement provides that State Street Bank & Trust, Kansas City, Missouri, will act as Custodian under the Plan, and will furnish custodial services for an annual maintenance fee of $12.00 for each participant, with no other charges. (This fee is in addition to the normal Custodian charges paid by the Pilgrim Funds.) The annual contract maintenance fee may be waived from time to time. For further details, including the right to appoint a successor Custodian, see the Plan and Custody Agreements as provided by the Company. Employers who wish to use shares of a Fund under a custodianship with another bank or trust company must make individual arrangements with such institution. INDIVIDUAL RETIREMENT ACCOUNTS Investors having earned income are eligible to purchase shares of a Fund under an IRA pursuant to Section 408(a) of the Internal Revenue Code. An individual who creates an IRA may contribute annually certain dollar amounts of earned income, and an additional amount if there is a non-working spouse. Simple IRA plans that employers may establish on behalf of their employees are also available. Roth IRA plans that enable employed and self-employed individuals to make non-deductible contributions, and, under certain circumstances, effect tax-free withdrawals, are also available. Copies of a model Custodial Account Agreement are available from the Distributor. Investors Fiduciary Trust Company, Kansas City, Missouri, will act as the Custodian under this model Agreement, for which it will charge the investor an annual fee of $12.00 for maintaining the Account (such fee is in addition to the normal custodial charges paid by the Pilgrim Funds). Full details on the IRA are contained in an IRS required disclosure statement, and the Custodian will not open an IRA until seven (7) days after the investor has received such statement from the Company. An IRA using shares of a Fund may also be used by employers who have adopted a Simplified Employee Pension Plan. Purchases of Fund shares by Section 403(b) and other retirement plans are also available. Section 403(b) plans are arrangements by a public school organization or a charitable, educational, or scientific organization that is described in Section 501(c)(3) of the Internal Revenue Code under which employees are permitted to take advantage of the federal income tax deferral benefits provided for in Section 403(b) of the Code. It is advisable for an investor considering the funding of any retirement plan to consult with an attorney or to obtain advice from a competent retirement plan consultant. 93 TELEPHONE REDEMPTION AND EXCHANGE PRIVILEGES As discussed in the Prospectus, the telephone redemption and exchange privileges are available for all shareholder accounts; however, retirement accounts may not utilize the telephone redemption privilege. The telephone privileges may be modified or terminated at any time. The privileges are subject to the conditions and provisions set forth below and in the Prospectus. (1) Telephone redemption and/or exchange instructions received in good order before the pricing of a Fund on any day on which the New York Stock Exchange is open for business (a "Business Day"), but not later than 4:00 p.m. eastern time, will be processed at that day's closing net asset value. For each exchange, the shareholder's account may be charged an exchange fee. There is no fee for telephone redemption; however, redemptions of Class A and Class B Shares may be subject to a contingent deferred sales charge (See "Redemption of Shares" in the Prospectus). (2) Telephone redemption and/or exchange instructions should be made by dialing 1-800-992-0180 and selecting option 3. (3) Pilgrim Funds will not permit exchanges in violation of any of the terms and conditions set forth in the Pilgrim Funds' Prospectus or herein. (4) Telephone redemption requests must meet the following conditions to be accepted by Pilgrim Funds: (a) Proceeds of the redemption may be directly deposited into a predetermined bank account, or mailed to the current address on the registration. This address cannot reflect any change within the previous thirty (30) days. (b) Certain account information will need to be provided for verification purposes before the redemption will be executed. (c) Only one telephone redemption (where proceeds are being mailed to the address of record) can be processed with in a thirty (30) day period. (d) The maximum amount which can be liquidated and sent to the address of record at any one time is $100,000. (e) The minimum amount which can be liquidated and sent to a predetermined bank account is $5,000. (5) If the exchange involves the establishment of a new account, the dollar amount being exchanged must at least equal the minimum investment requirement of the Pilgrim Fund being acquired. (6) Any new account established through the exchange privilege will have the same account information and options except as stated in the Prospectus. (7) Certificated shares cannot be redeemed or exchanged by telephone but must be forwarded to ING Pilgrim at P.O. Box 419368, Kansas City, MO 64141 and deposited into your account before any transaction may be processed. (8) If a portion of the shares to be exchanged are held in escrow in connection with a Letter of Intent, the smallest number of full shares of the Pilgrim Fund to be purchased on the exchange having the same aggregate net asset value as the shares being exchanged shall be substituted in the escrow account. Shares held in escrow may not be redeemed until the Letter of Intent has expired and/or the appropriate adjustments have been made to the account. 94 (9) Shares may not be exchanged and/or redeemed unless an exchange and/or redemption privilege is offered pursuant to the Pilgrim Funds' then-current prospectus. (10) Proceeds of a redemption may be delayed up to 15 days or longer until the check used to purchase the shares being redeemed has been paid by the bank upon which it was drawn. SYSTEMATIC WITHDRAWAL PLAN You may elect to make periodic withdrawals from your account in any fixed amount in excess of $100 ($1,000 in the case of Class Q) to yourself, or to anyone else you properly designate, as long as the account has a current value of at least $10,000 ($250,000 in the case of Class Q). To establish a systematic cash withdrawal, complete the Systematic Withdrawal Plan section of the Account Application. To have funds deposited to your bank account, follow the instructions on the Account Application. You may elect to have monthly, quarterly, semi-annual or annual payments. Redemptions are normally processed on the fifth day prior to the end of the month, quarter or year. Checks are then mailed or proceeds are forwarded to your bank account on or about the first of the following month. You may change the amount, frequency and payee, or terminate the plan by giving written notice to the Transfer Agent. A Systematic Withdrawal Plan may be modified at any time by the Fund or terminated upon written notice by the relevant Fund. During the withdrawal period, you may purchase additional shares for deposit to your account, subject to any applicable sales charge, if the additional purchases are equal to at least one year's scheduled withdrawals, or $1,200 ($12,000 in the case of Class Q), whichever is greater. There are no separate charges to you under this Plan, although a CDSC may apply if you purchased Class A, B or C Shares. Shareholders who elect to have a systematic cash withdrawal must have all dividends and capital gains reinvested. As shares of a Fund are redeemed under the Plan, you may realize a capital gain or loss for income tax purposes. DISTRIBUTIONS As noted in the Prospectus, shareholders have the privilege of reinvesting both income dividends and capital gains distributions, if any, in additional shares of a respective class of a Fund at the then current net asset value, with no sales charge. The Pilgrim Funds' management believes that most investors desire to take advantage of this privilege. It has therefore made arrangements with its Transfer Agent to have all income dividends and capital gains distributions that are declared by the Pilgrim Funds automatically reinvested for the account of each shareholder. A shareholder may elect at any time by writing to the Fund or the Transfer Agent to have subsequent dividends and/or distributions paid in cash. In the absence of such an election, each purchase of shares of a class of a Fund is made upon the condition and understanding that the Transfer Agent is automatically appointed the shareholder's agent to receive his dividends and distributions upon all shares registered in his name and to reinvest them in full and fractional Shares of the respective class of the Fund at the applicable net asset value in effect at the close of business on the reinvestment date. A shareholder may still at any time after a purchase of Fund shares request that dividends and/or capital gains distributions be paid to him in cash. 95 TAX CONSIDERATIONS The following discussion summarizes certain U.S. federal tax considerations generally affecting the Pilgrim Funds and its shareholders. This discussion does not provide a detailed explanation of all tax consequences, and shareholders are advised to consult their own tax advisers with respect to the particular federal, state, local and foreign tax consequences to them of an investment in the Pilgrim Funds. This discussion is based on the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations issued thereunder, and judicial and administrative authorities as in effect on the date of this Statement of Additional Information, all of which are subject to change, which change may be retroactive. Each Fund intends to qualify as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"). To so qualify and to be taxed as a regulated investment company, each Fund must, among other things: (a) derive at least 90% of its gross income each taxable year from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock or securities and gains from the sale or other disposition of foreign currencies, or other income (including gains from options, futures contracts and forward contracts) derived with respect to the Fund's business of investing in stocks, securities or currencies; (b) diversify its holdings so that, at the end of each quarter of the taxable year, (i) at least 50% of the value of the Fund's total assets is represented by cash and cash items, U.S. Government securities, securities of other regulated investment companies, and other securities, with such other securities limited in respect of any one issuer to an amount not greater in value than 5% of the Fund's total assets and to not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of the Fund's total assets is invested in the securities (other than U.S. Government securities or securities of other regulated investment companies) of any one issuer or of any two or more issuers that the Fund controls and that are determined to be engaged in the same business or similar or related businesses; and (c) distribute at least 90% of its investment company taxable income (which includes, among other items, dividends, interest and net short-term capital gains in excess of net long-term capital losses) each taxable year. The U.S. Treasury Department is authorized to issue regulations providing that foreign currency gains that are not directly related to a Fund's principal business of investing in stock or securities (or options and futures with respect to stock or securities) will be excluded from the income which qualifies for purposes of the 90% gross income requirement described above. To date, however, no such regulations have been issued. The status of the Pilgrim Funds as regulated investment companies does not involve government supervision of management or of their investment practices or policies. As a regulated investment company, a Fund generally will be relieved of liability for U.S. federal income tax on that portion of its investment company taxable income and net realized capital gains which it distributes to its shareholders. Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement also are subject to a nondeductible 4% excise tax. To prevent application of the excise tax, each Fund currently intends to make distributions in accordance with the calendar year distribution requirement. TAX LOSS CARRY-FORWARDS Tax loss carry-forwards were the following as of May 31, 2001: FUND AMOUNT EXPIRATION DATES ---- ------ ---------------- Pilgrim Growth and Income Fund $ 5,700,014 2010 Pilgrim Research Enhanced Index Fund $ 8,618,344 2008 to 2009 Pilgrim Tax Efficient Equity Fund $ 415,400 2009 Pilgrim Growth Opportunities Fund $254,659,070 2009 Pilgrim LargeCap Growth Fund $174,106,032 2009 to 2010 Pilgrim MidCap Opportunities Fund $ 31,574,828 2008 to 2009 Pilgrim Growth + Value Fund $308,761,269 2009 Pilgrim Small Cap Opportunities Fund $ 58,556,297 2009 Pilgrim Internet Fund $ 83,761,345 2009 96 DISTRIBUTIONS Dividends of investment company taxable income (including net short-term capital gains) are taxable to shareholders as ordinary income. Distributions of investment company taxable income may be eligible for the corporate dividends-received deduction to the extent attributable to a Fund's dividend income from U.S. corporations, and if other applicable requirements are met. However, the alternative minimum tax applicable to corporations may reduce the benefit of the dividends-received deduction. Distributions of net capital gains (the excess of net long-term capital gains over net short-term capital losses) designated by a Fund as capital gain dividends are not eligible for the dividends-received deduction and will generally be taxable to shareholders as long-term capital gains, regardless of the length of time the Fund's shares have been held by a shareholder. Net capital gains from assets held for one year or less will be taxed as ordinary income. Generally, dividends and distributions are taxable to shareholders, whether received in cash or reinvested in shares of a Fund. Any distributions that are not from a Fund's investment company taxable income or net capital gain may be characterized as a return of capital to shareholders or, in some cases, as capital gain. Shareholders will be notified annually as to the federal tax status of dividends and distributions they receive and any tax withheld thereon. Dividends, including capital gain dividends, declared in October, November, or December with a record date in such month and paid during the following January will be treated as having been paid by a Fund and received by shareholders on December 31 of the calendar year in which declared, rather than the calendar year in which the dividends are actually received. Distributions by a Fund reduce the net asset value of the Fund shares. Should a distribution reduce the net asset value below a shareholder's cost basis, the distribution nevertheless may be taxable to the shareholder as ordinary income or capital gain as described above, even though, from an investment standpoint, it may constitute a partial return of capital. In particular, investors should be careful to consider the tax implication of buying shares just prior to a distribution by a Fund. The price of shares purchased at that time includes the amount of the forthcoming distribution, but the distribution will generally be taxable to them. ORIGINAL ISSUE DISCOUNT Certain debt securities acquired by a Fund may be treated as debt securities that were originally issued at a discount. Original issue discount can generally be defined as the difference between the price at which a security was issued and its stated redemption price at maturity. Although no cash income is actually received by the Fund, original issue discount that accrues on a debt security in a given year generally is treated for federal income tax purposes as interest and, therefore, such income would be subject to the distribution requirements of the Code. Some of the debt securities may be purchased by a Fund at a discount which exceeds the original issue discount on such debt securities, if any. This additional discount represents market discount for federal income tax purposes. The gain realized on the disposition of any taxable debt security having market discount generally will be treated as ordinary income to the extent it does not exceed the accrued market discount on such debt security. Generally, market discount accrues on a daily basis for each day the debt security is held by a Fund at a constant rate over the time remaining to the debt security's maturity or, at the election of a Fund, at a constant yield to maturity which takes into account the semi-annual compounding of interest. 97 FOREIGN CURRENCY TRANSACTIONS Under the Code, gains or losses attributable to fluctuations in foreign currency exchange rates which occur between the time a Fund accrues income or other receivable or accrues expenses or other liabilities denominated in a foreign currency and the time a Fund actually collects such receivable or pays such liabilities generally are treated as ordinary income or ordinary loss. Similarly, on disposition of debt securities denominated in a foreign currency and on disposition of certain financial contracts and options, gains or losses attributable to fluctuations in the value of foreign currency between the date of acquisition of the security or contract and the date of disposition also are treated as ordinary gain or loss. These gains and losses, referred to under the Code as "Section 988" gains and losses, may increase or decrease the amount of a Fund's net investment income to be distributed to its shareholders as ordinary income. PASSIVE FOREIGN INVESTMENT COMPANIES A Fund may invest in stocks of foreign companies that are classified under the Code as passive foreign investment companies ("PFICs"). In general, a foreign company is classified as a PFIC if at least one-half of its assets constitute investment-type assets or 75% or more of its gross income is investment-type income. Under the PFIC rules, an "excess distribution" received with respect to PFIC stock is treated as having been realized ratably over the period during which a Fund held the PFIC stock. A Fund itself will be subject to tax on the portion, if any, of the excess distribution that is allocated to that Fund's holding period in prior taxable years (and an interest factor will be added to the tax, as if the tax had actually been payable in such prior taxable years) even though the Fund distributes the corresponding income to shareholders. Gain from the sale of PFIC stock as well as certain distributions from a PFIC are treated as excess distributions. All excess distributions are taxable as ordinary income. A Fund may be able to elect alternative tax treatment with respect to PFIC stock. Under an election that currently may be available, a Fund generally would be required to include in its gross income its share of the earnings of a PFIC on a current basis, regardless of whether any distributions are received from the PFIC. If this election is made, the special rules, discussed above, relating to the taxation of excess distributions, would not apply. Alternatively, another election may be available that involves marking to market the Pilgrim Funds' PFIC stock at the end of each taxable year with the result that unrealized gains are treated as though they were realized and are reported as ordinary income; any mark-to-market losses, as well as loss from an actual disposition of PFIC stock, are reported as ordinary loss to the extent of any net mark-to-market gains included in income in prior years. FOREIGN WITHHOLDING TAXES Income received by a Fund from sources within foreign countries may be subject to withholding and other income or similar taxes imposed by such countries. If more than 50% of the value of a Fund's total assets at the close of its taxable year consists of securities of foreign corporations, that Fund will be eligible and may elect to "pass through" to the Fund's shareholders the amount of foreign income and similar taxes paid by that Fund. Pursuant to this election, a shareholder will be required to include in gross income (in addition to taxable dividends actually received) his pro rata share of the foreign taxes paid by a Fund, and will be entitled either to deduct (as an itemized deduction) his pro rata share of foreign income and similar taxes in computing his taxable income or to use it as a foreign tax credit against his U.S. federal income tax liability, subject to limitations. No deduction for foreign taxes may be claimed by a shareholder who does not itemize deductions, but such a shareholder may be eligible to claim the foreign tax credit (see below). Each shareholder will be notified within 60 days after the close of the relevant Fund's taxable year whether the foreign taxes paid by the Fund will "pass through" for that year. Generally, a credit for foreign taxes is subject to the limitation that it may not exceed the shareholder's U.S. tax attributable to his foreign source taxable income. For this purpose, if the pass-through election is made, the 98 source of a Fund's income flows through to its shareholders. With respect to a Fund, gains from the sale of securities will be treated as derived from U.S. sources and certain currency fluctuation gains, including fluctuation gains from foreign currency denominated debt securities, receivables and payables, will be treated as ordinary income derived from U.S. sources. The limitation on the foreign tax credit is applied separately to foreign source passive income (as defined for purposes of the foreign tax credit), including the foreign source passive income passed through by a Fund. Shareholders may be unable to claim a credit for the full amount of their proportionate share of the foreign taxes paid by a Fund. The foreign tax credit limitation rules do not apply to certain electing individual taxpayers who have limited creditable foreign taxes and no foreign source income other than passive investment-type income. The foreign tax credit is eliminated with respect to foreign taxes withheld on dividends if the dividend-paying shares or the shares of the Fund are held by the Fund or the shareholders, as the case may be, for less than 16 days (46 days in the case of preferred shares) during the 30-day period (90-day period for preferred shares) beginning 15 days (45 days for preferred shares) before the shares become ex-dividend. Foreign taxes may not be deducted in computing alternative minimum taxable income and the foreign tax credit can be used to offset only 90% of the alternative minimum tax (as computed under the Code for purposes of this limitation) imposed on corporations and individuals. If a Fund is not eligible to make the election to "pass through" to its shareholders its foreign taxes, the foreign income taxes it pays generally will reduce investment company taxable income and the distributions by a Fund will be treated as United States source income. OPTIONS AND HEDGING TRANSACTIONS The taxation of equity options (including options on narrow-based stock indices) and over-the-counter options on debt securities is governed by Code Section 1234. Pursuant to Code Section 1234, with respect to a put or call option that is purchased by a Fund, if the option is sold, any resulting gain or loss will be a capital gain or loss, and will be short-term or long term, depending upon the holding period of the option. If the option expires, the resulting loss is a capital loss and is short-term or long-term, depending upon the holding period of the option. If the option is exercised, the cost of the option, in the case of a call option, is added to the basis of the purchased security and, in the case of a put option, reduces the amount realized on the underlying security in determining gain or loss. Certain options and financial contracts in which the Funds may invest are "section 1256 contracts." Gains or losses on Section 1256 contracts generally are considered 60% long-term and 40% short-term capital gains or losses ("60/40"); however, foreign currency gains or losses (as discussed above) arising from certain Section 1256 contracts may be treated as ordinary income or loss. Also, Section 1256 contracts held by a Fund at the end of each taxable year (and on certain other dates as prescribed under the Code) are "marked-to-market" with the result that unrealized gains or losses are treated as though they were realized. Generally, the hedging transactions undertaken by a Fund may result in "straddles" for U.S. federal income tax purposes. The straddle rules may affect the character of gains (or losses) realized by a Fund. In addition, losses realized by a Fund on positions that are part of the straddle may be deferred under the straddle rules, rather than being taken into account in calculating the taxable income for the taxable year in which the losses are realized. Because only a few regulations implementing the straddle rules have been promulgated, the tax consequences to a Fund of hedging transactions are not entirely clear. The hedging transactions may increase the amount of short-term capital gain realized by a Fund which is taxed as ordinary income when distributed to shareholders. A Fund may make one or more of the elections available under the Code which are applicable to straddles. If a Fund makes any of the elections, the amount, character, and timing of the recognition of gains or losses from the affected straddle positions will be determined under rules that vary according to the election(s) made. The rules applicable under certain of the elections may operate to accelerate the recognition of gains or losses from the affected straddle positions. 99 Because application of the straddle rules may affect the character of gains or losses, defer losses and/or accelerate the recognition of gains or losses from the affected straddle positions, the amount which must be distributed to shareholders and which will be taxed to shareholders as ordinary income or long-term capital gain may be increased or decreased as compared to a fund that did not engage in such hedging transactions. Notwithstanding any of the foregoing, a Fund may recognize gain (but not loss) from a constructive sale of certain "appreciated financial positions" if the Fund enters into a short sale, notional principal contract, futures or forward contract transaction with respect to the appreciated position or substantially identical property. Appreciated financial positions subject to this constructive sale treatment are interests (including options, futures and forward contracts and short sales) in stock, partnership interests, certain actively traded trust instruments and certain debt instruments. Constructive sale treatment does not apply to certain transactions if such transaction is closed before the end of the 30th day after the close of the Fund's taxable year and the Fund holds the appreciated financial position throughout the 60-day period beginning with the day such transaction was closed, if certain conditions are met. Requirements relating to each Fund's tax status as a regulated investment company may limit the extent to which a Fund will be able to engage in transactions in options and foreign currency forward contracts. SHORT SALES AGAINST THE BOX If a Fund sells short "against the box," unless certain constructive sale rules (discussed above) apply, it may realize a capital gain or loss upon the closing of the sale. Such gain or loss generally will be long- or short-term depending upon the length of time the Fund held the security which it sold short. In some circumstances, short sales may have the effect of reducing an otherwise applicable holding period of a security in the portfolio. The constructive sale rule, however, alters this treatment by treating certain short sales against the box and other transactions as a constructive sale of the underlying security held by the Fund, thereby requiring current recognition of gain, as described more fully under "Options and Hedging Transactions" above. Similarly, if a Fund enters into a short sale of property that becomes substantially worthless, the Fund will recognize gain at that time as though it had closed the short sale. Future Treasury regulations may apply similar treatment to other transactions with respect to property that becomes substantially worthless. OTHER INVESTMENT COMPANIES It is possible that by investing in other investment companies, a Fund may not be able to meet the calendar year distribution requirement and may be subject to federal income and excise tax. The diversification and distribution requirements applicable to each Fund may limit the extent to which each Fund will be able to invest in other investment companies. SALE OR OTHER DISPOSITION OF SHARES Upon the sale or exchange of his shares, a shareholder will realize a taxable gain or loss depending upon his basis in the shares. Such gain or loss will be treated as capital gain or loss if the shares are capital assets in the shareholder's hands, which generally may be eligible for reduced Federal tax rates, depending on the shareholder's holding period for the shares. Any loss realized on a sale or exchange will be disallowed to the extent that the shares disposed of are replaced (including replacement through the reinvesting of dividends and capital gain distributions in a Fund) within a period of 61 days beginning 30 days before and ending 30 days after the disposition of the shares. In such a case, the basis of the shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on the sale of a Fund's shares held by the shareholder for six months or less will be treated for federal income tax purposes as a long-term capital loss to the extent of any distributions of capital gain dividends received by the shareholder with respect to such shares. 100 In some cases, shareholders will not be permitted to take sales charges into account for purposes of determining the amount of gain or loss realized on the disposition of their shares. This prohibition generally applies where (1) the shareholder incurs a sales charge in acquiring the stock of a regulated investment company, (2) the stock is disposed of before the 91st day after the date on which it was acquired, and (3) the shareholder subsequently acquires shares of the same or another regulated investment company and the otherwise applicable sales charge is reduced or eliminated under a "reinvestment right" received upon the initial purchase of shares of stock. In that case, the gain or loss recognized will be determined by excluding from the tax basis of the shares exchanged all or a portion of the sales charge incurred in acquiring those shares. This exclusion applies to the extent that the otherwise applicable sales charge with respect to the newly acquired shares is reduced as a result of having incurred a sales charge initially. Sales charges affected by this rule are treated as if they were incurred with respect to the stock acquired under the reinvestment right. This provision may be applied to successive acquisitions of stock. BACKUP WITHHOLDING Each Fund generally will be required to withhold federal income tax at a rate of 30.5% (30% in 2002 and 2003) ("backup withholding") from dividends paid, capital gain distributions, and redemption proceeds to shareholders if (1) the shareholder fails to furnish a Fund with the shareholder's correct taxpayer identification number or social security number and to make such certifications as a Fund may require, (2) the IRS notifies the shareholder or a Fund that the shareholder has failed to report properly certain interest and dividend income to the IRS and to respond to notices to that effect, or (3) when required to do so, the shareholder fails to certify that he is not subject to backup withholding. Any amounts withheld may be credited against the shareholder's federal income tax liability. FOREIGN SHAREHOLDERS Taxation of a shareholder who, as to the United States, is a nonresident alien individual, foreign trust or estate, foreign corporation, or foreign partnership ("foreign shareholder"), depends on whether the income from the Fund is "effectively connected" with a U.S. trade or business carried on by such shareholder. If the income from the Fund is not effectively connected with a U.S. trade or business carried on by a foreign shareholder, ordinary income dividends (including distributions of any net short term capital gains) will be subject to U.S. withholding tax at the rate of 30% (or lower treaty rate) upon the gross amount of the dividend. Such a foreign shareholder would generally be exempt from U.S. federal income tax on gains realized on the sale of shares of the Fund, and distributions of net long term capital gains that are designated as capital gain dividends. If the income from the Fund is effectively connected with a U.S. trade or business carried on by a foreign shareholder, then ordinary income dividends, capital gain dividends and any gains realized upon the sale of shares of the Fund will be subject to U.S. federal income tax at the rates applicable to U.S. citizens or domestic corporations. The tax consequences to a foreign shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Foreign shareholders are urged to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Fund, including the applicability of foreign taxes. OTHER TAXES Distributions also may be subject to state, local and foreign taxes. U.S. tax rules applicable to foreign investors may differ significantly from those outlined above. This discussion does not purport to deal with all of the tax 101 consequences applicable to shareholders. Shareholders are advised to consult their own tax advisers for details with respect to the particular tax consequences to them of an investment in a Fund. REDEMPTIONS The right to redeem shares may be suspended and payment therefor postponed during periods when the New York Stock Exchange is closed, other than customary weekend and holiday closings, or, if permitted by rules of the SEC, during periods when trading on the Exchange is restricted, during any emergency that makes it impracticable for any Fund to dispose of its securities or to determine fairly the value of its net assets, or during any other period permitted by order of the SEC for the protection of investors. Furthermore, the Transfer Agent will not mail redemption proceeds until checks received for shares purchased have cleared, but payment will be forwarded immediately upon the funds becoming available. Shareholders will be subject to the applicable deferred sales charge, if any, for their shares at the time of redemption. The contingent deferred sales charge will be waived with respect to Class T Shares in the following instances: (i) any partial or complete redemption of shares of a shareholder who dies or becomes disabled, so long as the redemption is requested within one year of death or the initial determination of disability; (ii) any partial or complete redemption in connection with distributions under Individual Retirement Accounts ("IRAs") or other qualified retirement plans in connection with a lump sum or other form of distribution following retirement within the meaning of Section 72(t)(2)(A) (iv) or (v) of the Code, disability or death, or after attaining the age of 59 1/2 in the case of an IRA, Keogh Plan or custodial account pursuant to Section 403(b)(7) of the Code, or on any redemption that results from a tax free return of an excess contribution pursuant to Section 408(d)(4) or (5) of the Code or Section 4979(f) of the Code; (iii) redemptions effected pursuant to the Funds' right to liquidate a shareholder's account if the aggregate net asset value of the shares held in the account is less than $500; (iv) redemptions effected by (A) employees of The Advest Group, Inc. ("AGI") and its subsidiaries, (B) IRAs, Keogh plans and employee benefit plans for those employees, and (C) spouses and minor children of those employees, so long as orders for shares are placed on behalf of the spouses or children by the employees; (v) redemptions effected by accounts managed by investment advisory subsidiaries of AGI registered under the Investment Advisers Act of 1940; and (vi) redemptions in connection with exchanges of Fund Class T Shares, including shares of the Class T account of the Money Market Portfolio. EXCHANGES The following conditions must be met for all exchanges among the Funds and the Money Market Portfolio: (i) the shares that will be acquired in the exchange (the "Acquired Shares") are available for sale in the shareholder's state of residence; (ii) the Acquired Shares will be registered to the same shareholder account as the Shares to be surrendered (the "Exchanged Shares"); (iii) the Exchanged Shares must have been held in the shareholder's account for at least 30 days prior to the exchange; (iv) except for exchanges into the Money Market Portfolio, the account value of the Fund whose shares are to be acquired must equal or exceed the minimum initial investment amount required by that Fund after the exchange is implemented; and (v) a properly executed exchange request has been received by the Transfer Agent. Each Fund reserves the right to delay the actual purchase of the Acquired Shares for up to five business days if it determines that it would be disadvantaged by an immediate transfer of proceeds from the redemption of Exchanged Shares. Normally, however, the redemption of Exchanged Shares and the purchase of Acquired Shares will take place on the day that the exchange request is received in proper form. Each Fund reserves the right to terminate or modify its exchange privileges at any time upon prominent notice to shareholders. Such notice will be given at least 60 days in advance. It is the policy of ING Pilgrim to discourage and prevent frequent trading by shareholders among the Funds in response to market fluctuations. Accordingly, in order to maintain a stable asset base in each Fund and to reduce administrative expenses borne by each Fund, ING Pilgrim reserves the right to reject any exchange request. 102 If you exchange into Pilgrim Senior Income Fund, your ability to sell or liquidate your investment will be limited. Pilgrim Senior Income Fund is a closed-end interval fund and does not redeem its shares on a daily basis, and it is not expected that a secondary market for the fund's shares will develop, so you will not be able to sell them through a broker or other investment professional. To provide a measure of liquidity, the fund will normally make quarterly repurchase offers of 5% of its outstanding common shares. If more than 5% of the fund's common shares are tendered, you may not be able to completely liquidate your holdings in any one quarter. You also would not have liquidity between these quarterly repurchase dates. Investors exercising the exchange privilege should carefully review the prospectus of that fund. Investors may obtain a copy of the Pilgrim Senior Income Fund prospectus or any other Pilgrim Fund prospectus by calling (800) 992-0180. You are not required to pay an applicable CDSC upon an exchange from any Pilgrim Fund into the Pilgrim Senior Income Fund. However, if you exchange into the Pilgrim Senior Income Fund and subsequently offer your common shares for repurchase by that fund, the CDSC will apply from the original Pilgrim Fund from which you exchanged. The time period for application of the CDSC will be calculated based on the first date you acquired your shares in the original Pilgrim Fund. CONVERSION FEATURE Class B and Class T Shares of each Fund will automatically convert to Class A Shares without a sales charge at the relative net asset values of each of the classes after eight years from the acquisition of the Class B or Class T Shares, and as a result, will thereafter be subject to the lower distribution fee (but same service fee) under the Class A Rule 12b-1 plan for each Fund. CALCULATION OF PERFORMANCE DATA Each Fund may, from time to time, include "total return" in advertisements or reports to shareholders or prospective investors. Quotations of average annual total return will be expressed in terms of the average annual compounded rate of return of a hypothetical investment in a Fund over periods of 1, 5 and 10 years (up to the life of the Fund), calculated pursuant to the following formula which is prescribed by the SEC: n P(1 + T) = ERV Where: P = a hypothetical initial payment of $1,000, T = the average annual total return, n = the number of years, and ERV = the ending redeemable value of a hypothetical $1,000 payment made at the beginning of the period. All total return figures assume that all dividends are reinvested when paid. From time to time, a Fund may advertise its average annual total return over various periods of time. These total return figures show the average percentage change in value of an investment in the Fund from the beginning date of the measuring period. These figures reflect changes in the price of the Fund's shares and assume that any income dividends and/or capital gains distributions made by the Fund during the period were reinvested in shares of the Fund. Figures will be given for one, five and ten year periods (if applicable) and may be given for other periods as well (such as from commencement of the Fund's operations, or on a year-by-year basis). 103 Prior to October 17, 1997, Financial Services Fund operated as a closed-end investment company. Upon conversion of the Fund to an open-end investment company on October 17, 1997, all outstanding shares of Common Stock of the Fund were designated as Class A Shares. Performance information for the period prior to October 17, 1997 reflects the performance of the Fund as a closed-end fund. Performance information presented by the Fund for all periods is restated to reflect the current maximum front-end sales load payable by the Class A Shares of the Fund. Performance information for the period prior to October 17, 1997 has not been adjusted to reflect annual Rule 12b-1 fees of Class A Shares plus additional expenses incurred in connection with operating as an open-end investment company. Performance would have been lower if adjusted for these charges and expenses. Performance information for all periods after October 17, 1997 reflects Class A's annual Rule 12b-1 fees and other expenses associated with open-end investment companies. Quotations of yield for the Funds will be based on all investment income per share earned during a particular 30-day period (including dividends and interest), less expenses accrued during the period ("net investment income") and are computed by dividing net investment income by the maximum offering price per share on the last day of the period, according to the following formula: a-b 6 Yield= 2[(--- + 1) - 1] cd where a = dividends and interest earned during the period, b = expenses accrued for the period (net of reimbursements), c = the average daily number of shares outstanding during the period that were entitled to receive dividends, and d = the maximum offering price per share on the last day of the period. Under this formula, interest earned on debt obligations for purposes of "a" above, is calculated by (1) computing the yield to maturity of each obligation held by the Fund based on the market value of the obligation (including actual accrued interest) at the close of business on the last day of each month, or, with respect to obligations purchased during the month, the purchase price (plus actual accrued interest), (2) dividing that figure by 360 and multiplying the quotient by the market value of the obligation (including actual accrued interest as referred to above) to determine the interest income on the obligation for each day of the subsequent month that the obligation is in the Fund's portfolio (assuming a month of 30 days) and (3) computing the total of the interest earned on all debt obligations and all dividends accrued on all equity securities during the 30-day or one month period. In computing dividends accrued, dividend income is recognized by accruing 1/360 of the stated dividend rate of a security each day that the security is in the Fund's portfolio. For purposes of "b" above, Rule 12b-1 Plan expenses are included among the expenses accrued for the period. Any amounts representing sales charges will not be included among these expenses; however, the Fund will disclose the maximum sales charge as well as any amount or specific rate of any nonrecurring account charges. Undeclared earned income, computed in accordance with generally accepted accounting principles, may be subtracted from the maximum offering price calculation required pursuant to "d" above. A Fund may also from time to time advertise its yield based on a 30-day or 90-day period ended on a date other than the most recent balance sheet included in the Fund's Registration Statement, computed in accordance with the yield formula described above, as adjusted to conform with the differing period for which the yield computation is based. Any quotation of performance stated in terms of yield (whether based on a 30-day or 90-day period) will be given no greater prominence than the information prescribed under SEC rules. In addition, all advertisements containing performance data of any kind will include a legend disclosing that such performance data represents past performance and that the investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. 104 A Fund may also publish a distribution rate in sales literature and in investor communications preceded or accompanied by a copy of the current Prospectus. The current distribution rate for a Fund is the annualization of the Fund's distribution per share divided by the maximum offering price per share of a Fund at the respective month-end. The current distribution rate may differ from current yield because the distribution rate may contain items of capital gain and other items of income, while yield reflects only earned net investment income. In each case, the yield, distribution rates and total return figures will reflect all recurring charges against Fund income and will assume the payment of the maximum sales load, including any applicable contingent deferred sales charge. ADDITIONAL PERFORMANCE QUOTATIONS Advertisements of total return will always show a calculation that includes the effect of the maximum sales charge but may also show total return without giving effect to that charge. Because these additional quotations will not reflect the maximum sales charge payable, these performance quotations will be higher than the performance quotations that reflect the maximum sales charge. Total returns and yields are based on past results and are not necessarily a prediction of future performance. PERFORMANCE COMPARISONS In reports or other communications to shareholders or in advertising material, a Fund may compare the performance of its Class A, Class B, Class C, Class I, Class M, Class Q, and Class T Shares with that of other mutual funds as listed in the rankings prepared by Lipper Analytical Services, Inc., Morningstar, Inc., CDA Technologies, Inc., Value Line, Inc. or similar independent services that monitor the performance of mutual funds or with other appropriate indexes of investment securities. In addition, certain indexes may be used to illustrate historic performance of select asset classes. The performance information may also include evaluations of the Funds published by nationally recognized ranking services and by financial publications that are nationally recognized, such as BUSINESS WEEK, FORBES, FORTUNE, INSTITUTIONAL INVESTOR, MONEY and THE WALL STREET JOURNAL. If a Fund compares its performance to other funds or to relevant indexes, the Fund's performance will be stated in the same terms in which such comparative data and indexes are stated, which is normally total return rather than yield. For these purposes the performance of the Fund, as well as the performance of such investment companies or indexes, may not reflect sales charges, which, if reflected, would reduce performance results. Prior to October 17, 1997, Financial Services Fund was rated as a closed-end fund, which had a different fee structure. Fee structures are incorporated into certain ratings. If the Fund had been rated using the fee structure of an open-end fund, ratings for those periods may have been different. The yield for the various classes of Pilgrim fixed income funds for the month ended May 31, 2001 was as follows: FUND CLASS A CLASS B CLASS C CLASS M CLASS Q CLASS T ---- ------- ------- ------- ------- ------- ------- Convertible Fund 2.68% 2.18% 2.18% N/A 2.98% N/A Balanced Fund 3.55% 3.07% 3.07% N/A 3.82% 3.32% The average annual total returns, including sales charges, for each class of shares of each Fund for the one-, five-, and ten-year periods ended December 31, 2000, if applicable, and for classes that have not been in operation for ten years, the average annual total return from for the period from commencement of operations to December 31, 2000, are as follows: 105 SINCE INCEPTION 1 YEAR 5 YEAR 10 YEAR INCEPTION DATE ------ ------ ------- --------- -------- MAGNACAP FUND Class A -4.58 13.47 14.63 12.39 8/30/73 Class B -3.90 13.84 -- 15.27 7/17/95 Class C -0.30 -- -- 4.11 6/1/99 Class M -2.62 13.54 -- 14.92 7/17/95 Class Q 1.33 -- -- 1.19 11/19/99 FINANCIAL SERVICES FUND Class A 20.43 17.43 20.97 14.48 1/24/86 Class B 21.82 -- -- 2.68 10/20/97 LARGECAP GROWTH FUND Class A -23.77 -- -- 31.42 7/21/97 Class B -23.67 -- -- 32.38 7/21/97 Class C -20.51 -- -- 32.82 7/21/97 Class Q -19.12 -- -- 33.90 7/21/97 MIDCAP GROWTH FUND Class A -10.07 22.17 -- 19.00 4/19/93 Class B -8.99 22.68 -- 24.85 5/31/95 Class C -5.95 22.88 -- 19.18 4/19/93 Class Q -4.47 23.93 -- 24.28 6/30/94 SMALLCAP GROWTH FUND Class A -10.95 18.21 -- 17.42 12/27/93 Class B -10.36 18.56 -- 21.17 5/31/95 Class C -7.05 18.87 -- 17.67 12/27/93 Class Q -5.40 20.16 -- 19.77 8/31/95 CONVERTIBLE FUND Class A -14.26 18.07 -- 16.04 4/19/93 Class B -13.08 18.65 -- 19.34 5/31/95 Class C -10.18 18.76 -- 16.19 4/19/93 Class Q -8.74 19.88 -- 19.29 8/31/95 BALANCED FUND Class A -8.78 11.34 -- 11.07 4/19/93 Class B -8.17 11.83 -- 12.66 5/31/95 Class C -4.68 11.93 -- 11.23 4/19/93 Class Q -3.06 13.06 -- 12.10 8/31/95 Class T -- -- -- -9.99 3/31/00 GROWTH + VALUE FUND Class A -18.02 -- -- 19.51 11/18/96 Class B -17.46 -- -- 20.12 11/18/96 Class C -14.33 -- -- 20.38 11/18/96 Class Q -- -- -- -26.85 6/05/00 RESEARCH ENHANCED INDEX FUND Class A -17.23 -- -- -0.94 12/30/98 Class B -17.16 -- -- -0.10 12/30/98 Class C -13.66 -- -- 1.43 12/30/98 Class I -11.83 -- -- 2.42 12/30/98 Class Q -- -- -- -13.76 4/4/00 106 SINCE INCEPTION 1 YEAR 5 YEAR 10 YEAR INCEPTION DATE ------ ------ ------- --------- -------- SMALLCAP OPPORTUNITIES FUND Class A -11.44 26.15 -- 25.71 6/5/95 Class B -11.71 26.62 -- 26.11 6/5/95 Class C -7.76 26.72 -- 26.14 6/5/95 Class T -10.52 26.93 22.41 15.00 2/3/86 Class I -5.21 -- -- 57.81 4/1/99 Class Q -- -- -- -8.29 4/4/00 MIDCAP OPPORTUNITIES FUND Class A -6.08 -- -- 46.55 8/20/98 Class B -6.13 -- -- 48.64 8/20/98 Class C -2.03 -- -- 49.17 8/20/98 Class I 0.08 -- -- 50.66 8/20/98 Class Q -- -- -- -5.86 4/4/00 GROWTH OPPORTUNITIES FUND Class A -23.75 22.09 -- 21.95 6/5/95 Class B -24.66 22.53 -- 22.37 6/5/95 Class C -20.65 22.73 -- 22.45 6/5/95 Class T -23.60 22.77 18.10 14.87 2/3/86 Class I -18.74 -- -- 26.62 3/31/97 Class Q -- -- -- -17.55 6/1/00 TAX EFFICIENT EQUITY FUND Class A -13.52 -- -- 4.96 12/15/98 Class B -13.41 -- -- 5.71 12/15/98 Class C -9.86 -- -- 7.36 12/15/98 PILGRIM INTERNET FUND Class A -70.93 -- -- -22.49 7/1/99 Class B -70.56 -- -- -21.60 7/1/99 Class C -69.66 -- -- -19.99 7/1/99 GROWTH AND INCOME FUND Class A(1) -8.70 16.12 14.82 -- 2/11/59 Class B -- -- -- -15.69 8/22/00 Class C -- -- -- -10.07 9/26/00 Class A N/A N/A N/A N/A 11/05/01 Class B N/A N/A N/A N/A 11/05/01 Class C N/A N/A N/A N/A 11/05/01 ---------- (1) Prior to July 26, 2000, Lexington Management Corporation served as the adviser to the Fund and the Fund's shares were sold on a no-load basis. Effective July 26, 2000, the Fund's outstanding shares were classified as "Class A" shares. Reports and promotional literature may also contain the following information: (i) a description of the gross national or domestic product and populations, including but not limited to age characteristics, of various countries and regions in which a Fund may invest, as compiled by various organizations, and projections of such information; (ii) the performance of worldwide equity and debt markets; (iii) the capitalization of U.S. and foreign stock markets prepared or published by the International Finance Corporation, Morgan Stanley Capital International or a similar financial organization; (iv) the geographic distribution of a Fund's portfolio; (v) the major industries located in various jurisdictions; (vi) the number of shareholders in the Funds or other Pilgrim Funds and the dollar amount of the assets under management; (vii) descriptions of investing methods such as dollar-cost averaging, best day/worst day scenarios, etc.; (viii) comparisons of the average price to earnings ratio, price to book ratio, price to cash flow and relative currency valuations of the Funds and individual stocks in a Fund's portfolio, appropriate indices and descriptions of such comparisons; (ix) quotes from the Sub-Adviser of a Fund or other industry specialists; (x) lists or statistics of certain of a Fund's holdings including, but not limited to, portfolio composition, sector weightings, portfolio turnover rate, number of holdings, average market capitalization, and modern portfolio theory statistics; (xi) NASDAQ symbols for each class of shares of each Fund; and descriptions of the benefits of working with investment professionals in selecting investments. 107 In addition, reports and promotional literature may contain information concerning the Investment Adviser, the Sub-Advisers, Pilgrim Capital, ING Pilgrim Group, LLC or affiliates of the Company, the Investment Adviser, the Sub-Advisers, Pilgrim Capital or ING Pilgrim Group, LLC including: (i) performance rankings of other funds managed by the Investment Adviser or a Sub-Adviser, or the individuals employed by the Investment Adviser or a Sub-Adviser who exercise responsibility for the day-to-day management of a Fund, including rankings of mutual funds published by Lipper Analytical Services, Inc., Morningstar, Inc., CDA Technologies, Inc., or other rating services, companies, publications or other persons who rank mutual funds or other investment products on overall performance or other criteria; (ii) lists of clients, the number of clients, or assets under management; (iii) information regarding the acquisition of the Pilgrim Funds by Pilgrim Capital; (iv) the past performance of Pilgrim Capital and ING Pilgrim Group, LLC; (v) the past performance of other funds managed by the Investment Adviser; and (vi) information regarding rights offerings conducted by closed-end funds managed by the Investment Adviser. GENERAL INFORMATION CAPITALIZATION AND VOTING RIGHTS The authorized capital stock of Pilgrim Investment Funds, Inc. consists of 500,000,000 shares of $.10 par value each, of which 200,000,000 shares are classified as Shares of MagnaCap Fund. The authorized capital stock of Pilgrim Financial Services Fund, Inc. consists of 100,000,000 shares of common stock having a par value of $0.001/per share. Holders of shares of Pilgrim Financial Services Fund, Inc. have one vote for each share held, and a proportionate fraction of a vote for each fraction of a share held. The authorized capital of Pilgrim Mutual Funds, Pilgrim Equity Trust, Pilgrim SmallCap Opportunities Fund, Pilgrim Growth Opportunities Fund, and Pilgrim Mayflower Trust, is in each case an unlimited number of shares of beneficial interest. The authorized capital of Growth and Income Fund consists of 500,000,000 shares of common stock having a par value of $0.001/per share. The authorized capital of Pilgrim Funds Trust consists solely of an unlimited number of shares of beneficial interest with a par value of $0.001 each.. Holders of shares of each Funds have one vote for each share held. All shares when issued are fully paid, non-assessable, and redeemable. Shares have no preemptive rights. All shares have equal voting, dividend and liquidation rights. Shares have non-cumulative voting rights, which means that the holders of more than 50% of the shares voting for the election of Directors/Trustees can elect 100% of the Directors/Trustees if they choose to do so, and in such event the holders of the remaining shares voting for the election of Directors/Trustees will not be able to elect any person or persons to the Board of Directors/Trustees. Generally, there will not be annual meetings of shareholders. There will normally be no meetings of shareholders for the purpose of electing Directors/Trustees unless and until such time as less than a majority of the Directors/Trustees holding office have been elected by shareholders, at which time the Directors/Trustees then in office will call a shareholders' meeting for the election of Directors/Trustees. Shareholders may, in accordance with a Fund's charter, cause a meeting, of shareholders to be held for the purpose of voting on the removal of Directors/Trustees. Meetings of the shareholders will be called upon written request of shareholders holding in the aggregate not less than 10% of the outstanding shares of the affected Fund or class having voting rights. Except as set forth above and subject to the 1940 Act, the Directors/Trustees will continue to hold office and appoint successor Directors/Trustees. The Board of Directors/Trustees may classify or reclassify any unissued shares into shares of any series by setting or changing in any one or more respects, from time to time, prior to the issuance of such shares, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or qualifications of such shares. Any such classification or reclassification will comply with the provisions of the 1940 Act. The Board of Directors/Trustees may create additional series (or classes of series) of shares without shareholder approval. Any series or class of shares may be terminated by a vote of the shareholders of such series or class entitled to vote or by the Directors/Trustees of the Company by written notice to shareholders of such series or class. Shareholders may remove Directors/Trustees from office by votes cast at a meeting of shareholders or by written consent. CUSTODIAN The cash and securities owned by Growth + Value, Research Enhanced Index, LargeCap Growth, MidCap Growth, SmallCap Growth, Convertible, Balanced, MagnaCap and Financial Services Funds are held by State Street, 801 Pennsylvania, Kansas City, Missouri 64105, as Custodian, which takes no part in the decisions relating to the purchase or sale of a Fund's portfolio securities. The cash and securities owned by Growth & Income Fund are held by State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02181, as custodian, which takes no part in the decisions relating to the purchase or sale of the Fund's portfolio securities. 108 LEGAL COUNSEL Legal matters for each Company are passed upon by Dechert, 1775 Eye Street, N.W., Washington, D.C. 20006. INDEPENDENT AUDITORS KPMG LLP acts as independent auditors for the funds. KPMG is located at 355 South Grand Avenue, Los Angeles, California 90071. OTHER INFORMATION Each Company is registered with the SEC as an open-end management investment company. Such registration does not involve supervision of the management or policies of the Company by any governmental agency. The Prospectus and this Statement of Additional Information omit certain of the information contained in each Company's Registration Statement filed with the SEC and copies of this information may be obtained from the SEC upon payment of the prescribed fee or examined at the SEC in Washington, D.C. without charge. Investors in the Funds will be kept informed of the Funds' progress through annual and semi-annual reports showing portfolio composition, statistical data and any other significant data, including financial statements audited by independent certified public accountants. REPORTS TO SHAREHOLDERS The fiscal year of each Fund ends on May 31. Each Fund will send financial statements to its shareholders at least semiannually. An annual report containing financial statements audited by the independent auditors will be sent to shareholders each year. DECLARATION OF TRUST Equity Trust, SmallCap Opportunities Fund, Growth Opportunities Fund, and Mayflower Trust are organized as Massachusetts business trusts. The Declaration of Trust of each of these Funds provides that obligations of the Fund are not binding upon its Trustees, officers, employees and agents individually and that the Trustees, officers, employees and agents will not be liable to the trust or its investors for any action or failure to act, but nothing in the Declaration of Trust protects a Trustee, officer, employee or agent against any liability to the trust or its investors to which the Trustee, officer, employee or agent would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of his or her duties. The Declaration of Trust also provides that the debts, liabilities, obligations and expenses incurred, contracted for or existing with respect to a designated Fund shall be enforceable against the assets and property of such Fund only, and not against the assets or property of any other Fund or the investors therein. FINANCIAL STATEMENTS The financial statements from the Funds' May 31, 2001 Annual Reports are incorporated herein by reference. Copies of the Funds' Annual and Semi-Annual Reports may be obtained without charge by contacting Pilgrim Funds at 7337 E. Doubletree Ranch Road, Scottsdale, Arizona 85258, (800) 992-0180. 109 PART C OTHER INFORMATION ITEM 23. EXHIBITS (a) (1) Form of Articles of Incorporation-- filed as an Exhibit to Post-Effective Amendment No. 69 to Registrant's Registration Statement on Form N-1A on July 26, 2000 and incorporated herein by reference. (2) Form of Articles Supplementary Designating Classes A, B, C & Q -- filed as an Exhibit to Post-Effective Amendment No. 69 to Registrant's Registration Statement on Form N-1A on July 26, 2000 and incorporated herein by reference. (b) Form of Bylaws-- filed as an Exhibit to Post-Effective Amendment No. 69 to Registrant's Registration Statement on Form N-1A on July 26, 2000 and incorporated herein by reference. (c) Not Applicable (d) Form of Investment Management Agreement between Registrant and Pilgrim Investments, Inc.-- previously filed as an Exhibit to Post-Effective Amendment No. 70 to Registrant's Registration Statement on Form N-1A on March 1, 2001 and incorporated herein by reference.. (e) (1) Form of Underwriting Agreement between Registrant and Pilgrim Securities, Inc.-- previously filed as an Exhibit to Post-Effective Amendment No. 70 to Registrant's Registration Statement on Form N-1A on March 1, 2001. (2) Form of Service and Distribution Plan-- filed herein. (f) Not Applicable (g) Form of Custodian Agreement between Registrant and State Street Bank & Trust Company-- filed as an Exhibit to Post-Effective Amendment No. 69 to Registrant's Registration Statement on Form N-1A on July 26, 2000 and incorporated herein by reference. (h) (1) Form of Administration Agreement between Registrant and Pilgrim Group, Inc.-- filed as an Exhibit to Post-Effective Amendment No. 69 to Registrant's Registration Statement on Form N-1A on July 26, 2000 and incorporated herein by reference. (2) Form of Expense Limitation Agreement between Registrant and Pilgrim Investments, Inc.-- filed as an Exhibit to Post-Effective Amendment No. 69 to Registrant's Registration Statement on Form N-1A on July 26, 2000 and incorporated herein by reference. (3) Form of Selling Group Agreement -- previously filed as an Exhibit to Post-Effective Amendment No. 71 to the Registrant's Registration Statement on Form N-1A on April 30, 2001 and incorporated herein by reference. (4) Form of Financial Institution Selling Group Agreement -- previously filed as an Exhibit to Post-Effective Amendment No. 71 to the Registrant's Registration Statement on Form N-1A on April 30, 2001 and incorporated herein by reference. C-1 (i) Opinion of Counsel - Filed as an Exhibit to Post-Effective amendment No. 65 to Registrant's Registration Statement on Form N-1A on March 2, 1998 and incorporated herein by reference (j) (1) Consent of KPMG LLP-- filed herein. (2) Consent of Dechert-- filed herein. (k) Not Applicable (l) Form of Investment Letter of Initial Investors in Registrant - Filed as an exhibit to Registrant's Form N-1A Registration Statement and incorporated herein by reference (m) (1) Form of Service and Distribution Plan for Class A Shares -- filed as an Exhibit to Post-Effective Amendment No. 69 to Registrant's Registration Statement on Form N-1A on July 26, 2000 and incorporated herein by reference. (2) Form of Service and Distribution Plan for Class B Shares -- filed as an Exhibit to Post-Effective Amendment No. 69 to Registrant's Registration Statement on Form N-1A on July 26, 2000 and incorporated herein by reference. (3) Form of Service and Distribution Plan for Class C Shares -- filed as an Exhibit to Post-Effective Amendment No. 69 to Registrant's Registration Statement on Form N-1A on July 26, 2000 and incorporated herein by reference. (4) Form of Shareholder Service Plan for Class Q Shares -- filed as an Exhibit to Post-Effective Amendment No. 69 to Registrant's Registration Statement on Form N-1A on July 26, 2000 and incorporated herein by reference. (n) (1) Form of Multiple Class Plan Pursuant to Rule 18f-3-- filed herein. (2) Form of Multiple Class Plan Pursuant to Rule 18f-3 -- filed as an Exhibit to Post-Effective Amendment No. 69 to Registrant's Registration Statement on Form N-1A on July 26, 2000 and incorporated herein by reference. (o) Form of Code of Ethics-- filed as an Exhibit to Post-Effective Amendment No. 69 to Registrant's Registration Statement on Form N-1A on July 26, 2000 and incorporated herein by reference. ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT None. ITEM 25. INDEMNIFICATION Article Seventh of the Articles of Incorporation provides to the fullest extent that limitations on the liability of directors and officers are permitted by the Maryland General Corporation Law, no director or officer of the corporation shall have any liability to the corporation or its stockholders for damages. This limitation on liability applies to events occurring at the time a person serves as a director or officer of the corporation whether or not such person is a director or officer at the time of any proceeding in which liability is asserted. The corporation shall indemnify and advance expenses to its currently acting and its former directors to the fullest extent that indemnification of directors is permitted by the Maryland General Corporation C-2 Law. The corporation shall indemnify and advance expenses to its officers to the same extent as its directors and to such further extent as is consistent with the law. The Board of Directors may, through a by-law, resolution or agreement, make further provisions for indemnification of directors, officers, employees and agents to the fullest extent permitted by Maryland General Corporation Law. No provision of the Articles of Incorporation shall be effective to require a waiver of compliance with any provision of the Securities Act of 1933, or of the Investment Company Act of 1940, or of any valid rule, regulation or order of the Securities and Exchange Commission thereunder or to protect or purport to protect any director or officer of the corporation against any liability to the corporation or its stockholders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Section 7 of Registrant's Administration Agreement provides for the indemnification of Registrant's Administrator against all liabilities incurred by it in performing its obligations under the agreement, except with respect to matters involving its disabling conduct. Registrant has obtained from a major insurance carrier a trustees' and officers' liability policy covering certain types of errors and omissions. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a trustee, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISERS Information as to the directors and officers of the Investment Manager, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by the directors and officers of the Investment Manager in the last two years, is included in its application for registration as an investment adviser on Form ADV (File No. 801-48282) filed under the Investment Advisers Act of 1940 and is incorporated herein by reference thereto. ITEM 27. PRINCIPAL UNDERWRITERS (a) ING Pilgrim Securities, Inc. is the principal underwriter for the Registrant and for Pilgrim Advisory Funds, Inc., Pilgrim Investment Funds, Inc., Pilgrim Bank and Thrift Fund, Inc., Pilgrim Prime Rate Trust, Pilgrim Mutual Funds, Pilgrim Equity Trust, Pilgrim SmallCap Opportunities Fund, Pilgrim Growth Opportunities Fund, Pilgrim Mayflower Trust, Pilgrim Global Technology Fund, Inc., Pilgrim GNMA Income Fund, Inc., Pilgrim Precious Metals Fund, Inc., Pilgrim International Fund, Inc., Pilgrim Silver Fund, Inc., Pilgrim SmallCap Asia Growth Fund, Inc., Pilgrim Russia Fund, Pilgrim Worldwide Emerging Markets Fund, Inc., Pilgrim Funds Trust and Lexington Money Market Trust. C-3 (b) Information as to the directors and officers of the Distributor, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by the directors and officers of the Distributor in the last two years, is included in its application for registration as a broker-dealer on Form BD (File No. 8-48020) filed under the Securities Exchange Act of 1934 and is incorporated herein by reference thereto. (c) Not applicable. ITEM 28. LOCATION OF ACCOUNTS AND RECORDS All accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940 and the rules promulgated thereunder are maintained at the offices of (a) the Registrant, (b) ING Pilgrim Investments, LLC, (c) ING Pilgrim Group, LLC, (d) the Portfolio Managers, (e) the Custodians and (f) the Transfer Agent. The address of each is as follows: (a) Pilgrim Growth and Income Fund, Inc. 7337 East Doubletree Ranch Rd. Scottsdale, Arizona 85258 (b) ING Pilgrim Investments, LLC 7337 East Doubletree Ranch Rd. Scottsdale, Arizona 85258 (c) ING Pilgrim Group, LLC 7337 East Doubletree Ranch Rd. Scottsdale, Arizona 85258 (d) ING Pilgrim Investments, LLC 7337 East Doubletree Ranch Rd. Scottsdale, Arizona 85258 (e) State Street Bank and Trust Company 225 Franklin Street Boston, MA 02110 (f) DST Systems, Inc. P.O. Box 419368 Kansas City, Missouri 64141 ITEM 29. MANAGEMENT SERVICES None. ITEM 32. UNDERTAKINGS Not Applicable. C-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, Registrant certifies that it meets all the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Scottsdale and State of Arizona on the 28th day of September, 2001. PILGRIM GROWTH AND INCOME FUND, INC. By: /s/ Kimberly A. Anderson ------------------------------------ Kimberly A. Anderson Vice President and Secretary Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated. SIGNATURE TITLE DATE --------- ----- ---- ---------------------- Director and Chairman September 28, 2001 John G. Turner* ---------------------- President and Chief Executive James M. Hennessy* Officer September 28, 2001 ---------------------- Director September 28, 2001 Paul S. Doherty* ---------------------- Director September 28, 2001 Alan L. Gosule* ---------------------- Director September 28, 2001 Walter H. May, Jr.* ---------------------- Director September 28, 2001 Thomas J. McInerney* ---------------------- Director September 28, 2001 Jock Patton* ---------------------- Director September 28, 2001 David W.C. Putnam* C-5 SIGNATURE TITLE DATE --------- ----- ---- ---------------------- Director September 28, 2001 Blaine E. Rieke* ---------------------- Director September 28, 2001 Richard A. Wedemeyer* ---------------------- Senior Vice President and Michael J. Roland* Principal Financial Officer September 28, 2001 *By: /s/ Kimberly A. Anderson --------------------------------- Kimberly A. Anderson, Vice President and Secretary Attorney-in-Fact** ---------- ** Powers of Attorney for the Directors, James M. Hennessy and Michael J. Roland were filed as part of Post-Effective Amendment No. 70 to the Registrant's Registration Statement on Form N-1A as filed on March 1, 2001 and are incorporated herein by reference. C-6 EXHIBIT LIST EXHIBIT NUMBER NAME OF EXHIBIT -------------- --------------- (e)(2) Form of Service and Distribution Plan (j)(1) Consent of KPMG LLP (j)(2) Consent of Dechert (n)(1) Form of Multiple Class Plan Pursuant to Rule 18f-3 EX-99.E.2 3 ex-e2.txt GROWTH AND INCOME SERVICE PLAN Exhibit (e)(2) FORM OF SERVICE AND DISTRIBUTION PLAN WHEREAS, Pilgrim Growth and Income Fund, Inc. (the "Company") engages in business as an open-end management investment company and is registered as such under the Investment Company Act of 1940, as amended (the "Act"); WHEREAS, shares of common stock of the Company currently consist of one series, Pilgrim Growth and Income Fund (the "Fund"); WHEREAS, shares of common stock of the Fund are divided into classes of shares, one of which is designated Class B; WHEREAS, the Company employs ING Pilgrim Securities, Inc. as distributor of the securities of which it is the issuer and may from time to time retain, pursuant to the terms of a distribution agreement with such person (each, an "Underwriting Agreement") other persons to so act pursuant to this Service and Distribution Plan (the "Plan") (each such person so acting from time to time, the "Distributor"); WHEREAS, the Company and the Distributor have entered into an Underwriting Agreement pursuant to which the Company has employed the Distributor in such capacity during the continuous offering of shares of the Company; and WHEREAS, the Company wishes to amend and restate the Plan with respect to all Class B shares, whether issued before or after the date hereof, as set forth hereinafter. NOW, THEREFORE, the Company hereby amends this Plan on behalf of the Fund with respect to its Class B shares, in accordance with Rule 12b-l under the Act, on the following terms and conditions: 1. A. The Fund shall pay to each Distributor, as compensation for acting as principal distributor in respect of the Class B Shares (as hereinafter defined) of the Fund its "Allocable Portion" (as hereinafter defined) of a fee (the "Distribution Fee"), which shall accrue daily at the rate of 0.75% per annum of the Fund's average daily net assets attributable to Class B Shares of the Fund and be payable monthly. The Underwriting Agreement between the Company and each Distributor relating to the Class B Shares shall provide that: (I) the Distributor will be deemed to have performed all services required to be performed in order to be entitled to receive its Allocable Portion (as defined below) of the Distribution Fee payable in respect of the Class B Shares upon the settlement date of each sale of a "Commission Share" (as defined in the Allocation Schedule attached to the Underwriting Agreement) taken into account in determining such Distributor's Allocable Portion of such Distribution Fee; (II) notwithstanding anything to the contrary in this Plan or the Underwriting Agreement, the Fund's obligation to pay such Distributor its Allocable Portion of the Distribution Fee payable shall not be terminated or modified (including, without limitation, by a change in the rules applicable to the conversion of Class B Shares into shares of another class) for any reason (including a termination of the Underwriting Agreement between such Distributor and the Fund) except: (a) to the extent required by a change in the Investment Company Act of 1940 (the "Act"), the rules and regulations under the Act, the Conduct Rules of the National Association of Securities Dealers, Inc. ("NASD") or other applicable law, in each case enacted or promulgated after April 30, 2001; (b) on a basis which does not alter the Distributor's Allocable Portion of the Distribution Fee computed with reference to Commission Shares, the Date of Original Issuance (as defined in the Allocation Schedule attached to the Underwriting Agreement) of which occurs on or prior to the adoption of such termination or modification and with respect to Free Shares (as defined in the Allocation Schedule) which would be attributed to such Distributor under the Allocation Schedule with reference such Commission Shares; or (c) in connection with a "Complete Termination" (as hereinafter defined) of the Plan; (III) the Fund will not take any action to waive or change any contingent deferred sales charge ("CDSC") in respect of the Class B Shares, the Date of Original Issuance of which occurs, on or prior to the taking of such action except as provided in the Fund's prospectus or statement of additional information on the date such Commission Share was issued, without the consent of such Distributor and its Transferees (as hereinafter defined); (IV) notwithstanding anything to the contrary in this Distribution Plan or the Underwriting Agreement, neither the termination of such Distributor's role as principal distributor of the Class B Shares, nor the termination of such Underwriting Agreement, nor the termination of this Plan will terminate such Distributor's right to its Allocable Portion of the CDSCs; and (V) notwithstanding anything to the contrary in the Distribution Plan or the Underwriting Agreement, such Distributor may assign, sell or pledge (collectively, "Transfer") its rights to its Allocable Portion of the Distribution Fees and CDSCs and, upon receipt of notice of such Transfer, each Fund shall pay to the assignee, purchaser or pledgee (collectively with their subsequent transferees, "Transferees"), as third party beneficiaries of such Underwriting Agreement, such portion of such Distributor's Allocable Portion of the Distribution Fees or CDSCs in respect of the Class B Shares so sold or pledged, and except as provided in (II) above and notwithstanding anything of the contrary set forth in this Plan or in the Underwriting Agreement, the Fund's obligation to pay such Distributor's Allocable Portion of the Distribution Fees and CDSCs payable in respect of the Class B Shares shall be absolute and unconditional and shall not be subject to dispute, offset, counterclaim or any defense whatsoever, at law or equity, including, without limitation, any of the foregoing based on the insolvency or bankruptcy of such Distributor. 2 For purposes of this Plan, the term "Allocable Portion" of Distribution Fees or CDSCs payable in respect of the Class B Shares as applied to any Distributor shall mean the portion of such Distribution Fees or CDSCs payable in respect of such Class B Shares allocated to such Distributor in accordance with the Allocation Schedule (attached to the Underwriting Agreement as it relates to the Class B Shares). For purposes of this Plan and each Distribution Agreement, the term "Complete Termination" of the Plan means a termination of this Plan and every other distribution plan of the Fund for Class B shares, each successor company or fund, and each company or fund acquiring a substantial portion of the assets of the Fund (collectively, the "Affected Funds") involving the complete cessation of the payment of Distribution Fees in respect of all current Class B shares of the Affected Funds and each future class of shares of the Affected Funds which has substantially similar characteristics to the shares of the current Class B shares of the Fund, including the manner of payment and amount of sales charge, contingent deferred sales charge or other similar charges borne directly or indirectly by the holders of such shares (all such classes of shares "Class B Shares"); provided that (a) the Directors of the Company, including the independent Directors of the Company, shall have determined that such termination is in the best interest of the Fund and the shareholders of the Fund, and (b) such termination does not alter the CDSC as in effect at the time of such termination applicable to Commission Shares of the Fund, the Date of Original Issuance of which occurs prior to such termination. B. In addition to the amount provided in 1.A. above, the Fund shall pay to the Distributor, as the distributor of the Class B shares of the Fund, a service fee at the rate of 0.25% on an annualized basis of the average daily net assets of the Fund's Class B shares, provided that, at any time such payment is made, whether or not this Plan continues in effect, the making thereof will not cause the limitation upon such payments established by this Plan to be exceeded. Such fee shall be calculated and accrued daily and paid monthly or at such intervals as the Board of Directors shall determine, subject to any applicable restriction imposed by rules of the NASD. 2. The amount set forth in paragraph 1.A. of this Plan shall be paid for the Distributor's services as distributor of the shares of the Fund in connection with any activities or expenses primarily intended to result in the sale of the Class B shares of the Fund, including, but not limited to, payment of compensation, including incentive compensation, to securities dealers (which may include the Distributor itself) and other financial institutions and organizations (collectively, the "Service Organizations") to obtain various distribution related and/or administrative services for the Fund. These services may include, among other things, processing new shareholder account applications, preparing and transmitting to the Fund's Transfer Agent computer processable tapes of all transactions by customers and serving as the primary source of information to customers in providing information and answering questions concerning the Fund and their transactions with the Fund. The Distributor is also authorized to engage in advertising, the preparation and distribution of sales literature and other promotional activities on behalf of the Fund. In addition, this Plan hereby authorizes payment by the Fund of the cost of printing and distributing Fund Prospectuses and Statements of Additional Information to prospective investors and of implementing and operating the Plan. Distribution expenses also include an allocation of overhead of the Distributor and accruals for interest on the amount of distribution expenses that exceed distribution fees and CDSCs received by the Distributor. Payments under the Plan are not tied exclusively to actual distribution and service expenses, and the payments may exceed distribution and service expenses actually incurred. 3 The amount set forth in paragraph 1.B. of this Plan may be used by the Distributor to pay securities dealers (which may include the Distributor itself) and other financial institutions and organizations for servicing shareholder accounts, including a continuing fee which may accrue immediately after the sale of shares. 3. This Plan shall not take effect until it, together with any related agreements, has been approved by votes of a majority of both (a) the Company's Board of Directors and (b) those Directors of the Company who are not "interested persons" of the Company (as defined in the Act) and who have no direct or indirect financial interest in the operation of this Plan or any agreements related to it (the "Rule 12b-l Directors"), cast in person at a meeting (or meetings) called for the purpose of voting on this Plan and such related agreements. 4. After approval as set forth in paragraph 3, and any other approvals required pursuant to the Act and Rule 12b-1 thereunder, this Plan shall take effect at the time specified by the Company's Board of Directors. The Plan shall continue in full force and effect as to the Class B shares of the Fund for so long as such continuance is specifically approved at least annually in the manner provided for approval of this Plan in paragraph 3. 5. The Distributor shall provide to the Directors of the Company, at least quarterly, a written report of the amounts so expended and the purposes for which such expenditures were made. 6. This Plan may be terminated as to the Fund at any time, without payment of any penalty, by vote of the Directors of the Company, by vote of a majority of the Rule 12b-l Directors, or by a vote of a majority of the outstanding voting securities of Class B shares of the Fund on not more than 30 days' written notice to any other party to the Plan. 7. This Plan may not be amended to increase materially the amount of distribution fee (including any service fee) provided for in paragraph 1 hereof unless such amendment is approved by a vote of the shareholders of the Class B shares of the Fund, and no material amendment to the Plan shall be made unless approved in the manner provided for approval and annual renewal in paragraph 3 hereof. 8. While this Plan is in effect, the selection and nomination of Directors who are not interested persons (as defined in the Act) of the Company shall be committed to the discretion of the Directors who are not such interested persons. 9. The Company shall preserve copies of this Plan and any related agreements and all reports made pursuant to paragraph 5 hereof, for a period of not less than six years from the date of this Plan, and any such agreement or any such report, as the case may be, must be kept in an easily accessible place for the first two years. Dated: August 7, 2001 4 EX-99.J.1 4 ex-j1.txt CONSENT OF KPMG LLP Exhibit (j)(1) INDEPENDENT AUDITORS' CONSENT The Board of Directors of Pilgrim Growth & Income Fund, Inc.: We consent to the use of our report incorporated herein by reference and to the references to our firm under the heading "Financial Highlights" in the prospectus and "Independent Auditors" in the statement of additional information. /s/ KPMG LLP Los Angeles, California September 28, 2001 EX-99.J.2 5 ex-j2.txt CONSENT OF DECHERT Exhibit (j)(2) [LETTERHEAD OF DECHERT] September 28, 2001 Pilgrim Growth and Income Fund, Inc. 7337 East Doubletree Ranch Road Scottsdale, Arizona 85258-2034 Re: Pilgrim Growth and Income Fund, Inc. (File Nos. 2-14767 and 811-0865) Dear Sirs: We hereby consent to all references to our firm in Post-Effective Amendment No. 72 to the Registration Statement of Pilgrim Growth and Income Fund, Inc. In giving such consent, however, we do not admit that we are within the category of persons whose consent is required by Section 7 of the Securities Act of 1933, as amended, and the rules and regulations thereunder. Very truly yours, /s/ Dechert EX-99.N.1 6 ex-n1.txt 18F-3 PLAN Exhibit (n)(1) FORM OF MULTIPLE CLASS PLAN PURSUANT TO RULE 18f-3 FOR PILGRIM GROWTH AND INCOME FUND, INC. WHEREAS, Pilgrim Growth and Income Fund, Inc. (the "Company") engages in business as an open-end management investment company and is registered as such under the Investment Company Act of 1940, as amended (the "Act"); and WHEREAS, shares of common stock of the Company currently consist of one series, Pilgrim Growth and Income Fund (the "Fund"); and WHEREAS, the Company has adopted, on behalf of the Fund, a Multiple Class Plan pursuant to Rule 18f-3 under the Act (the "Plan") with respect to the Fund; and WHEREAS, pursuant to an Underwriting Agreement dated July 26, 2000, the Company on behalf of the Fund employs Pilgrim Securities, Inc. ("Distributor") as distributor of the securities of which it is the issuer; and NOW, THEREFORE, the Company hereby adopts, on behalf of the Fund, the Plan, in accordance with Rule 18f-3 under the Act on the following terms and conditions: 1. FEATURES OF THE CLASSES. The Fund issues its shares of common stock in four classes: "Class A Shares," "Class B Shares," "Class C Shares," and "Class Q Shares". Shares of each class of the Fund shall represent an equal pro rata interest in the Fund and, generally, shall have identical voting, dividend, liquidation, and other rights, preferences, powers, restrictions, limitations, qualifications and terms and conditions, except that: (a) each class shall have a different designation; (b) each class of shares shall bear any Class Expenses, as defined in Section 5 below; and (c) each class shall have exclusive voting rights on any matter submitted to shareholders that relates solely to it or its distribution arrangement and each class shall have separate voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of any other class. In addition, Class A, Class B, Class C, and Class Q shares shall have the features described in Sections 2, 5 and 6 below. 2. SALES CHARGE STRUCTURE. (a) CLASS A SHARES. Class A shares of the Fund shall be offered at the then-current net asset value plus a front-end sales charge. The front-end sales charge shall be in such amount as is disclosed in a Fund's current prospectus or prospectus supplement and shall be subject to reductions for larger purchases and such waivers or reductions as are determined or approved by the Board of Directors. There is no initial front-end sales charge on purchases of an amount as disclosed in the prospectus. Class A shares generally shall not be subject to a contingent deferred sales charge provided, however, that such a charge may be imposed when shares are redeemed within one or two years of purchase and/or in such other cases as is disclosed in the Fund's current prospectus or supplement thereto subject to the supervision of the Board of Directors. -1- (b) CLASS B SHARES. Class B shares of the Fund shall be offered at the then-current net asset value without the imposition of a front-end sales charge. A contingent deferred sales charge in such amount as is described in the Fund's current prospectus or prospectus supplement shall be imposed on Class B shares, subject to such waivers or reductions as are described in the Fund's prospectus or supplement thereto, subject to the supervision of the Fund's Board of Directors. (c) CLASS C SHARES. Class C shares of the Fund shall be offered at the then-current net asset value without the imposition of a front-end sales charge. A contingent deferred sales charge in such amount as is described in the Fund's current prospectus or prospectus supplement shall be imposed on Class C shares, subject to such waivers or reductions as are described in the Fund's prospectus or supplement thereto, subject to the supervision of the Fund's Board of Directors. (d) CLASS Q SHARES. Class Q shares of the Fund shall be offered at the then-current net asset value without the imposition of a front-end sales charge. Class Q shares shall not be subject to a contingent deferred sales charge. 3. SERVICE AND DISTRIBUTION PLANS. Each class of shares of the Fund has adopted a Rule 12b-1 plan each with the following terms: (a) CLASS A SHARES. Class A shares of the Fund may pay Distributor monthly a fee at an annual rate of 0.25% of the average daily net assets of the Fund's Class A shares for distribution or service activities (each as defined in paragraph (f), below), as designated by Distributor. Distributor, on behalf of Class A shares of the Fund, may pay Authorized Dealers quarterly a fee at the annual rate of 0.25% of the average daily net assets of the Fund's Class A shares for shareholder services and distribution activities (as defined in paragraph (f), below) rendered to Class A Shareholders. (b) CLASS B SHARES. Class B shares of the Fund may pay Distributor monthly a fee at the annual rate of 1.00% of the average daily net assets of the Fund's Class B shares for distribution or service activities (as defined in paragraph (f), below), as designated by Distributor. Distributor, on behalf of Class B shares of the Fund, may pay Authorized Dealers quarterly a fee at the annual rate of 0.25% of the average daily net assets of the Fund's Class B shares for distribution and service activities (as defined in paragraph (f), below) rendered to Class B shareholders. (c) CLASS C SHARES. Class C shares of the Fund may pay Distributor monthly a fee at the annual rate of 1.00% of the average daily net assets of the Fund's Class C shares for distribution or service activities (as defined in paragraph (f), below), as designated by Distributor. Distributor, on behalf of Class C -2- shares of the Fund, may pay Authorized Dealers quarterly a fee at the annual rate of 0.25% of the average daily net assets of the Fund's Class C shares for distribution and service activities (as defined in paragraph (f), below) rendered to Class C shareholders. (d) CLASS Q SHARES. Class Q shares of the Fund may pay Distributor monthly a fee at the annual rate of 0.25% of the average daily net assets of the Fund's Class Q shares for service activities (as defined in paragraph (f), below) as designated by Distributor. Distributor, on behalf of Class Q shares, may pay Authorized Dealers quarterly a fee at the annual rate of 0.25% of the average daily net assets of the Fund's Class Q shares for service activities (as defined in paragraph (f), below) rendered to Class Q shareholders. (e) DISTRIBUTION AND SERVICE ACTIVITIES. (1) As used herein, the term "distribution services" shall include services rendered by Distributor as distributor of the shares of a Fund in connection with any activities or expenses primarily intended to result in the sale of shares of a Fund, including, but not limited to, compensation to registered representatives or other employees of Distributor or to other broker-dealers that have entered into an Authorized Dealer Agreement with Distributor, compensation to and expenses of employees of Distributor who engage in or support distribution of the Funds' shares; telephone expenses; interest expense; printing of prospectuses and reports for other than existing shareholders; preparation, printing and distribution of sales literature and advertising materials; and profit and overhead on the foregoing. (2) As used herein, the term "service activities" shall mean activities in connection with the provision of personal, continuing services to investors in each Fund, excluding transfer agent and subtransfer agent services for beneficial owners of shares of a Fund, aggregating and processing purchase and redemption orders, providing beneficial owners with account statements, processing dividend payments, providing subaccounting services for Fund shares held beneficially, forwarding shareholder communications to beneficial owners and receiving, tabulating and transmitting proxies executed by beneficial owners; provided, however, that if the National Association of Securities Dealers Inc. ("NASD") adopts a definition of "service fee" for purposes of Section 2830 of the NASD Conduct Rules that differs from the definition of "service activities" hereunder, or if the NASD adopts a related definition intended to define the same concept, the definition of "service activities" in this Paragraph shall be automatically amended, without further action of the Board of Directors, to conform to such NASD definition. Overhead and other expenses of Distributor related to its "service activities," including telephone and other communications expenses, may be included in the information regarding amounts expended for such activities. 4. COMPLIANCE STANDARDS. The Company desires that investors in the Fund select the sales financing method that best suits his or her particular financial situation. In this connection, Distributor may encourage Authorized Dealers to establish standards which govern sales of shares of the Fund to assist investors in making investment decisions and to help ensure proper supervision of purchase recommendations. 5. ALLOCATION OF INCOME AND EXPENSES. (a) The gross income of the Fund shall, generally, be allocated to each class on the basis of relative net assets. To the extent practicable, certain expenses (other than Class Expenses -3- as defined below which shall be allocated more specifically) shall be subtracted from the gross income on the basis of the net assets of each class of the Fund. These expenses include: (1) Expenses incurred by the Company (for example, fees of Directors, auditors and legal counsel) not attributable to the Fund or to a particular class of shares of the Fund ("Corporate Level Expenses"); and (2) Expenses incurred by the Fund not attributable to any particular class of the Fund's shares (for example, advisory fees, custodial fees, or other expenses relating to the management of the Fund's assets) ("Fund Expenses"). (b) Expenses attributable to a particular class ("Class Expenses") shall be limited to: (i) payments made pursuant to a 12b-1 plan; (ii) transfer agent fees attributable to a specific class; (iii) printing and postage expenses related to preparing and distributing materials such as shareholder reports, prospectuses and proxies to current shareholders of a specific class; (iv) Blue Sky registration fees incurred by a class; (v) SEC registration fees incurred by a class; (vi) the expense of administrative personnel and services to support the shareholders of a specific class; (vii) litigation or other legal expenses relating solely to one class; and (viii) directors' fees incurred as a result of issues relating to one class. Expenses in category (i) above must be allocated to the class for which such expenses are incurred. All other "Class Expenses" listed in categories (ii)-(viii) above may be allocated to a class but only if the President and Chief Financial Officer have determined, subject to Board approval or ratification, which of such categories of expenses will be treated as Class Expenses, consistent with applicable legal principles under the Act and the Internal Revenue Code of 1986, as amended. Therefore, expenses of the Fund shall be apportioned to each class of shares depending on the nature of the expense item. Corporate Level Expenses and Fund Expenses will be allocated among the classes of shares based on their relative net asset values. Approved Class Expenses shall be allocated to the particular class to which they are attributable. In addition, certain expenses may be allocated differently if their method of imposition changes. Thus, if a Class Expense can no longer be attributed to a class, it shall be charged to the Fund for allocation among classes, as determined by the Board of Directors. Any additional Class Expenses not specifically identified above which are subsequently identified and determined to be properly allocated to one class of shares shall not be so allocated until approved by the Board of Directors of the Company in light of the requirements of the Act and the Internal Revenue Code of 1986, as amended. 6. EXCHANGE PRIVILEGES. Shares of one class of the Fund may be exchanged for shares of that same class of any other Pilgrim Fund at NAV without payment of any additional front-end sales charge, except as provided below and except that any contingent deferred sales charge ("CDSC") that was applicable to the original Pilgrim Fund being held by the shareholder shall continue to apply to the investment into the Pilgrim Fund into which the shareholder has exchanged. If a shareholder exchanges into Pilgrim Senior Income Fund and subsequently offers his common shares for repurchase by that fund, the CDSC will apply from the original Pilgrim Fund from which he or she exchanged. A sales charge, equal -4- to the excess, if any, of the sales charge rate applicable to the shares being acquired over the sales charge rate previously paid, may be assessed on exchanges from the Fund. If a shareholder exchanges and subsequently redeems his or her shares, any applicable CDSC will be based on the full period of the share ownership. 7. CONVERSION FEATURES. A shareholder's Class B shares will automatically convert to Class A shares in the Fund on the first business day of the month in which the eighth anniversary of the issuance of the Class B shares occurs, together with a pro rata portion of all Class B shares representing dividends and other distributions paid in additional Class B shares. The conversion of Class B shares into Class A shares may be subject to the continuing availability of an opinion of counsel or an Internal Revenue Service ruling to the effect that (1) such conversion will not constitute taxable events for federal tax purposes; and (2) the payment of different dividends on Class A and Class B shares shares, respectively, does not result in the Fund's dividends or distributions constituting "preferential dividends" under the Internal Revenue Code of 1986. The Class B shares so converted will no longer be subject to the higher expenses borne by Class B shares. The conversion will be effected at the relative net asset values per share of the two Classes. 8. QUARTERLY AND ANNUAL REPORTS. The Directors shall receive quarterly and annual statements concerning all allocated Class Expenses and distribution and servicing expenditures complying with paragraph (b)(3)(ii) of Rule 12b-1, as it may be amended from time to time. In the statements, only expenditures properly attributable to the sale or servicing of a particular class of shares will be used to justify any distribution or servicing fee or other expenses charged to that class. Expenditures not related to the sale or servicing of a particular class shall not be presented to the Directors to justify any fee attributable to that class. The statements, including the allocations upon which they are based, shall be subject to the review and approval of the independent Directors in the exercise of their fiduciary duties. 9. ACCOUNTING METHODOLOGY. (a) The following procedures shall be implemented in order to meet the objective of properly allocating income and expenses: (1) On a daily basis, a fund accountant shall calculate the Plan Fee to be charged to each 12b-1 class of shares by calculating the average daily net asset value of such shares outstanding and applying the applicable fee rate of the respective class to the result of that calculation. (2) The fund accountant will allocate designated Class Expenses, if any, to the respective classes. (3) The fund accountant shall allocate income and Corporate Level and Fund Expenses among the respective classes of shares based on the net asset value of each class in relation to the net asset value of the Fund for Fund Expenses, and in relation to the net asset value of the Company for Corporate Level Expenses. These calculations shall be based on net asset values at the beginning of the day. -5- (4) The fund accountant shall then complete a worksheet, developed for purposes of complying with this Section of this Plan, using the allocated income and expense calculations from Paragraph (3) above, and the additional fees calculated from Paragraphs (1) and (2) above. The fund accountant may make non-material changes to the form of worksheet as it deems appropriate. (5) The fund accountant shall develop and use appropriate internal control procedures to assure the accuracy of its calculations and appropriate allocation of income and expenses in accordance with this Plan. 10. WAIVER OR REIMBURSEMENT OF EXPENSES. Expenses may be waived or reimbursed by any adviser to the Company, by the Company's underwriter or any other provider of services to the Company without the prior approval of the Company's Board of Directors. 11. EFFECTIVENESS OF PLAN. This Plan shall not take effect until it has been approved by votes of a majority of both (a) the Directors of the Company and (b) those Directors of the Company who are not "interested persons" of the Company (as defined in the Act) and who have no direct or indirect financial interest in the operation of this Plan, cast in person at a meeting (or meetings) called for the purpose of voting on this Plan. 12. MATERIAL MODIFICATIONS. This Plan may not be amended to modify materially its terms unless such amendment is approved in the manner provided for initial approval in paragraph 11 hereof. 13. LIMITATION OF LIABILITY. The Directors of the Company and the shareholders of the Fund shall not be liable for any obligations of the Company or the Fund under this Plan, and Distributor or any other person, in asserting any rights or claims under this Plan, shall look only to the assets and property of the Company or the Fund in settlement of such right or claim, and not to such Directors or shareholders. Dated: May 9, 2001 -6-