As filed with the Securities and Exchange Commission on December 4, 2000
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. [ ]
PILGRIM GNMA INCOME FUND, INC.
(Exact Name of Registrant as Specified in Charter)
7337 E. Doubletree Ranch Road, Scottsdale, Arizona 88258
(Address of Principal Executive Offices) (Zip Code)
(800) 992-0180
(Registrant's Area Code and Telephone Number)
James M. Hennessy
ING Pilgrim Investments, Inc.
7337 E. Doubletree Ranch Road
Scottsdale, Arizona 88258
(Name and Address of Agent for Service)
With copies to:
Jeffrey S. Puretz, Esq.
Dechert
1775 Eye Street, N.W.
Washington, DC 20006
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Approximate Date of Proposed Public Offering:
As soon as practicable after this Registration Statement becomes effective.
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It is proposed that this filing will become effective on
January 3, 2001 pursuant to Rule 488 under the Securities Act of 1933.
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No filing fee is required because an indefinite number of shares have previously
been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended.
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<PAGE>
Pilgrim Government Securities Income Fund, Inc.
7337 E. Doubletree Ranch Road
Scottsdale, Arizona 88258
(800) 992-0180
_____________, 2000
Dear Shareholder:
Your Board of Directors has called a Special Meeting of Shareholders
("Special Meeting) of the Pilgrim Government Securities Income Fund ("Pilgrim
GSIF") scheduled to be held at _______ [a.m./p.m.], local time, on ___________,
2001 at 7337 E. Doubletree Ranch Road, Scottsdale, Arizona 88258.
The Board of Directors has approved a reorganization of Pilgrim GSIF into
the Pilgrim GNMA Income Fund ("GNMA Income Fund"), each of which is managed by
ING Pilgrim Investments, Inc. and is part of the Pilgrim Funds (the
"Reorganization"). If approved by shareholders, you would become a shareholder
of the GNMA Income Fund on the date that the Reorganization occurs. The GNMA
Income Fund has investment objectives and policies that are substantially
similar in many respects to those of Pilgrim GSIF, and the Reorganization is
expected to result in operating expenses that are lower for shareholders.
You are being asked to vote to approve an Agreement and Plan of
Reorganization. The accompanying document describes the proposed transaction and
compares the policies and expenses of each of the Funds for your evaluation.
After careful consideration, the Board of Directors of Pilgrim GSIF
unanimously approved this proposal and recommended shareholders vote "FOR" the
proposal.
A Proxy Statement/Prospectus that describes the Reorganization is enclosed.
We hope that you can attend the Special Meeting in person; however, we urge you
in any event to vote your shares by completing and returning the enclosed proxy
card in the envelope provided at your earliest convenience.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. IN ORDER
TO AVOID THE ADDED COST OF FOLLOW-UP SOLICITATIONS AND POSSIBLE ADJOURNMENTS,
PLEASE TAKE A FEW MINUTES TO READ THE PROXY STATEMENT/PROSPECTUS AND CAST YOUR
VOTE. IT IS IMPORTANT THAT YOUR VOTE BE RECEIVED NO LATER THAN __________, 2001.
Pilgrim GSIF is using Shareholder Communications Corporation, a
professional proxy solicitation firm, to assist shareholders in the voting
process. As the date of the meeting approaches, if we have not already heard
from you, you may receive a telephone call from Shareholder Communications
Corporation reminding you to exercise your right to vote.
We appreciate your participation and prompt response in this matter and
thank you for your continued support.
Sincerely,
Robert W. Stallings,
President
<PAGE>
Pilgrim Government Securities Income Fund, Inc.
7337 E. Doubletree Ranch Road
Scottsdale, Arizona 88258
(800) 992-0180
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF
PILGRIM GOVERNMENT SECURITIES INCOME FUND
SCHEDULED FOR ___________, 2001
To the Shareholders:
A Special Meeting of Shareholders ("Special Meeting") of the Pilgrim
Government Securities Income Fund ("Pilgrim GSIF") is scheduled for _________,
2001 at _______ [a.m./p.m.], local time, at 7337 E. Doubletree Ranch Road,
Scottsdale, Arizona 88258.
At the Special Meeting you will be asked:
1. To consider and approve an Agreement and Plan of Reorganization
providing for the acquisition of all of the assets and liabilities of
Pilgrim GSIF by the Pilgrim GNMA Income Fund; and
2. To transact such other business as may properly come before the
Special Meeting or any adjournments thereof.
Shareholders of record at the close of business on ___________, 2000 are
entitled to notice of, and to vote at, the meeting. Your attention is called to
the accompanying Proxy Statement/Prospectus. Regardless of whether you plan to
attend the meeting, PLEASE COMPLETE, SIGN AND RETURN PROMPTLY THE ENCLOSED PROXY
CARD so that a quorum will be present and a maximum number of shares may be
voted. If you are present at the meeting, you may change your vote, if desired,
at that time.
By Order of the Board of Directors
James M. Hennessy,
Secretary
______________, 2000
<PAGE>
TABLE OF CONTENTS
INTRODUCTION............................................................... 1
SUMMARY.................................................................... 2
COMPARISON OF INVESTMENT OBJECTIVES AND STRATEGIES......................... 3
Comparison of Portfolio Characteristics............................ 4
Relative Performance............................................... 5
Comparison of Risks and Investment Techniques of the Funds......... 6
COMPARISON OF FEES AND EXPENSES............................................ 8
Operating Expenses................................................. 8
Expense Table...................................................... 9
General Information................................................ 12
ADDITIONAL INFORMATION ABOUT THE GNMA INCOME FUND.......................... 12
Investment Personnel............................................... 12
Performance of the GNMA Income Fund................................ 13
INFORMATION ABOUT THE REORGANIZATION....................................... 14
ADDITIONAL INFORMATION ABOUT THE FUNDS..................................... 16
GENERAL INFORMATION ABOUT THE PROXY STATEMENT.............................. 17
Solicitation of Proxies............................................ 17
Voting Rights...................................................... 18
Other Matters to Come Before the Meeting........................... 19
Shareholder Proposals.............................................. 19
Reports to Shareholders............................................ 19
APPENDIX A................................................................. A-1
APPENDIX B................................................................. B-1
APPENDIX C................................................................. C-1
APPENDIX D................................................................. D-1
APPENDIX E................................................................. E-1
<PAGE>
PROXY STATEMENT/PROSPECTUS
SPECIAL MEETING OF SHAREHOLDERS SCHEDULED FOR
_________________, 2001
PILGRIM GOVERNMENT SECURITIES INCOME FUND, INC.
Relating to the Reorganization into
PILGRIM GNMA INCOME FUND, INC.
(COLLECTIVELY, THE "FUNDS")
INTRODUCTION
This Proxy Statement/Prospectus provides you with information about a
proposed transaction. This transaction involves the transfer of all the assets
and liabilities of the Pilgrim Government Securities Income Fund ("Pilgrim
GSIF") to the Pilgrim GNMA Income Fund ("GNMA Income Fund") in exchange for
shares of the GNMA Income Fund (the "Reorganization"). Pilgrim GSIF would then
distribute to its shareholders their portion of the shares of the GNMA Income
Fund it receives in the Reorganization. The result would be a liquidation of
Pilgrim GSIF. You would receive shares of the GNMA Income Fund having an
aggregate value equal to the aggregate value of the shares you held of Pilgrim
GSIF, as of the close of business on the business day of the closing of the
Reorganization. You are being asked to vote on the Agreement and Plan of
Reorganization through which these transactions would be accomplished.
Because you, as a shareholder of Pilgrim GSIF, are being asked to approve a
transaction that will result in your holding of shares of the GNMA Income Fund,
this Proxy Statement also serves as a Prospectus for the GNMA Income Fund.
This Proxy Statement/Prospectus, which you should retain for future
reference, contains important information about the GNMA Income Fund that you
should know before investing. For a more detailed discussion of the investment
objectives, policies, restrictions and risks of each of the Funds, see the
Prospectus (the "Pilgrim Prospectus") dated November 1, 2000, and the Statement
of Additional Information for the GNMA Income Fund and Pilgrim GSIF dated July
31, 2000 and November 1, 2000, respectively, which may be obtained, without
charge, by calling (800) 992-0180. Each of the Funds also provides periodic
reports to its shareholders which highlight certain important information about
the Funds, including investment results and financial information. The annual
report for the GNMA Income Fund dated December 31, 1999 and the semi-annual
report dated June 30, 2000 are incorporated herein by reference. You may receive
a copy of the most recent annual report for either Fund and any more recent
semi-annual report, without charge, by calling (800) 992-0180.
You may also obtain proxy materials, reports and other information filed by
the GNMA Income Fund from the Securities and Exchange Commission's ("SEC")
Public Reference Room (1-800-SEC-0330) or from the SEC's internet website at
www.sec.gov.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES, OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
1
<PAGE>
SUMMARY
You should read this entire Proxy Statement/Prospectus carefully. For
additional information, you should consult the Pilgrim Prospectus, and the
Agreement and Plan of Reorganization, which is attached hereto as Appendix B.
THE PROPOSED REORGANIZATION. On November 2, 2000, the Board of Directors of
Pilgrim GSIF approved an Agreement and Plan of Reorganization (the
"Reorganization Agreement"). Subject to shareholder approval, the Reorganization
Agreement provides for:
* the transfer of all of the assets of Pilgrim GSIF to the GNMA Income
Fund, in exchange for shares of the GNMA Income Fund;
* the assumption by the GNMA Income Fund of all of the liabilities of
Pilgrim GSIF;
* the distribution of the GNMA Income Fund shares to the shareholders of
Pilgrim GSIF; and
* the complete liquidation of Pilgrim GSIF (the "Reorganization").
The Reorganization is expected to be effective upon the opening of business
on ___________, 2001, or on a later date as the parties may agree (the
"Closing"). As a result of the Reorganization, each shareholder of Class A,
Class B, Class C, Class M, Class Q and Class T Shares of Pilgrim GSIF, would
become a shareholder of the same Class of the GNMA Income Fund. Each shareholder
would hold, immediately after the Closing, shares of each Class of the GNMA
Income Fund having an aggregate value equal to the aggregate value of the shares
of that same Class of Pilgrim GSIF held by that shareholder as of the close of
business on the business day of the Closing.
The Reorganization is one of many reorganizations that are proposed among
various Pilgrim Funds. The Pilgrim Fund complex has grown in recent years
through the addition of many funds. Management of the Pilgrim Funds has proposed
the consolidation of a number of Pilgrim Funds that management believes have
similar or compatible investment policies. The proposed reorganizations are
designed to reduce the overlap in funds in the complex, thereby eliminating
duplication of costs and other inefficiencies arising from having similar
portfolios within the same fund group. ING Pilgrim Investments, Inc. ("ING
Pilgrim Investments") also believes that the reorganizations may benefit fund
shareholders by resulting in surviving funds with a greater asset base. This is
expected to achieve economies of scale for shareholders and may provide greater
investment opportunities for the surviving funds or the potential to take larger
portfolio positions.
In considering whether to approve the Reorganization, you should note that:
* The Funds have investment objectives and policies that are similar in
many respects.
2
<PAGE>
* The GNMA Income Fund normally invests primarily in Government National
Mortgage Association ("GNMA") mortgage-backed securities, while
Pilgrim GSIF normally invests in a broader range of securities issued
or guaranteed by the U.S. Government and its agencies and
instrumentalities, including GNMA, the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC").
* The proposed Reorganization is expected to result in a reduction of
net operating expenses for shareholders of Pilgrim GSIF. For example,
the operating expenses, expressed as a percentage of net asset value
per share for Class A shares, are as follows:
* Expenses of Pilgrim GSIF (based on the twelve-month period ended
June 30, 2000): 1.30%;
* Expenses of GNMA Income Fund (1): 1.18%;
* Estimated expenses of Pilgrim GNMA Income Fund after the
Reorganization: 1.15%.
* For the one year, five year and ten year periods ended June 30, 2000,
average annual returns of the GNMA Income Fund for Class A shares were
higher in each case than those of Pilgrim GSIF.
Approval of the Reorganization Agreement requires the affirmative vote of a
majority of the outstanding shares of Pilgrim GSIF.
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF PILGRIM GSIF
UNANIMOUSLY APPROVED THE PROPOSED REORGANIZATION. THE BOARD RECOMMENDS THAT YOU
VOTE "FOR" THE PROPOSED REORGANIZATION.
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(1) Based upon expenses incurred by the GNMA Income Fund for the 12 month
period ended June 30, 2000, adjusted for current expenses of contracts and
12b-1 plans which became effective when ING Pilgrim Investments became
adviser to the Fund on July 26, 2000.
3
<PAGE>
COMPARISON OF INVESTMENT OBJECTIVES AND STRATEGIES
As you can see from the chart below, the investment objectives and
strategies of the Funds are similar.
<TABLE>
<CAPTION>
PILGRIM GSIF GNMA INCOME FUND
------------ ----------------
<S> <C> <C>
INVESTMENT OBJECTIVE * Seeks high current income, * Seeks a high level of current
consistent with liquidity and income, consistent with liquidity
preservation of capital. and safety of principal, through
investment primarily in GNMA
mortgage-backed securities (also
known as "GNMA Certificates") that
are guaranteed as to the timely
payment of principal and interest
by the U.S. Government.
PRIMARY INVESTMENT * Normally invests at least 70% of * Normally invests at least 80% of
STRATEGIES its total assets in securities the value of its total assets in
issued or guaranteed by the U.S. GNMA Certificates.
Government and the following
agencies or instrumentalities of * The remaining assets of the Fund
the U.S. Government: GNMA; FNMA; will be invested in other
and the FHLMC. securities issued or guaranteed by
the U.S. Government, including U.S.
* If the Fund falls below the 70% Treasury securities.
threshold due to changes in the
value of the Fund's holdings or the * May invest in debt securities of
sale of securities to meet any maturity, although the
redemptions, the Fund will purchase portfolio manager expects to invest
only U.S. Government securities in long-term debt instruments.
until the 70% level is restored.
* The remainder of the Fund's assets
may be invested in securities
issued by other agencies and
instrumentalities of the U.S.
Government and in instruments
collateralized by securities issued
or guaranteed by the U.S.
Government or its agencies or
instrumentalities.
* May invest in securities of any
maturity; however, the Fund is
expected to have a dollar-weighted
average duration within a range of
20% above or below that of the
Lehman Intermediate Treasury Index.
As of September 30, 2000, the
dollar-weighted average duration
was 3.09 years.
* May enter into reverse repurchase
agreements, dollar roll
transactions or pairing off
transactions.
* The adviser determines the
composition of the portfolio on the
basis of its judgment of existing
market conditions, such as the
general direction of interest
rates, trends in credit-worthiness,
expected inflation, supply and
demand of fixed income securities,
and other factors.
INVESTMENT ADVISER * ING Pilgrim Investments * ING Pilgrim Investments
PORTFOLIO MANAGERS * Robert K. Kinsey * Denis P. Jamison and Roseann G.
</TABLE>
4
<PAGE>
COMPARISON OF PORTFOLIO CHARACTERISTICS
The following table compares certain characteristics of the portfolios of
the Funds as of June 30, 2000:
<TABLE>
<CAPTION>
PILGRIM GSIF GNMA INCOME FUND
------------ ----------------
<S> <C> <C>
Net Assets $113,365,132 $357,838,674
Number of Holdings 78 192
Average Credit Quality AAA AAA
Average Dollar-Weighted
Duration 3.5 years 5.2 years
Portfolio Turnover Rate 44.00% (12 months ended 6/30/00) 51.70% (6 months ended 6/30/00)
As a percentage of Net Assets:
Treasury bonds, bills and notes 0.00% 0.70%
Mortgage-Related Securities
GNMA 20.31% 107.10%
FNMA 34.98% 0.00%
FHLMC 37.52% 0.00%
Other 1.74% 0.00%
Short-Term Investments 4.11% 0.00%
Top 10 Holdings FNMA Pool 535048 - 9.17% GNMA/cl 461928 - 6.04%
(as a percentage of Net Assets) Federal Home Loan PC G30160 - 9.05% GNMA/pl 490040 - 4.84%
Federal Home Loan PC C90265 - 8.10% GNMA/pl 438448 - 3.45%
GNMA Pool 780977 - 6.06% GNMA/sf TBA - 2.55%
GNMA Pool 002781 - 5.82% GNMA/pl 441361 - 2.50%
Federal Home Loan PC E00767 - 5.72% GNMA/pl 453799 - 2.29%
Federal Home Loan PC C00910 - 3.48% GNMA/Pn 461874 - 2.27%
GNMA Pool 417274 - 3.43% GNMA/sf 451505 - 1.99%
Federal Home Loan PC E78987 - 3.37% GNMA/pn 279985 - 1.92%
FNMA Pool 109011 - 3.35% GNMA/sf 412369 - 1.63%
</TABLE>
RELATIVE PERFORMANCE
The following table shows, for each calendar year since 1990 and the period
January 1, 2000 to September 30, 2000, the average annual total return for: (a)
Class A shares of Pilgrim GSIF; (b) Class A shares of the GNMA Income Fund; (c)
the Lehman Brothers Mortgage-Backed Securities Index; and (d) the Lehman
Brothers Intermediate Treasury Index. Performance of the Funds in the table does
not reflect the deduction of sales loads, and would be lower if they did. The
indices have inherent performance advantages over the Funds since they have no
cash in their portfolios, impose no sales charges and incur no operating
expenses. An investor cannot invest directly in an index. Total return is
calculated assuming reinvestment of all dividends and capital gain distributions
at net asset value and excluding the deduction of sales charges.
LEHMAN BROTHERS LEHMAN BROTHERS
CALENDAR GNMA MORTGAGE-BACKED INTERMEDIATE
YEAR/PERIOD INCOME SECURITIES TREASURY
ENDED PILGRIM GSIF FUND(2) INDEX(3) INDEX(4)
----- ------------ ------- -------- --------
12/31/90 8.03% 9.23% 10.72 9.56%
12/31/91 11.90% 15.75% 15.72 14.11%
12/31/92 7.46%(5) 5.19% 6.96 6.93%
12/31/93 4.71% 8.06% 6.84 8.17%
12/31/94 (3.61)% (2.07)% (1.61) (1.75)%
12/31/95 14.51% 15.91% 16.80 14.41%
12/31/96 2.56% 5.71% 5.35 4.06%
12/31/97 7.85% 10.20% 9.49 7.72%
12/31/98 5.61% 7.52% 6.96 8.49%
12/31/99 (1.17)% 0.58% 1.86 0.49%
1/1/00-9/30/00(1) 5.97% 6.31% 7.01 6.26%
5
<PAGE>
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(1) Not annualized.
(2) Prior to July 26, 2000, Lexington Management Corporation ("Lexington")
served as adviser to the GNMA Income Fund. Lexington was acquired by the
parent of ING Pilgrim Investments on July 26, 2000. Denis P. Jamison has
been primarily responsible for managing the Fund since July 1981, and
continued to manage after the July 26th transaction.
(3) The Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index
comprised of 520 mortgage backed securities with an average yield of 7.58%.
The average coupon of the index is 6.85%. This index is typically used as a
benchmark for intermediate-term bonds.
(4) The Lehman Brothers Intermediate Treasury Index is an unmanaged index that
measures the performance of U.S. Treasures with maturities of under 10
years, and is used to measure the performance of Pilgrim GSIF. Information
on the Index is presented because effective May 24, 1999, Pilgrim GSIF
seeks an average portfolio duration within +/- 20% of the duration of that
index. Previously the Fund's average portfolio maturity was generally
longer.
(5) The Fund earned income and realized capital gains as a result of entering
into reverse repurchase agreements during the six-month period from July to
December 1992 that caused the Fund to exceed its 10% investment restriction
on borrowing. Therefore, the Fund's performance was higher than it would
have been had the Fund adhered to its borrowing restriction.
COMPARISON OF RISKS AND INVESTMENT TECHNIQUES OF THE FUNDS
Because the Funds share investment objectives and policies that are
similar, many of the risks of investing in the GNMA Income Fund are similar to
the risks of investing in Pilgrim GSIF. A principal risk of an investment in
either Fund is that you may lose money on your investment. Each Fund's shares
may go up or down, sometimes rapidly and unpredictably. Market conditions,
investment policies, portfolio management, and other factors affect such
fluctuations.
Both Funds are subject to risks associated with investing in debt
securities, including changes in interest rates, credit risks, prepayment risks
and risks of using derivatives, as described below.
* The value of each Fund's investments may fall when interest rates
rise. Each of the Funds may be sensitive to interest rates because
they primarily invest in U.S. Government securities with short and
intermediate terms to maturity. Debt securities with longer durations
tend to be more sensitive to changes in interest rates, usually making
them more volatile than debt securities with shorter durations.
* Either Fund could lose money if the issuer of a debt security is
unable to meet its financial obligations or goes bankrupt. Generally,
both Funds are subject to less credit risks than other income funds
that emphasize corporate bonds because both Funds principally invest
in debt securities issued or guaranteed by the U.S. Government, its
agencies and government sponsored enterprises. However, obligations of
some U.S. Government agencies, such as FNMA and FHLMC, are not backed
by the full faith and credit of the U.S. Government. Consequently,
there are somewhat greater credit risks involved with investing in
securities issued by those entities than in securities backed by the
full faith and credit of the U.S. Government. All U.S. Government
securities may be subject to price declines due to changing interest
rates.
6
<PAGE>
* Each of the Funds may invest in mortgage related securities, which can
be paid off early if the borrowers on the underlying mortgages pay off
their mortgages sooner than scheduled. If interest rates are falling,
both Funds will be forced to reinvest this money at lower yields.
* Each of the 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 GNMA, FNMA, and 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.
The following is a summary of the types of securities in which the Funds
may invest and strategies the Funds may employ in pursuit of their investment
objectives. As with any security, an investment in a Fund's shares involves
certain risks, including loss of principal. The Funds are subject to varying
degrees of financial, market and credit risk. An investment in either of the
Funds is not a deposit of a bank and is not insured by the Federal Deposit
Insurance Corporation or any other government agency.
U.S. GOVERNMENT SECURITIES. Each Fund may invest in U.S. Government
securities. U.S. Government securities include direct obligations of the U.S.
Treasury (such as U.S. Treasury bills, notes and bonds) and obligations issued
or guaranteed by U.S. Government agencies or instrumentalities. While U.S.
Government securities provide substantial protection against credit risk, they
do not protect investors against price declines in the securities due to
changing interest rates. Additionally, obligations of some U.S. Government
agencies, such as FNMA and FHLMC, are not backed by the full faith and credit of
the U.S. Government, and are subject to somewhat greater credit risk than direct
obligations of the U.S. Treasury and GNMA's.
U.S. GOVERNMENT AGENCY MORTGAGE-RELATED SECURITIES. Each Fund may invest in
U.S. Government agency mortgage-related securities. Like other fixed income
securities, when interest rates rise, the value of these mortgage-backed
securities generally will decline, and may decline more rapidly as the
underlying mortgages are less likely to be prepaid; 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 mortgage loans
underlying a mortgage-backed security will be subject to normal principal
amortization, and may be prepaid prior to maturity due to the sale of the
underlying property, the refinancing of the loan, or foreclosure. 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 may
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.
Further, during periods that interest rates are low, prepaid amounts would be
reinvested in low-yielding instruments.
RESTRICTED AND ILLIQUID SECURITIES. The GNMA Income Fund may not invest in
restricted or illiquid securities, except as described below with respect to
certain repurchase agreements. Pilgrim GSIF may invest up to 15% of its net
assets in illiquid securities, which do not include restricted securities that
are readily marketable. Generally, a security is considered illiquid if it
cannot be disposed of within seven days at approximately the value at which it
is carried. Illiquidity might prevent the sale of the security at a time when
the 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.
7
<PAGE>
Restricted securities, including private placements, are subject to legal
or contractual restrictions on resale. They can be eligible for purchase without
registration with the SEC by certain institutional investors known as "qualified
institutional buyers." For both Funds, restricted securities could be treated as
liquid. Restricted securities that are treated as liquid could be less liquid
than registered securities traded on established secondary markets.
LENDING PORTFOLIO SECURITIES. The GNMA Income Fund may not lend portfolio
securities. To generate additional income, Pilgrim GSIF may lend portfolio
securities in an amount up to 33 1/3% of total assets to broker-dealers, major
banks, or other recognized domestic institutional borrowers of securities. The
borrower at all times during the loan must maintain with the Fund cash or cash
equivalent collateral or provide to the Fund 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 Fund any
interest paid on such securities, and the Fund 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 Fund or the
borrower at any time. 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.
REVERSE REPURCHASE AGREEMENT AND DOLLAR ROLL TRANSACTIONS. Pilgrim GSIF 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. 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 1940 Act. Reverse repurchase agreements, together with
other permitted borrowings, may constitute up to 33 1/3% of the Fund's net
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, Pilgrim
GSIF, but not the GNMA Income 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 institutional 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
8
<PAGE>
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
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 purchase
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.
COMPARISON OF FEES AND EXPENSES
The following describes and compares the fees and expenses of the Funds.
For further information on the fees and expenses of the GNMA Income Fund, see
"Appendix C: Additional Information Regarding the GNMA Income Fund."
TOTAL OPERATING EXPENSES The operating expenses of the GNMA Income Fund,
expressed as a ratio of expenses to average daily net assets ("expense ratio"),
are currently lower than those of Pilgrim GSIF for Class A Shares. For the
twelve month period ending June 30, 2000, the net expenses as adjusted for
current expenses of contracts and distribution plans that became effective when
ING Pilgrim Investments became adviser to the GNMA Income Fund were 1.18% for
Class A shares, which is lower than those of the same Class of Pilgrim GSIF.
The operating expenses for the GNMA Income Fund are based upon expenses
incurred by the Fund for the 12 month period ended June 30, 2000, adjusted for
current expenses of contracts and distribution plans which became effective when
ING Pilgrim Investments became adviser to the Fund on July 26, 2000.
EXPENSE LIMITATION ARRANGEMENTS. Expense limitation arrangements are in
place for both Funds. Under the terms of the expense limitation agreement with
GNMA Income Fund, ING Pilgrim Investments has agreed to limit the expenses of
the Fund, excluding interest, taxes, brokerage and extraordinary expenses,
subject to possible recoupment to ING Pilgrim Investments within three years.
The current expense limitation for the Fund provides that it will remain in
effect through July 26, 2002. There can be no assurance that the expense
limitation will be continued after that date. Although an expense limitation
agreement is in place for Class A, Class B, Class C and Class Q shares of
Pilgrim GNMA Income Fund, the Fund's actual expenses are lower than the expense
limitations contained in the agreements.
9
<PAGE>
ING Pilgrim Investments has separately agreed to reimburse Pilgrim GSIF to
the extent that total Fund operating expenses, excluding interest, taxes,
brokerage commissions, extraordinary expenses and distribution fees in excess of
0.25%, exceed 1.50% of the Fund's daily net assets on the first $40 million in
net assets and 1% of average daily net assets in excess of $40 million. The
expense limit for the Fund will terminate only with termination of the advisory
contract with ING Pilgrim Investments. Although the reimbursement agreement is
in place, the Fund's actual expenses are lower than the limitations contained in
the agreement. This information and similar information in shown in the table
entitled "Annual Fund Operating Expenses."
MANAGEMENT FEE. Each Fund pays a management fee based on a percentage of
the Fund's average daily net assets, as follows:
ASSETS TO WHICH FEE APPLIES PILGRIM GSIF
--------------------------- ------------
First $500 million 0.50%
$500 million to $1 billion 0.45%
Assets over $1 billion 0.40%
ASSETS TO WHICH FEE APPLIES GNMA INCOME FUND
--------------------------- ----------------
First $150 million 0.60%
Next $250 million 0.50%
Next $400 million 0.45%
Assets over $800 million 0.40%
DISTRIBUTION AND SERVICE FEES. The distribution (12b-1) and service fees of
Pilgrim GSIF are the same as those of the GNMA Income Fund.
EXPENSE TABLE
The current expenses of each Fund and estimated PRO FORMA expenses giving
effect to the proposed Reorganization are shown in the following table. Expenses
for the Funds are based on the operating expenses incurred for the 12 month
period ended June 30, 2000, as adjusted, in the case of GNMA Income Fund, for
current expenses of contracts and distribution plans which became effective when
ING Pilgrim Investments became adviser to the Fund. PRO FORMA fees show
estimated fees of the GNMA Income Fund after giving effect to the proposed
Reorganization. PRO FORMA numbers are in good faith and are hypothetical and are
adjusted for anticipated contractual changes.
10
<PAGE>
ANNUAL FUND OPERATING EXPENSES (UNAUDITED)
(expenses that are deducted from Fund assets, shown as a ratio of expenses
to average daily net assets)(1)
<TABLE>
<CAPTION>
DISTRIBUTION
(12b-1) AND
SHAREHOLDER TOTAL FUND
MANAGEMENT SERVICING OTHER OPERATING FEE WAIVER NET FUND
FEES Fees(2) EXPENSES EXPENSES BY ADVISER(3) EXPENSES
---- ------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Pilgrim GSIF 0.50% 0.25% 0.55% 1.30% -- 1.30%
GNMA Income Fund 0.54% 0.25% 0.39% 1.18% -- 1.18%
GNMA Income Fund After
Reorganization (PRO FORMA) 0.54% 0.25% 0.36% 1.15% -- 1.15%
CLASS B(4)
Pilgrim GSIF 0.50% 1.00% 0.55% 2.05% -- 2.05%
GNMA Income Fund 0.54% 1.00% 0.39% 1.93% -- 1.93%
GNMA Income Fund After
Reorganization (PRO FORMA) 0.54% 1.00% 0.36% 1.90% -- 1.90%
CLASS C (5)
Pilgrim GSIF 0.50% 1.00% 0.55% 2.05% -- 2.05%
GNMA Income Fund 0.54% 1.00% 0.39% 1.93% -- 1.93%
GNMA Income Fund After
Reorganization (PRO FORMA) 0.54% 1.00% 0.36% 1.90% -- 1.90%
CLASS M
Pilgrim GSIF 0.50% 0.75% 0.55% 1.80% -- 1.80%
GNMA Income Fund N/A N/A N/A N/A N/A N/A
GNMA Income Fund After
Reorganization (PRO FORMA) 0.54% 0.75% 0.36% 1.65% -- 1.65%
CLASS Q (6)
Pilgrim GSIF 0.50% 0.25% 0.55% 1.30% -- 1.30%
GNMA Income Fund 0.54% 0.25% 0.39% 1.18% -- 1.18%
GNMA Income Fund After
Reorganization (PRO FORMA) 0.54% 0.25% 0.36% 1.15% -- 1.15%
CLASS T (7)
Pilgrim GSIF 0.50% 0.65% 0.55% 1.70% -- 1.70%
GNMA Income Fund N/A N/A N/A N/A N/A N/A
GNMA Income Fund After
Reorganization (PRO FORMA) 0.54% 0.65% 0.36% 1.55% -- 1.55%
</TABLE>
----------
(1) The fiscal year end for Pilgrim GSIF is June 30. The fiscal year end for
GNMA Income Fund is December 31. Expenses of the Funds and the PRO FORMA
expenses are estimated based upon expenses incurred by each Fund for the
12-month period ended June 30, 2000. Expenses of the GNMA Income Fund are
based upon expenses incurred by the Fund for the 12 month period ended June
30, 2000, adjusted for current expenses of contracts and 12b-1 plans which
became effective when ING Pilgrim Investments became adviser to the Fund.
PRO FORMA expenses are adjusted for anticipated contractual changes.
(2) As a result of distribution (Rule 12b-1) fees, a long term investor may pay
more than the economic equivalent of the maximum sales charge allowed by
the Rules of the National Association of Securities Dealers, Inc.
11
<PAGE>
(3) ING Pilgrim Investments has implemented expense limitation agreement for
the GNMA Income Fund that limits the expenses to 1.29%, 2.04%, 2.04% and
1.29%, for Class A, Class B, Class C and Class Q shares, respectively. ING
Pilgrim Investments has agreed that the expense limitations will apply to
GNMA Income Fund until July 26, 2002. ING Pilgrim Investments has
separately agreed to reimburse Pilgrim GSIF to the extent that total Fund
operating expenses, excluding interest, taxes, brokerage commissions,
extraordinary expenses and distribution fees in excess of 0.25%, exceed
1.50% of the Fund's daily net assets on the first $40 million in net assets
and 1% of average daily net assets in excess of $40 million. The expense
limit for the Fund will terminate only with termination of the advisory
contract with ING Pilgrim Investments.
(4) Because Class B shares are new for the GNMA Income Fund, its expenses are
estimated based on Class A expenses.
(5) Because Class C shares are new for GNMA Income Fund, its expenses are
estimated based on Class A expenses.
(6) Because Class Q shares are new for both Funds, their expenses are estimated
based on Class A expenses of their respective funds.
(7) Because Class T shares are new for Pilgrim GSIF, its expenses are based on
Class A expenses.
Following the Reorganization and in the ordinary course of business as a
mutual fund, certain holdings of Pilgrim GSIF that will be transferred to the
GNMA Income Fund in connection with the Reorganization may be sold. Such sales
may result in increased transactional costs for the GNMA Income Fund, and the
realization of taxable gains or losses for the GNMA Income Fund. It is expected
that the combined Funds will have lower operating expenses than the operating
expenses of either Fund prior to the Reorganization.
EXAMPLES. The examples are intended to help you compare the cost of
investing in the Funds and in the combined Fund on a PRO FORMA basis - assuming
the Funds have been combined. The examples assume that you invest $10,000 in
each Fund for the time periods indicated. The examples also assume that your
investment has a 5% return each year and that each Fund's operating expenses
remain the same. The 5% return is an assumption and is not intended to portray
past or future investment results. Based on the above assumptions, you would pay
the following expenses if you redeem your shares at the end of each period
shown. Because this is an estimate, your actual expenses may be higher or lower.
<TABLE>
<CAPTION>
PRO FORMA:
PILGRIM GSIF GNMA INCOME FUND THE FUNDS COMBINED
-------------------------------- -------------------------------- ---------------------------------
1 3 5 10 1 3 5 10 1 3 5 10
YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS
---- ----- ----- ----- ---- ----- ----- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $601 $868 $1,154 $1,968 $590 $832 $1,093 $1,839 $587 $823 $1,078 $1,806
Class B 708 943 1,303 2,187* 696 906 1,242 2,059* 693 897 1,226 2,027*
Class C 308 643 1,103 2,379 296 606 1,042 2,254 293 597 1,026 2,222
Class M 502 873 1,268 2,372 N/A N/A N/A N/A 487 828 1,193 2,216
Class Q 132 412 713 1,568 120 375 649 1,432 117 365 633 1,398
Class T 573 736 923 1,903* N/A N/A N/A N/A 558 690 845 1,738*
</TABLE>
----------
* The ten year calculations for Class B and Class T shares assume conversion
of the Class B and Class T shares to Class A shares at the end of the
eighth year following the date of purchase.
12
<PAGE>
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
PRO FORMA:
PILGRIM GSIF GNMA INCOME FUND THE FUNDS COMBINED
-------------------------------- -------------------------------- ---------------------------------
1 3 5 10 1 3 5 10 1 3 5 10
YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS
---- ----- ----- ----- ---- ----- ----- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $601 $868 $1,154 $1,968 $590 $832 $1,093 $1,839 $587 $823 $1,078 $1,806
Class B 208 643 1,103 2,187* 196 606 1,042 2,059* 193 597 1,026 2,027*
Class C 208 643 1,103 2,379 196 606 1,042 2,254 193 597 1,026 2,222
Class M 502 873 1,268 2,372 N/A N/A N/A N/A 487 828 1,193 2,216
Class Q 132 412 713 1,568 120 375 649 1,432 117 365 633 1,398
Class T 173 536 923 1,903* N/A N/A N/A N/A 158 490 845 1,738*
</TABLE>
----------
* The ten year calculations for Class B and Class T shares assume conversion
of the Class B and Class T shares to Class A shares at the end of the end
of the eighth year following the date of purchase.
GENERAL INFORMATION
Class A, Class B, Class C, Class M, Class Q and Class T shares of the GNMA
Income Fund issued to a shareholder in connection with the Reorganization will
be subject to the same contingent deferred sales charge, if any, applicable to
the corresponding shares of Pilgrim GSIF held by that shareholder immediately
prior to the Reorganization.
In addition, the period that the shareholder held shares of Pilgrim GSIF
will be included in the holding period of the GNMA Income Fund shares for
purposes of calculating any contingent deferred sales charge. Similarly, Class B
and Class T shares of the GNMA Income Fund issued to a shareholder in connection
with the Reorganization will convert to Class A shares eight years after the
date that the Class B and Class T shares of Pilgrim GSIF were purchased by the
shareholder. The GNMA Income Fund and Pilgrim GSIF are each subject to the sales
load structure described in the table below.
TRANSACTION FEES ON NEW INVESTMENTS
(fees paid directly from your investment)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS M CLASS Q CLASS T
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Maximum sales charge (load) imposed
on purchases (as a percentage of
offering price) 4.75%(1) None None 3.25%(1) None None
Maximum deferred sales charge (load)
(as a percentage of the lower of
original purchase price or redemption
proceeds) None(2) 5.00%(3) 1.00%(4) None None 4.00%(5)
</TABLE>
----------
(1) Reduced for purchases of $50,000 and over. See "Class A Shares: Initial
Sales Charge Alternative" and "Class M Shares: Initial Sales Charge
Alternative" in Appendix C.
(2) A contingent deferred sales charge of no more than 1.00% 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. See "Class A Shares:
Initial Sales Charge Alternative" in Appendix C.
13
<PAGE>
(3) Imposed upon redemptions within 6 years of purchase. The fee has scheduled
reductions after the first year. See "Class B Shares: Deferred Sales Charge
Alternative" in Appendix C and "Deferred Sales Charges" in the Pilgrim
Prospectus.
(4) Imposed upon redemptions within 1 year from purchase.
(5) Imposed upon redemptions within 4 years from purchase. The fee has
scheduled reductions after the first year. See "Class T Shares: Deferred
Sales Charge Alternative" in Appendix C and "Deferred Sales Charges" in the
Pilgrim Prospectus.
Neither the GNMA Income Fund nor Pilgrim GSIF has any redemption fees,
exchange fees or sales charges on reinvested dividends.
ADDITIONAL INFORMATION ABOUT THE GNMA INCOME FUND
INVESTMENT PERSONNEL
The GNMA Income Fund is co-managed by Denis P. Jamison, Senior Vice
President and Senior Portfolio Manager for ING Pilgrim Investments, and Roseann
G. McCarthy, Assistant Vice President of ING Pilgrim Investments. Mr. Jamison
has served as Senior Portfolio Manager of the GNMA Income Fund since 1981. Ms.
McCarthy has served as co-manager of the Fund since May 1999. Prior to joining
the Fixed Income Department in 1997, Ms. McCarthy was Mutual Fund Marketing and
Research Coordinator. Prior to 1995, she was Fund Statistician and Shareholder
Service Representative for the Lexington Funds.
PERFORMANCE OF THE GNMA INCOME FUND
The bar chart and table that follow provide an indication of the risks of
investing in the GNMA Income Fund by showing (on a calendar year basis) changes
in the GNMA Income Fund's annual total return from year to year and by showing
(on a calendar year basis) how the GNMA Income Fund's average annual returns for
one year, five years and ten years compare to those of the Lehman Brothers
Mortgage-Backed Securities Index. The information in the bar chart is based on
the performance of the Class A shares of the GNMA Income Fund although the bar
chart does not reflect the deduction of the sales load on Class A shares. If the
bar chart included the sales load, returns would be less than those shown. The
GNMA Income Fund's past performance is not necessarily an indication of how the
Fund will perform in the future. Total returns include reinvestments of
dividends and capital gain distribution if any. All indices are unmanaged.
CALENDAR YEAR-BY-YEAR RETURNS (%)*
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
9.23% 15.75% 5.19% 8.06% -2.07% 15.91% 5.71% 10.20% 7.52% 0.58%
----------
* During the period shown in the chart, the Fund's best quarterly performance
was 5.85% for the quarter ended September 30, 1991, and the Fund's worst
quarterly performance was -2.42% for the quarter ended March 31, 1994. The
Fund's year-to-date total return as of September 30, 2000, was 6.31%. Prior
to July 26, 2000, Lexington served as adviser to the GNMA Income Fund.
Lexington was acquired by the parent of ING Pilgrim Investments on July 26,
2000. Denis P. Jamison has been primarily responsible for managing the Fund
since July 1981, and continued to manage after the July 26th transaction.
14
<PAGE>
The table below shows what the average annual total returns of the GNMA
Income Fund would equal if you averaged out actual performance over various
lengths of time, compared to the Lehman Brothers Mortgage-Backed Securities
Index. The Lehman Brothers Mortgage-Backed Securities Index has an inherent
performance advantages over the GNMA Income Fund since it has no cash in its
portfolio, imposes no sales charges and incurs no operating expenses. An
investor cannot invest directly in an index. The GNMA Income Fund's performance
reflected in the table assumes the deduction of the maximum sales charge in all
cases.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1999(1)
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
GNMA Income Fund - Class A (2) -4.20% 6.83% 6.95%
Lehman Mortgage-Backed Index(3) 1.86% 7.98% 7.78%
----------
(1) This table shows the performance of the Class A shares of the GNMA Income
Fund. No other class of shares was offered during the period ended December
31, 1999.
(2) Reflects deduction of sales charge of 4.75%.
(3) The Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index
comprised of 520 mortgage-backed securities with an average yield of 7.58%
and is typically used as a benchmark for intermediate-term bond funds.
The table below shows the performance of the GNMA Income Fund if sales
charges are not reflected.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1999(1)
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
GNMA Income Fund - Class A 0.58% 7.87% 7.47%
----------
(1) This table shows the performance of the Class A shares of the GNMA Income
Fund. No other class of shares was offered during the period ended December
31, 1999.
For a discussion by the former adviser regarding the performance of GNMA
Income Fund for the year ended December 31, 1999, see Appendix A to this Proxy
Statement/Prospectus. Additional information about GNMA Income Fund is included
in Appendix C to this Proxy Statement/Prospectus. Additional information about
Pilgrim GSIF is included in the Pilgrim Prospectus dated November 1, 2000.
INFORMATION ABOUT THE REORGANIZATION
THE REORGANIZATION AGREEMENT. The Reorganization Agreement provides for the
transfer of all of the assets and liabilities of Pilgrim GSIF to GNMA Income
Fund in exchange for shares of the GNMA Income Fund. Pilgrim GSIF will
distribute the shares of the GNMA Income Fund received in the exchange to the
shareholders of Pilgrim GSIF and then Pilgrim GSIF will be liquidated.
After the Reorganization, each shareholder of Pilgrim GSIF will own shares
in the GNMA Income Fund having an aggregate value equal to the aggregate value
of each respective Class of shares in Pilgrim GSIF held by that shareholder as
of the close of business on the business day of the Closing. Shareholders of
each Class of shares of Pilgrim GSIF will receive shares of the corresponding
Class of the GNMA Income Fund. In the interest of economy and convenience,
shares of the GNMA Income Fund generally will not be represented by physical
certificates unless requested in writing.
15
<PAGE>
Until the Closing, shareholders of Pilgrim GSIF will continue to be able to
redeem their shares. Redemption requests received after the Closing will be
treated as requests received by GNMA Income Fund for the redemption of its
shares received by the shareholder in the Reorganization.
The obligations of the Funds under the Reorganization Agreement are subject
to various conditions, including approval of the shareholders of Pilgrim GSIF.
The Reorganization Agreement also requires that each of the Funds take, or cause
to be taken, all action, and do or cause to be done, all things reasonably
necessary, proper or advisable to consummate and make effective the transactions
contemplated by the Reorganization Agreement. The Reorganization Agreement may
be terminated by mutual agreement of the parties or on certain other grounds.
Please refer to Appendix B to review the terms and conditions of the
Reorganization Agreement.
REASONS FOR THE REORGANIZATION. The Reorganization is one of many
reorganizations that are proposed among various Pilgrim Funds. The Pilgrim Fund
complex has grown in recent years through the addition of many funds. Management
of the Pilgrim Funds has proposed the consolidation of a number of Pilgrim Funds
that management believes have similar or compatible investment policies. The
proposed reorganizations are designed to reduce the overlap in funds in the
complex, thereby eliminating duplication of costs and other inefficiencies
arising from having similar portfolios within the same fund group. ING Pilgrim
Investments also believes that the reorganizations may benefit fund shareholders
by resulting in surviving funds with a greater asset base. This is expected to
achieve economies of scale for shareholders and may provide greater investment
opportunities for the surviving funds or the potential to take larger portfolio
positions.
The proposed Reorganization was presented to the Board of Directors of
Pilgrim GSIF for consideration and approval at a meeting held on November 2,
2000. For the reasons discussed below, the Directors, including all of the
Directors who are not "interested persons" (as defined in the 1940 Act) of
Pilgrim GSIF, determined that the interests of the shareholders of Pilgrim GSIF
will not be diluted as a result of the proposed Reorganization, and that the
proposed Reorganization is in the best interests of Pilgrim GSIF and its
shareholders.
The Reorganization will allow Pilgrim GSIF's shareholders to continue to
participate in a professionally-managed portfolio which consists primarily of
securities issued or guaranteed by the U.S. Government or its agencies and
instrumentalities. As shareholders of the GNMA Income Fund, these shareholders
will be able to exchange into other mutual funds in the group of Pilgrim funds
and ING funds that offer the same Class of shares in which such shareholder is
currently invested. A list of the Pilgrim funds and ING funds and Classes
available after the Reorganization is contained in Appendix D.
BOARD CONSIDERATION. The Board of Directors of Pilgrim GSIF, in
recommending the proposed transaction, considered a number of factors, including
the following:
(1) The plans of management to reduce the overlap in funds in the Pilgrim
Fund complex.
(2) expense ratios and information regarding fees and expenses of Pilgrim
GSIF and the GNMA Income Fund, including the expense limitation
arrangements offered by ING Pilgrim Investments in connection with
each Fund;
16
<PAGE>
(3) estimates that show that combining the Funds is expected to result in
lower expense ratios because of economies of scale expected to result
from an increase in the asset size of the surviving fund;
(4) whether the Reorganization would dilute the interests of Pilgrim
GSIF's current shareholders;
(5) the relative investment performance and risks of the GNMA Income Fund
as compared to Pilgrim GSIF;
(6) the similarity of the GNMA Income Fund's investment objectives,
policies and restrictions with those of Pilgrim GSIF; and
(7) the tax-free nature of the Reorganization to Pilgrim GSIF and its
shareholders.
THE DIRECTORS OF PILGRIM GSIF RECOMMEND THAT SHAREHOLDERS OF PILGRIM GSIF
APPROVE THE REORGANIZATION.
TAX CONSIDERATIONS. The Reorganization is intended to qualify for Federal
income tax purposes as a tax-free reorganization under Section 368 of the
Internal Revenue Code of 1986, as amended. Accordingly, pursuant to this
treatment, neither Pilgrim GSIF nor its shareholders nor the GNMA Income Fund is
expected to recognize any gain or loss for federal income tax purposes from the
transactions contemplated by the Reorganization Agreement. As a condition to the
Closing of the Reorganization, the Funds will receive an opinion from the law
firm of Dechert to the effect that the Reorganization will qualify as a tax-free
reorganization for Federal income tax purposes. That opinion will be based in
part upon certain assumptions and upon certain representations made by the
Funds.
Immediately prior to the Reorganization, Pilgrim GSIF will pay a dividend
or dividends which, together with all previous dividends, will have the effect
of distributing to its shareholders all of Pilgrim GSIF's investment company
taxable income for taxable years ending on or prior to the Reorganization
(computed without regard to any deduction for dividends paid) and all of its net
capital gain, if any, realized in taxable years ending on or prior to the
Reorganization (after reduction for any available capital loss carryforward).
Such dividends will be included in the taxable income of Pilgrim GSIF's
shareholders.
As of June 30, 2000, Pilgrim GSIF had accumulated capital loss
carryforwards in the amount of approximately $30,848,996. As of December 31,
1999, the GNMA Income Fund had accumulated capital loss carryforwards of
approximately $2,897,736. After the Reorganization, the losses of the GNMA
Income Fund will be available to the GNMA Income Fund to offset its capital
gains, although the amount of these losses which may offset the GNMA Income
Fund's future capital gains in any given year may be limited. Also, after the
Reorganization, the losses of Pilgrim GSIF will be available to the GNMA Income
Fund to offset its capital gains, although a portion of the amount of these
losses which may offset the GNMA Income Fund's capital gains in any given year
will be limited due to a previous reorganization and to this Reorganization. As
a result of this limitation, it is possible that the GNMA Income Fund may not be
able to use its losses as rapidly as it might have had the Reorganization not
occurred, and part of these losses may not be useable at all. The ability of the
GNMA Income Fund to absorb losses in the future depends upon a variety of
factors that cannot be known in advance, including the existence of capital
gains against which these losses may be offset. In addition, the benefits of any
of the capital loss carryforwards currently are available only to
pre-Reorganization shareholders of the relevant fund. After the Reorganization,
however, these benefits will inure to the benefit of all post-Reorganization
shareholders of the GNMA Income Fund.
EXPENSES OF THE REORGANIZATION. ING Pilgrim Investments, Adviser to the
Funds, will bear half the cost of the Reorganization. The Funds will bear the
other half of the expenses relating to the proposed Reorganization, including,
but not limited to, the costs of solicitation of voting instructions and any
necessary filings with the Securities and Exchange Commission. Of the
Reorganization expenses allocated to the Funds, each Fund will bear a ratable
portion based on their relative net asset values immediately before Closing.
17
<PAGE>
ADDITIONAL INFORMATION ABOUT THE FUNDS
FORM OF ORGANIZATION. GNMA Income Fund is the only series of the Pilgrim
GNMA Income Fund, Inc., a corporation organized under the laws of Maryland.
Pilgrim GSIF is the only series of the Pilgrim Government Securities Income
Fund, Inc., a corporation organized under the laws of California. Both the GNMA
Income Fund and Pilgrim GSIF are governed by eleven member Boards of Directors.
The eleven Directors of the GNMA Income Fund also serve on the Board of Pilgrim
GSIF.
DISTRIBUTOR. ING Pilgrim Securities, Inc. (the "Distributor"), whose
address is 7337 E. Doubletree Ranch Road, Scottsdale, Arizona 88258, is the
principal distributor for each of the Funds.
DIVIDENDS AND OTHER DISTRIBUTIONS. Each Fund pays dividends from net
investment income and net capital gains, if any, on a monthly basis. Dividends,
and distributions of each of the Funds are automatically reinvested in
additional shares of the respective Class of the particular Fund, unless the
shareholder elects to receive distributions in cash.
If the Reorganization Agreement is approved by Pilgrim GSIF's shareholders,
then as soon as practicable before the Closing, Pilgrim GSIF will pay its
shareholders a cash distribution of all undistributed net investment income and
undistributed realized net capital gains, if any.
CAPITALIZATION. The following table shows on an unaudited basis the
capitalization of each of the Funds as of June 30, 2000, and on a PRO FORMA
basis as of June 30, 2000 giving effect to the Reorganization:
NET ASSET VALUE SHARES
NET ASSETS PER SHARE OUTSTANDING
---------- --------- -----------
PILGRIM GSIF
Class A $54,206,175 $11.93 4,545,302
Class B $33,692,207 $11.89 2,834,631
Class C $2,047,497 $12.01 170,455
Class M $509,983 $11.92 42,790
Class Q $21,720 $11.94 1,819
Class T $22,887,550 $11.89 1,924,439
GNMA INCOME FUND(1)
Class A $357,838,674 $ 8.12 44,054,738
Class B N/A N/A N/A
Class C N/A N/A N/A
Class M N/A N/A N/A
Class Q N/A N/A N/A
Class T N/A N/A N/A
GNMA INCOME FUND AFTER
REORGANIZATION (PRO FORMA)
Class A $412,044,849 $ 8.12 50,744,440
Class B $33,692,207 $ 8.12 4,149,287
Class C $2,047,497 $ 8.12 252,155
Class M $509,983 $ 8.12 62,806
Class Q $21,720 $ 8.12 2,675
Class T $22,787,550 $ 8.12 2,818,664
----------
(1) During the period ended June 30, 2000, no Class B, Class C, Class M,
Class Q or Class T shares of the GNMA Income Fund were outstanding. The
Classes B, C, M, Q and T net asset values per share were derived from
Class A.
18
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GENERAL INFORMATION ABOUT THE PROXY STATEMENT
SOLICITATION OF PROXIES
Solicitation of proxies is being made primarily by the mailing of this
Notice and Proxy Statement with its enclosures on or about _______, 2001.
Shareholders of Pilgrim GSIF whose shares are held by nominees, such as brokers,
can vote their proxies by contacting their respective nominee. In addition to
the solicitation of proxies by mail, employees of ING Pilgrim Investments and
its affiliates, without additional compensation, may solicit proxies in person
or by telephone, telegraph, facsimile, or oral communication. Pilgrim GSIF has
retained Shareholder Communications Corporation, a professional proxy
solicitation firm, to assist with any necessary solicitation of proxies.
Shareholders of Pilgrim GSIF may receive a telephone call from the professional
proxy solicitation firm asking the shareholder to vote.
A shareholder may revoke the accompanying proxy at any time prior to its
use by filing with Pilgrim GSIF a written revocation or duly executed proxy
bearing a later date. In addition, any shareholder who attends the meeting in
person may vote by ballot at the meeting, thereby canceling any proxy previously
given. The persons named in the accompanying proxy will vote as directed by the
proxy, but in the absence of voting directions in any proxy that is signed and
returned, they intend to vote "FOR" the Reorganization proposal and may vote in
their discretion with respect to other matters not now known to the Board of
Directors of Pilgrim GSIF that may be presented at the meeting.
VOTING RIGHTS
Shareholders of Pilgrim GSIF are entitled to one vote for each share held
as to any matter on which the holder is entitled to vote. Shares have
non-cumulative voting rights and no preemptive or subscription rights.
Shareholders of Pilgrim GSIF at the close of business on _________, 2000,
(the "Record Date") will be entitled to be present and give voting instructions
for Pilgrim GSIF at the meeting with respect to their shares owned as of that
Record Date. As of the Record Date, ______ shares of Pilgrim GSIF were
outstanding and entitled to vote.
Approval of the Reorganization requires the affirmative vote of a majority
of the outstanding shares of Pilgrim GSIF.
The holders of a majority of the outstanding shares present in person or
represented by proxy shall constitute a quorum. In the absence of a quorum, a
majority of outstanding shares entitled to vote present in person or by proxy
may adjourn the meeting from time to time until a quorum is present.
If a shareholder abstains from voting as to any matter, or if a broker
returns a "non-vote" proxy, indicating a lack of authority to vote on a matter,
the shares represented by the abstention or non-vote will be deemed present at
the meeting for purposes of determining a quorum. However, abstentions and
broker non-votes will not be deemed represented at the meeting for purposes of
calculating the vote on any matter. As a result, an abstention or broker
non-vote will have the same effect as a vote against the Reorganization.
19
<PAGE>
The Funds expect that, before the meeting, broker-dealer firms holding
shares of Pilgrim GSIF in "street name" for their customers will request voting
instructions from their customers and beneficial owners. If these instructions
are not received by the date specified in the broker-dealer firms' proxy
solicitation materials, the Funds understand that the broker-dealers that are
members of the New York Stock Exchange may vote on the items to be considered at
the meeting on behalf of their customers and beneficial owners under the rules
of the New York Stock Exchange.
To the knowledge of Pilgrim GSIF, as of November 1, 2000, no current
Director owns 1% or more of the outstanding shares of Pilgrim GSIF, and the
officers and Directors own, as a group, less than 1% of the shares of Pilgrim
GSIF.
Appendix E hereto lists the persons that, as of November 1, 2000 owned
beneficially or of record 5% or more of the outstanding shares of any Class of
Pilgrim GSIF or GNMA Income Fund.
OTHER MATTERS TO COME BEFORE THE MEETING
Pilgrim GSIF does not know of any matters to be presented at the meeting
other than those described in this Proxy Statement/Prospectus. If other business
should properly come before the Meeting, the proxyholders will vote thereon in
accordance with their best judgment.
SHAREHOLDER PROPOSALS
Pilgrim GSIF is not required to hold regular annual meetings and, in order
to minimize their costs, does not intend to hold meetings of shareholders unless
so required by applicable law, regulation, regulatory policy or if otherwise
deemed advisable by Pilgrim GSIF's management. Therefore it is not practicable
to specify a date by which shareholder proposals must be received in order to be
incorporated in an upcoming proxy statement for an annual meeting.
REPORTS TO SHAREHOLDERS
ING Pilgrim Investments will furnish, without charge, a copy of the most
recent Annual Report regarding either Fund and the most recent Semi-Annual
Report succeeding the Annual Report, if any, on request. Requests for such
reports should be directed to Pilgrim at 7337 E. Doubletree Ranch Road,
Scottsdale, Arizona 88258 or at (800) 992-0180.
IN ORDER THAT THE PRESENCE OF A QUORUM AT THE MEETING MAY BE ASSURED,
PROMPT EXECUTION AND RETURN OF THE ENCLOSED PROXY CARD IS REQUESTED. A
SELF-ADDRESSED, POSTAGE-PAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
James M. Hennessy,
Secretary
________, 2001
7337 E. Doubletree Ranch Road
Scottsdale, AZ 88258
20
<PAGE>
APPENDIX A
Set forth below is an excerpt from Lexington GNMA's Annual Report, dated
December 31, 1999, regarding the Fund's performance, including a report from the
former adviser to the GNMA Income Fund -- Lexington Management Corporation.
Annual Report
December 31, 1999
LEXINGTON GNMA
INCOME FUND, INC.
----------------------
Investment Objective: High Current Income
The Lexington GNMA Income Fund's total return for the fourth quarter of
1999 was -0.77%* which compares to -0.12% for the average GNMA fund monitored by
Lipper, Inc. The Fund's total return for 1999 was 0.58%* which compares to 0.11%
for the average GNMA fund. It was not a good year for bond investors. Interest
rates, as measured by the yield on the thirty-year U.S. Treasury bond, rose
nearly 150 basis points--from 5.1% to about 6.5%. Last year will be remembered
as one of the worst ever for the bond market. Meanwhile, the stock market was
having one of its best years ever. So far, 2000 is shaping up to be a repeat of
1999. Yields have continued to trend higher. But as the gap between bond and
equity valuations continues to widen, investors should anticipate a reversal of
fortunes for these markets before the year is over.
There are considerable fundamental differences between market conditions
and psychology today than a year ago even though bond price performance is
strikingly similar. First, during the fourth quarter of 1998, the financial
markets were awash in liquidity as the Federal Reserve had lowered short-term
interest rates and pumped money into the financial system to prevent a meltdown
in the wake of the Russian debt crises. Yields on thirty-year U.S Treasury debt
fell below 5% and there was a general consensus that a global economic slowdown
was about to ensue. Moreover, bond yields had been more or less steadily
declining for four years. Professional bond managers were fully invested and
somewhat complacent about future prospects even though the mathematics of the
bond market should have told them to watch out; low yields always equate to high
price risk for bonds.
Today, bonds are unloved investment vehicles. Fixed income mutual funds
have experienced a steady stream of shareholder withdrawals. Bond managers have
reduced the average maturity of their holdings and added cash. Worries about a
global slowdown have been replaced by fears of strong economic growth, both here
and abroad. Everyone agrees that the Federal Reserve will keep raising
short-term interest rates and draining liquidity until the stock market cracks
or the economy falters, neither of which seems likely any time soon. Meanwhile,
inflation will creep higher, further eroding the real return of bonds. These
worries have mounted despite a significant rise in interest rates, which has
reduced the risk of owning bonds. For example, the typical GNMA mortgage bond
yielded 6.4% at the start of 1999. By the end of the year, that return was 7.6%.
There's a lot more coupon income today to offset price losses than a year ago.
It's also clear that if interest rates move much above current levels (8.50% for
new mortgages) they will have considerable impact on the economy.
"Fortune favors the brave." We are looking for the opportunity to adopt a
more aggressive investment stance for the Fund. During the first nine months of
1999, the portfolio had a defensive structure. We moved to a neutral position
during the fall, a tactic that hurt our performance as interest rates continued
to rise. Now, based on the excellent relative value of bonds versus both
prospective inflation and alternative investment vehicles, we plan to increase
the portfolio's effective maturity and interest rate sensitivity. It's difficult
to know what will be the trigger, perhaps a significant stock market reversal or
an economic slowdown in the U.S. Moreover, a bond market turnaround may be a few
months down the road. We are reasonably sure, however, that 2000 will not be a
replay of 1999 and bond investors will enjoy significantly higher returns.
A-1
<PAGE>
Comparison of change in value of a $10,000 investment in
Lexington GNMA Income Fund, Inc. and
the unmanaged Lehman Brothers Mortgage-Backed Securities Index
Lehman Brothers
Lexington GNMA Mortgage-Backed
Date Income Fund Securities Index
---- ----------- ----------------
12/31/89 $10,000 $10,000
12/31/90 $10,923 $11,072
12/31/91 $12,643 $12,813
12/30/92 $13,299 $13,704
12/31/93 $14,371 $14,642
12/31/94 $14,073 $14,406
12/31/9S $16,312 $16,826
12/30/96 $17,245 $17,726
12/31/97 $19,004 $19,409
12/31/98 $20,433 $20,759
12/31/99 $20,552 $21,145
Average Annual Standard Total Returns
for the Period Ending 12/31/99
Lehman Brothers
Lexington GNMA Mortgage-Backed
Annualized Returns: Income Fund Securities Index
------------------- ----------- ----------------
1 YR 0.58% 1.86%
5 YR 7.87% 7.98%
10 YR 7.47% 7.78%
This graph, prepared in accordance with SEC regulations, compares a $10,000
investment in the Fund with a similar investment in the unmanaged Lehman
Brothers Mortgage-Backed Securities Index. Results for the Fund and the Lehman
Brothers Mortgage-Backed Securities Index include the reinvestment of all
dividend and capital gain distributions. 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 at their original cost. Total return represents past
performance and it is not predictive of future results.
* 0.58%, 7.87% and 7.47% are the one, five and ten year average annual
standard total returns, respectively, for the period ended December 31,
1999. 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. Total return represents past performance and is not
predictive of future results. There is no guarantee that the Fund can
achieve its objective.
A-3
<PAGE>
APPENDIX B
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this _____ day of _____________, 2001, by and between Pilgrim GNMA Income Fund,
Inc., a Maryland corporation (the "Acquiring Company") with its principal place
of business at 7337 E. Doubletree Ranch Road, Scottsdale, Arizona 85258, on
behalf of its sole series, Pilgrim GNMA Income Fund (the "Acquiring Fund"), and
Pilgrim Government Securities Fund, Inc., a California corporation (the
"Acquired Company") with its principal place of business at 7337 E. Doubletree
Ranch Road, Scottsdale, Arizona 85258, on behalf of its sole series, Pilgrim
Government Securities Fund (the "Acquired Fund").
This Agreement is intended to be and is adopted as a plan of reorganization
and liquidation within the meaning of Section 368(a)(1) of the United States
Internal Revenue Code of 1986, as amended (the "Code"). The reorganization (the
"Reorganization") will consist of the transfer of all of the assets of the
Acquired Fund to the Acquiring Fund in exchange solely for Class A, Class B,
Class C, Class M, Class Q and Class T voting shares of Common Stock (one cent
($0.01) par value) of the Acquiring Fund (the "Acquiring Fund Shares"), the
assumption by the Acquiring Fund of all liabilities of the Acquired Fund, and
the distribution of the Acquiring Fund Shares to the shareholders of the
Acquired Fund in complete liquidation of the Acquired Fund as provided herein,
all upon the terms and conditions hereinafter set forth in this Agreement.
WHEREAS, the Acquired Fund and the Acquiring Fund are open-end, registered
investment companies of the management type or a series thereof and the Acquired
Fund owns securities which generally are assets of the character in which the
Acquiring Fund is permitted to invest;
WHEREAS, the Directors of the Acquiring Company have determined that the
exchange of all of the assets of the Acquired Fund for Acquiring Fund Shares and
the assumption of all liabilities of the Acquired Fund by the Acquiring Fund is
in the best interests of the Acquiring Fund and its shareholders and that the
interests of the existing shareholders of the Acquiring Fund would not be
diluted as a result of this transaction; and
WHEREAS, the Directors of the Acquired Company have determined that the
exchange of all of the assets of the Acquired Fund for Acquiring Fund Shares and
the assumption of all liabilities of the Acquired Fund by the Acquiring Fund is
in the best interests of the Acquired Fund and its shareholders and that the
interests of the existing shareholders of the Acquired Fund would not be diluted
as a result of this transaction;
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND TO THE ACQUIRING FUND IN EXCHANGE
FOR THE ACQUIRING FUND SHARES, THE ASSUMPTION OF ALL ACQUIRED FUND
LIABILITIES AND THE LIQUIDATION OF THE ACQUIRED FUND
1.1 Subject to the requisite approval of the Acquired Fund shareholders and
the other terms and conditions herein set forth and on the basis of the
representations and warranties contained herein, the Acquired Fund agrees to
transfer all of the Acquired Fund's assets, as set forth in paragraph 1.2, to
the Acquiring Fund, and the Acquiring Fund agrees in exchange therefor: (i) to
deliver to the Acquired Fund the number of full and fractional Class A, Class B,
Class C, Class M, Class Q and Class T Acquiring Fund Shares determined by
dividing the value of the Acquired Fund's net assets with respect to each class,
computed in the manner and as of the time and date set forth in paragraph 2.1,
by the net asset value of one Acquiring Fund Share of the same class, computed
B-1
<PAGE>
in the manner and as of the time and date set forth in paragraph 2.2; and (ii)
to assume all liabilities of the Acquired Fund, as set forth in paragraph 1.3.
Such transactions shall take place at the closing provided for in paragraph 3.1
(the "Closing").
1.2 The assets of the Acquired Fund to be acquired by the Acquiring Fund
shall consist of all assets and property, including, without limitation, all
cash, securities, commodities and futures interests and dividends or interests
receivable, that are owned by the Acquired Fund, and any deferred or prepaid
expenses shown as an asset on the books of the Acquired Fund, on the closing
date provided for in paragraph 3.1 (the "Closing Date") (collectively,
"Assets").
1.3 The Acquired Fund will endeavor to discharge all of its known
liabilities and obligations prior to the Closing Date. The Acquiring Fund shall
also assume all of the liabilities of the Acquired Fund, whether accrued or
contingent, known or unknown, existing at the Valuation Date (collectively,
"Liabilities"). On or as soon as practicable prior to the Closing Date, the
Acquired Fund will declare and pay to its shareholders of record one or more
dividends and/or other distributions so that it will have distributed
substantially all (and in no event less than 98%) of its investment company
taxable income (computed without regard to any deduction for dividends paid) and
realized net capital gain, if any, for the current taxable year through the
Closing Date.
1.4 Immediately after the transfer of assets provided for in paragraph 1.1,
the Acquired Fund will distribute to the Acquired Fund's shareholders of record
with respect to each class of its shares, determined as of immediately after the
close of business on the Closing Date (the "Acquired Fund Shareholders"), on a
pro rata basis within that class, the Acquiring Fund Shares of the same class
received by the Acquired Fund pursuant to paragraph 1.1, and will completely
liquidate. Such distribution and liquidation will be accomplished, with respect
to each class of the Acquired Fund's shares, by the transfer of the Acquiring
Fund Shares then credited to the account of the Acquired Fund on the books of
the Acquiring Fund to open accounts on the share records of the Acquiring Fund
in the names of the Acquired Fund Shareholders. The aggregate net asset value of
Class A, Class B, Class C, Class M, Class Q and Class T Acquiring Fund Shares to
be so credited to Class A, Class B, Class C, Class M, Class Q and Class T
Acquired Fund Shareholders shall, with respect to each class, be equal to the
aggregate net asset value of the Acquired Fund shares of that same class owned
by such shareholders on the Closing Date. All issued and outstanding shares of
the Acquired Fund will simultaneously be canceled on the books of the Acquired
Fund, although share certificates representing interests in Class A, Class B,
Class C, Class M, Class Q and Class T shares of the Acquired Fund will represent
a number of the same class of Acquiring Fund Shares after the Closing Date, as
determined in accordance with Section 2.3. The Acquiring Fund shall not issue
certificates representing the Class A, Class B, Class C, Class M, Class Q and
Class T Acquiring Fund Shares in connection with such exchange.
1.5 Ownership of Acquiring Fund Shares will be shown on the books of the
Acquiring Fund's transfer agent.
1.6 Any reporting responsibility of the Acquired Fund including, but not
limited to, the responsibility for filing of regulatory reports, tax returns, or
other documents with the Securities and Exchange Commission (the "Commission"),
any state securities commission, and any federal, state or local tax authorities
or any other relevant regulatory authority, is and shall remain the
responsibility of the Acquired Fund.
2. VALUATION
2.1 The value of the Assets shall be the value computed as of immediately
after the close of business of the New York Stock Exchange and after the
declaration of any dividends on the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures in the
B-2
<PAGE>
then-current prospectus and statement of additional information with respect to
the Acquiring Fund, and valuation procedures established by the Acquiring Fund's
Board of Directors.
2.2 The net asset value of a Class A, Class B, Class C, Class M, Class Q
and Class T Acquiring Fund Share shall be the net asset value per share computed
with respect to that class as of the Valuation Date, using the valuation
procedures set forth in the Acquiring Fund's then-current prospectus and
statement of additional information with respect to the Acquiring Fund, and
valuation procedures established by the Acquiring Fund's Board of Directors.
2.3 The number of the Class A, Class B, Class C, Class M, Class Q and Class
T Acquiring Fund Shares to be issued (including fractional shares, if any) in
exchange for the Acquired Fund's assets shall be determined with respect to each
such class by dividing the value of the net assets with respect to the Class A,
Class B, Class C, Class M, Class Q and Class T shares of the Acquired Fund, as
the case may be, determined using the same valuation procedures referred to in
paragraph 2.1, by the net asset value of an Acquiring Fund Share, determined in
accordance with paragraph 2.2.
2.4 All computations of value shall be made by the Acquired Fund's
designated record keeping agent and shall be subject to confirmation by the
Acquiring Fund's record keeping agent and by each Fund's respective independent
accountants.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be _____ ___, 2001, or such other date as the
parties may agree to in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of immediately after the close of
business on the Closing Date unless otherwise agreed to by the parties. The
close of business on the Closing Date shall be as of 4:00 p.m., Eastern Time.
The Closing shall be held at the offices of the Acquiring Fund or at such other
time and/or place as the parties may agree.
3.2 The Acquired Fund shall direct State Street Bank and Trust Company
("State Street"), as custodian for the Acquired Fund (the "Custodian"), to
deliver, at the Closing, a certificate of an authorized officer stating that (i)
the Assets shall have been delivered in proper form to the Acquiring Fund within
two business days prior to or on the Closing Date, and (ii) all necessary taxes
in connection with the delivery of the Assets, including all applicable federal
and state stock transfer stamps, if any, have been paid or provision for payment
has been made. The Acquired Fund's portfolio securities represented by a
certificate or other written instrument shall be presented by the Acquired Fund
Custodian to the custodian for the Acquiring Fund for examination no later than
five business days preceding the Closing Date, and shall be transferred and
delivered by the Acquired Fund as of the Closing Date for the account of the
Acquiring Fund duly endorsed in proper form for transfer in such condition as to
constitute good delivery thereof. The Custodian shall deliver as of the Closing
Date by book entry, in accordance with the customary practices of such
depositories and the Custodian, the Acquired Fund's portfolio securities and
instruments deposited with a securities depository, as defined in Rule 17f-4
under the Investment Company Act of 1940, as amended (the "1940 Act"). The cash
to be transferred by the Acquired Fund shall be delivered by wire transfer of
federal funds on the Closing Date.
3.3 The Acquired Fund shall direct DST Systems, Inc. (the "Transfer
Agent"), on behalf of the Acquired Fund, to deliver at the Closing a certificate
of an authorized officer stating that its records contain the names and
addresses of the Acquired Fund Shareholders and the number and percentage
ownership of outstanding Class A, Class B, Class C, Class M, Class Q and Class T
shares owned by each such shareholder immediately prior to the Closing. The
Acquiring Fund shall issue and deliver a confirmation evidencing the Acquiring
Fund Shares to be credited on the Closing Date to the Secretary of the Acquiring
Fund, or provide evidence satisfactory to the Acquired Fund that such Acquiring
Fund Shares have been credited to the Acquired Fund's account on the books of
the Acquiring Fund. At the Closing each party shall deliver to the other such
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<PAGE>
bills of sale, checks, assignments, share certificates, if any, receipts or
other documents as such other party or its counsel may reasonably request.
3.4 In the event that on the Valuation Date (a) the New York Stock Exchange
or another primary trading market for portfolio securities of the Acquiring Fund
or the Acquired Fund shall be closed to trading or trading thereupon shall be
restricted, or (b) trading or the reporting of trading on such Exchange or
elsewhere shall be disrupted so that, in the judgment of the Board of Directors
of the Acquired Fund or the Board of Directors of the Acquiring Fund,
respectively, accurate appraisal of the value of the net assets of the Acquiring
Fund or the Acquired Fund is impracticable, the Closing Date shall be postponed
until the first business day after the day when trading shall have been fully
resumed and reporting shall have been restored.
4. REPRESENTATIONS AND WARRANTIES
4.1 Except as has been disclosed to the Acquiring Fund in a written
instrument executed by an officer of the Acquired Company, the Acquired Company
on behalf of the Acquired Fund represents and warrants to the Acquiring Fund as
follows:
(a) The Acquired Fund is duly organized as a series of the Acquired
Company, which is a corporation duly organized, validly existing and in good
standing under the laws of the State of California with power under the Acquired
Company's Articles of Incorporation to own all of its properties and assets and
to carry on its business as it is now being conducted;
(b) The Acquired Company is a registered investment company classified as a
management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act, and the registration of
shares of the Acquired Fund under the Securities Act of 1933, as amended ("1933
Act"), is in full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquired Fund of
the transactions contemplated herein, except such as have been obtained under
the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act")
and the 1940 Act and such as may be required by state securities laws;
(d) The current prospectus and statement of additional information of the
Acquired Fund and each prospectus and statement of additional information of the
Acquired Fund used during the three years previous to the date of this Agreement
conforms or conformed at the time of its use in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and does not or did not at the time of
its use include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
materially misleading;
(e) On the Closing Date, the Acquired Fund will have good and marketable
title to the Assets and full right, power, and authority to sell, assign,
transfer and deliver such Assets hereunder free of any liens or other
encumbrances, and upon delivery and payment for such Assets, the Acquiring Fund
will acquire good and marketable title thereto, subject to no restrictions on
the full transfer thereof, including such restrictions as might arise under the
1933 Act, other than as disclosed to the Acquiring Fund;
(f) The Acquired Fund is not engaged currently, and the execution, delivery
and performance of this Agreement will not result, in (i) a material violation
of the Acquired Company's Articles of Incorporation or By-Laws or of any
agreement, indenture, instrument, contract, lease or other undertaking to which
the Acquired Company on behalf of the Acquired Fund is a party or by which it is
bound, or (ii) the acceleration of any obligation, or the imposition of any
penalty, under any agreement, indenture, instrument, contract, lease, judgment
B-4
<PAGE>
or decree to which the Acquired Company on behalf of the Acquired Fund is a
party or by which it is bound;
(g) All material contracts or other commitments of the Acquired Fund (other
than this Agreement and certain investment contracts, including options, futures
and forward contracts) will terminate without liability to the Acquired Fund on
or prior to the Closing Date;
(h) Except as otherwise disclosed in writing to and accepted by the
Acquiring Company on behalf of the Acquiring Fund, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or, to its knowledge, threatened against
the Acquired Fund or any of its properties or assets that, if adversely
determined, would materially and adversely affect its financial condition or the
conduct of its business. The Acquired Company on behalf of the Acquired Fund
knows of no facts which might form the basis for the institution of such
proceedings and is not a party to or subject to the provisions of any order,
decree or judgment of any court or governmental body which materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated;
(i) The Statement of Assets and Liabilities, Statements of Operations and
Changes in Net Assets, and Portfolio of Investments of the Acquired Fund at June
30, 2000 have been audited by KPMG LLP, independent auditors, and are in
accordance with generally accepted accounting principles ("GAAP") consistently
applied, and such statements (copies of which have been furnished to the
Acquiring Fund) present fairly, in all material respects, the financial
condition of the Acquired Fund as of such date in accordance with GAAP, and
there are no known contingent liabilities of the Acquired Fund required to be
reflected on a balance sheet (including the notes thereto) in accordance with
GAAP as of such date not disclosed therein;
(j) Since June 30, 2000, there has not been any material adverse change in
the Acquired Fund's financial condition, assets, liabilities or business, other
than changes occurring in the ordinary course of business, or any incurrence by
the Acquired Fund of indebtedness maturing more than one year from the date such
indebtedness was incurred, except as otherwise disclosed to and accepted by the
Acquiring Fund. For the purposes of this subparagraph (j), a decline in net
asset value per share of the Acquired Fund due to declines in market values of
securities in the Acquired Fund's portfolio, the discharge of Acquired Fund
liabilities, or the redemption of Acquired Fund Shares by shareholders of the
Acquired Fund shall not constitute a material adverse change;
(k) On the Closing Date, all Federal and other tax returns, dividend
reporting forms, and other tax-related reports of the Acquired Fund required by
law to have been filed by such date (including any extensions) shall have been
filed and are or will be correct in all material respects, and all Federal and
other taxes shown as due or required to be shown as due on said returns and
reports shall have been paid or provision shall have been made for the payment
thereof, and to the best of the Acquired Fund's knowledge, no such return is
currently under audit and no assessment has been asserted with respect to such
returns;
(l) For each taxable year of its operation (including the taxable year
ending on the Closing Date), the Acquired Fund has met (or will meet) the
requirements of Subchapter M of the Code for qualification as a regulated
investment company, has been (or will be) eligible to and has computed (or will
compute) its federal income tax under Section 852 of the Code, and will have
distributed all of its investment company taxable income and net capital gain
(as defined in the Code) that has accrued through the Closing Date, and before
the Closing Date will have declared dividends sufficient to distribute all of
its investment company taxable income and net capital gain for the period ending
on the Closing Date;
B-5
<PAGE>
(m) All issued and outstanding shares of the Acquired Fund are, and on the
Closing Date will be, duly and validly issued and outstanding, fully paid and
non-assessable by the Acquired Company and have been offered and sold in every
state and the District of Columbia in compliance in all material respects with
applicable registration requirements of the 1933 Act and state securities laws.
All of the issued and outstanding shares of the Acquired Fund will, at the time
of Closing, be held by the persons and in the amounts set forth in the records
of the Transfer Agent, on behalf of the Acquired Fund, as provided in paragraph
3.3. The Acquired Fund does not have outstanding any options, warrants or other
rights to subscribe for or purchase any of the shares of the Acquired Fund, nor
is there outstanding any security convertible into any of the Acquired Fund
shares;
(n) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Closing Date by all necessary action, if any,
on the part of the Directors of the Acquired Company on behalf of the Acquired
Fund, and, subject to the approval of the shareholders of the Acquired Fund,
this Agreement will constitute a valid and binding obligation of the Acquired
Fund, enforceable in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other laws relating to or
affecting creditors' rights and to general equity principles;
(o) The information to be furnished by the Acquired Fund for use in
registration statements, proxy materials and other documents filed or to be
filed with any federal, state or local regulatory authority (including the
National Association of Securities Dealers, Inc.), which may be necessary in
connection with the transactions contemplated hereby, shall be accurate and
complete in all material respects and shall comply in all material respects with
Federal securities and other laws and regulations thereunder applicable thereto;
and
(p) The proxy statement of the Acquired Fund (the "Proxy Statement") to be
included in the Registration Statement referred to in paragraph 5.6, insofar as
it relates to the Acquired Fund, will, on the effective date of the Registration
Statement and on the Closing Date (i) not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not materially misleading provided, however,
that the representations and warranties in this subparagraph (p) shall not apply
to statements in or omissions from the Proxy Statement and the Registration
Statement made in reliance upon and in conformity with information that was
furnished by the Acquiring Fund for use therein, and (ii) comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and
the rules and regulations thereunder.
4.2 Except as has been disclosed to the Acquired Fund in a written
instrument executed by an officer of the Acquiring Company, the Acquiring
Company on behalf of the Acquiring Fund represents and warrants to the Acquired
Company as follows:
(a) The Acquiring Fund is duly organized as a series of the Acquiring
Company, which is a corporation duly organized, validly existing and in good
standing under the laws of the State of California with power under the
Acquiring Company's Articles of Incorporation to own all of its properties and
assets and to carry on its business as it is now being conducted;
(b) The Acquiring Company is a registered investment company classified as
a management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act and the registration of
shares of the Acquiring Fund under the 1933 Act, is in full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquiring Fund of
the transactions contemplated herein, except such as have been obtained under
B-6
<PAGE>
the 1933 Act, the 1934 Act and the 1940 Act and such as may be required by state
securities laws;
(d) The current prospectus and statement of additional information of the
Acquiring Fund and each prospectus and statement of additional information of
the Acquiring Fund used during the three years previous to the date of this
Agreement conforms or conformed at the time of its use in all material respects
to the applicable requirements of the 1933 Act and the 1940 Act and the rules
and regulations of the Commission thereunder and does not or did not at the time
of its use include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
materially misleading;
(e) On the Closing Date, the Acquiring Fund will have good and marketable
title to the Acquiring Fund's assets, free of any liens of other encumbrances,
except those liens or encumbrances as to which the Acquired Fund has received
notice and necessary documentation at or prior to the Closing;
(f) The Acquiring Fund is not engaged currently, and the execution,
delivery and performance of this Agreement will not result, in (i) a material
violation of the Acquiring Fund's Articles of Incorporation or By-Laws or of any
agreement, indenture, instrument, contract, lease or other undertaking to which
the Acquiring Company on behalf of the Acquiring Fund is a party or by which it
is bound, or (ii) the acceleration of any obligation, or the imposition of any
penalty, under any agreement, indenture, instrument, contract, lease, judgment
or decree to which the Acquiring Company on behalf of the Acquiring Fund is a
party or by which it is bound;
(g) Except as otherwise disclosed in writing to and accepted by the
Acquired Company on behalf of the Acquired Fund, no litigation or administrative
proceeding or investigation of or before any court or governmental body is
presently pending or, to its knowledge, threatened against the Acquiring Fund or
any of its properties or assets that, if adversely determined, would materially
and adversely affect its financial condition or the conduct of its business. The
Acquiring Company on behalf of the Acquiring Fund knows of no facts which might
form the basis for the institution of such proceedings and is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects its business or its
ability to consummate the transactions herein contemplated;
(h) The Statement of Assets and Liabilities, Statements of Operations and
Changes in Net Assets and Portfolio of Investments of the Acquiring Fund at
December 31, 1999 have been audited by KPMG LLP, independent auditors, and are
in accordance with GAAP consistently applied, and such statements (copies of
which have been furnished to the Acquired Fund) present fairly, in all material
respects, the financial condition of the Acquiring Fund as of such date in
accordance with GAAP, and there are no known contingent liabilities of the
Acquiring Fund required to be reflected on a balance sheet (including the notes
thereto) in accordance with GAAP as of such date not disclosed therein;
(i) Since December 31, 1999 there has not been any material adverse change
in the Acquiring Fund's financial condition, assets, liabilities or business,
other than changes occurring in the ordinary course of business, or any
incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquired Fund. For purposes of this subparagraph (i), a
decline in net asset value per share of the Acquiring Fund due to declines in
market values of securities in the Acquiring Fund's portfolio, the discharge of
Acquiring Fund liabilities, or the redemption of Acquiring Fund Shares by
shareholders of the Acquiring Fund, shall not constitute a material adverse
change;
(j) On the Closing Date, all Federal and other tax returns, dividend
reporting forms, and other tax-related reports of the Acquiring Fund required by
law to have been filed by such date (including any extensions) shall have been
B-7
<PAGE>
filed and are or will be correct in all material respects, and all Federal and
other taxes shown as due or required to be shown as due on said returns and
reports shall have been paid or provision shall have been made for the payment
thereof, and to the best of the Acquiring Fund's knowledge no such return is
currently under audit and no assessment has been asserted with respect to such
returns;
(k) For each taxable year of its operation (including the taxable year that
includes the Closing Date), the Acquiring Fund has met (or will meet) the
requirements of Subchapter M of the Code for qualification as a regulated
investment company has been eligible to and has computed (or will compute) its
federal income tax under Section 852 of the Code, has distributed all of its
investment company taxable income and net capital gain (as defined in the Code)
for periods ending prior to the Closing Date;
(l) All issued and outstanding Acquiring Fund Shares are, and on the
Closing Date will be, duly and validly issued and outstanding, fully paid and
non-assessable and have been offered and sold in every state and the District of
Columbia in compliance in all material respects with applicable registration
requirements of the 1933 Act and state securities laws. The Acquiring Fund does
not have outstanding any options, warrants or other rights to subscribe for or
purchase any Acquiring Fund Shares, nor is there outstanding any security
convertible into any Acquiring Fund Shares;
(m) The execution, delivery and performance of this Agreement will have
been fully authorized prior to the Closing Date by all necessary action, if any,
on the part of the Directors of the Acquiring Company on behalf of the Acquiring
Fund and this Agreement will constitute a valid and binding obligation of the
Acquiring Fund, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium and other
laws relating to or affecting creditors' rights and to general equity
principles;
(n) The Class A, Class B, Class C, Class M, Class Q and Class T Acquiring
Fund Shares to be issued and delivered to the Acquired Fund, for the account of
the Acquired Fund Shareholders, pursuant to the terms of this Agreement, will on
the Closing Date have been duly authorized and, when so issued and delivered,
will be duly and validly issued Acquiring Fund Shares, and will be fully paid
and non-assessable;
(o) The information to be furnished by the Acquiring Company for use in the
registration statements, proxy materials and other documents that may be
necessary in connection with the transactions contemplated hereby shall be
accurate and complete in all material respects and shall comply in all material
respects with Federal securities and other laws and regulations applicable
thereto; and
(p) That insofar as it relates to the Acquiring Fund, the Registration
Statement relating to the Acquiring Fund Shares issuable hereunder, and the
proxy materials of the Acquired Fund to be included in the Registration
Statement, and any amendment or supplement to the foregoing, will, from the
effective date of the Registration Statement through the date of the meeting of
shareholders of the Acquired Fund contemplated therein (i) not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading provided,
however, that the representations and warranties in this subparagraph (p) shall
not apply to statements in or omissions from the Registration Statement made in
reliance upon and in conformity with information that was furnished by the
Acquired Fund for use therein, and (ii) comply in all material respects with the
provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and
regulations thereunder.
B-8
<PAGE>
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 The Acquiring Fund and the Acquired Fund each will operate its business
in the ordinary course between the date hereof and the Closing Date, it being
understood that such ordinary course of business will include the declaration
and payment of customary dividends and distributions, and any other distribution
that may be advisable.
5.2 The Acquired Fund will call a meeting of the shareholders of the
Acquired Fund to consider and act upon this Agreement and to take all other
action necessary to obtain approval of the transactions contemplated herein.
5.3 The Acquired Fund covenants that the Class A, Class B, Class C, Class
M, Class Q and Class T Acquiring Fund Shares to be issued hereunder are not
being acquired for the purpose of making any distribution thereof, other than in
accordance with the terms of this Agreement.
5.4 The Acquired Fund will assist the Acquiring Fund in obtaining such
information as the Acquiring Fund reasonably requests concerning the beneficial
ownership of the Acquired Fund shares.
5.5 Subject to the provisions of this Agreement, the Acquiring Fund and the
Acquired Fund will each take, or cause to be taken, all action, and do or cause
to be done, all things reasonably necessary, proper or advisable to consummate
and make effective the transactions contemplated by this Agreement.
5.6 The Acquired Fund will provide the Acquiring Fund with information
reasonably necessary for the preparation of a prospectus (the "Prospectus")
which will include the Proxy Statement referred to in paragraph 4.1(p), all to
be included in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the 1934 Act and the
1940 Act, in connection with the meeting of the shareholders of the Acquired
Fund to consider approval of this Agreement and the transactions contemplated
herein.
5.7 As soon as is reasonably practicable after the Closing, the Acquired
Fund will make a liquidating distribution to its shareholders consisting of the
Class A, Class B, Class C, Class M, Class Q and Class T Acquiring Fund Shares
received at the Closing.
5.8 The Acquiring Fund and the Acquired Fund shall each use its reasonable
best efforts to fulfill or obtain the fulfillment of the conditions precedent to
effect the transactions contemplated by this Agreement as promptly as
practicable.
5.9 The Acquired Company on behalf of the Acquired Fund covenants that the
Acquired Company will, from time to time, as and when reasonably requested by
the Acquiring Fund, execute and deliver or cause to be executed and delivered
all such assignments and other instruments, and will take or cause to be taken
such further action as the Acquiring Company on behalf of the Acquiring Fund may
reasonably deem necessary or desirable in order to vest in and confirm (a) the
Acquired Company's on behalf of the Acquired Fund's title to and possession of
the Acquiring Fund Shares to be delivered hereunder, and (b) the Acquiring
Company's on behalf of the Acquiring Fund's title to and possession of all the
assets and to carry out the intent and purpose of this Agreement.
5.10 The Acquiring Fund will use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act and such of
the state blue sky or securities laws as may be necessary in order to continue
its operations after the Closing Date.
B-9
<PAGE>
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of the Acquired Company on behalf of the Acquired Fund to
consummate the transactions provided for herein shall be subject, at the
Acquired Company's election, to the performance by the Acquiring Company on
behalf of the Acquiring Fund of all the obligations to be performed by it
hereunder on or before the Closing Date, and, in addition thereto, the following
further conditions:
6.1 All representations and warranties of the Acquiring Company on behalf
of the Acquiring Fund contained in this Agreement shall be true and correct in
all material respects as of the date hereof and, except as they may be affected
by the transactions contemplated by this Agreement, as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date;
6.2 The Acquiring Company shall have delivered to the Acquired Company a
certificate executed in its name by its President or Vice President and its
Treasurer or Assistant Treasurer, in a form reasonably satisfactory to the
Acquired Company and dated as of the Closing Date, to the effect that the
representations and warranties of the Acquiring Company on behalf of the
Acquiring Fund made in this Agreement are true and correct at and as of the
Closing Date, except as they may be affected by the transactions contemplated by
this Agreement and as to such other matters as the Acquired Company shall
reasonably request;
6.3 The Acquiring Company on behalf of the Acquiring Fund shall have
performed all of the covenants and complied with all of the provisions required
by this Agreement to be performed or complied with by the Acquiring Company on
behalf of the Acquiring Fund on or before the Closing Date; and
6.4 The Acquired Fund and the Acquiring Fund shall have agreed on the
number of full and fractional Acquiring Fund Shares of each Class to be issued
in connection with the Reorganization after such number has been calculated in
accordance with paragraph 1.1.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Company on behalf of the Acquiring Fund to
complete the transactions provided for herein shall be subject, at the Acquiring
Company's election to the performance by the Acquired Company on behalf of the
Acquired Fund of all of the obligations to be performed by it hereunder on or
before the Closing Date and, in addition thereto, the following conditions:
7.1 All representations and warranties of the Acquired Company on behalf of
the Acquired Fund contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date;
7.2 The Acquired Company shall have delivered to the Acquiring Fund a
statement of the Acquired Fund's assets and liabilities, as of the Closing Date,
certified by the Treasurer of the Acquired Company;
7.3 The Acquired Company shall have delivered to the Acquiring Fund on the
Closing Date a certificate executed in its name by its President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
satisfactory to the Acquiring Company and dated as of the Closing Date, to the
effect that the representations and warranties of the Acquired Company on behalf
of the Acquired Fund made in this Agreement are true and correct at and as of
the Closing Date, except as they may be affected by the transactions
contemplated by this Agreement, and as to such other matters as the Acquiring
Company shall reasonably request;
B-10
<PAGE>
7.4 The Acquired Company on behalf of the Acquired Fund shall have
performed all of the covenants and complied with all of the provisions required
by this Agreement to be performed or complied with by the Acquired Company on
behalf of the Acquired Fund on or before the Closing Date;
7.5 The Acquired Fund and the Acquiring Fund shall have agreed on the
number of full and fractional Acquiring Fund Shares of each Class to be issued
in connection with the Reorganization after such number has been calculated in
accordance with paragraph 1.1; and
7.6 The Acquired Fund shall have declared and paid a distribution or
distributions prior to the Closing that, together with all previous
distributions, shall have the effect of distributing to its shareholders (i) all
of its investment company taxable income and all of its net realized capital
gains, if any, for the period from the close of its last fiscal year to 4:00
p.m. Eastern time on the Closing; and (ii) any undistributed investment company
taxable income and net realized capital gains from any period to the extent not
otherwise already distributed.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND AND THE
ACQUIRED FUND
If any of the conditions set forth below have not been satisfied on or
before the Closing Date with respect to the Acquired Fund or the Acquiring Fund,
the other party to this Agreement shall, at its option, not be required to
consummate the transactions contemplated by this Agreement:
8.1 The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of the
Acquired Fund in accordance with the provisions of the Acquired Company's
Articles of Incorporation, By-Laws, applicable California law and the 1940 Act,
and certified copies of the resolutions evidencing such approval shall have been
delivered to the Acquiring Fund. Notwithstanding anything herein to the
contrary, neither the Acquiring Company nor the Acquired Company may waive the
conditions set forth in this paragraph 8.1;
8.2 On the Closing Date no action, suit or other proceeding shall be
pending or, to its knowledge, threatened before any court or governmental agency
in which it is sought to restrain or prohibit, or obtain damages or other relief
in connection with, this Agreement or the transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and
permits of Federal, state and local regulatory authorities deemed necessary by
the Acquiring Company or the Acquired Company to permit consummation, in all
material respects, of the transactions contemplated hereby shall have been
obtained, except where failure to obtain any such consent, order or permit would
not involve a risk of a material adverse effect on the assets or properties of
the Acquiring Fund or the Acquired Fund, provided that either party hereto may
for itself waive any of such conditions;
8.4 The Registration Statement shall have become effective under the 1933
Act and no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act; and
8.5 The parties shall have received the opinion of Dechert addressed to the
Acquired Company and the Acquiring Company substantially to the effect that,
based upon certain facts, assumptions, and representations, the transaction
contemplated by this Agreement shall constitute a tax-free reorganization for
Federal income tax purposes. The delivery of such opinion is conditioned upon
receipt by Dechert of representations it shall request of the Acquiring Company
B-11
<PAGE>
and the Acquired Company. Notwithstanding anything herein to the contrary,
neither the Acquiring Company nor the Acquired Company may waive the condition
set forth in this paragraph 8.5.
9. BROKERAGE FEES AND EXPENSES
9.1 The Acquired Company on behalf of the Acquired Fund and the Acquiring
Company on behalf of the Acquiring Fund represent and warrant to each other that
there are no brokers or finders entitled to receive any payments in connection
with the transactions provided for herein.
9.2 The expenses relating to the proposed Reorganization will be shared so
that (1) half of such costs are borne by the investment adviser to the Acquired
and Acquiring Funds, and (2) half are borne by the Acquired and Acquiring Funds
and will be paid by the Acquired Fund and Acquiring Fund pro rata based upon the
relative net assets of the Acquired Fund and Acquiring Fund as of the close of
business on the record date for determining the shareholders of the Acquired
Fund entitled to vote on the Reorganization. The costs of the Reorganization
shall include, but not be limited to, costs associated with obtaining any
necessary order of exemption from the 1940 Act, preparation of the Registration
Statement, printing and distributing the Acquiring Fund's prospectus and the
Acquired Fund's proxy materials, legal fees, accounting fees, securities
registration fees, and expenses of holding shareholders' meetings.
Notwithstanding any of the foregoing, expenses will in any event be paid by the
party directly incurring such expenses if and to the extent that the payment by
another person of such expenses would result in the disqualification of such
party as a "regulated investment company" within the meaning of Section 851 of
the Code.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Company and the Acquired Company agree that neither
party has made any representation, warranty or covenant not set forth herein and
that this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder. The
covenants to be performed after the Closing shall survive the Closing.
11. TERMINATION
This Agreement and the transactions contemplated hereby may be terminated
and abandoned by resolution of the Board of Directors of the Acquired Fund or
the Board of Directors of the Acquiring Fund at any time prior to the Closing
Date, if circumstances should develop that, in the opinion of either Board, make
proceeding with the Agreement inadvisable.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be deemed necessary or advisable by the authorized officers of the Acquired
Company and the Acquiring Company; provided, however, that following the meeting
of the shareholders of the Acquired Fund called by the Acquired Fund pursuant to
paragraph 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Class A, Class B,
Class C, Class M, Class Q and Class T Acquiring Fund Shares to be issued to the
Acquired Fund Shareholders under this Agreement to the detriment of such
shareholders without their further approval.
B-12
<PAGE>
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by
facsimile, personal service or prepaid or certified mail addressed to the
Acquiring Company or to the Acquired Company, 7337 E. Doubletree Ranch Road,
Scottsdale, Arizona 85258, attn: James M. Hennessy, in each case with a copy to
Dechert, 1775 Eye Street, N.W., Washington, D.C. 20006, attn: Jeffrey S. Puretz.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT; LIMITATION OF LIABILITY
14.1 The Article and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with
the laws of the State of California without regard to its principles of
conflicts of laws.
14.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its President or Vice President and its seal to be affixed
thereto and attested by its Secretary or Assistant Secretary.
ATTEST: PILGRIM GNMA INCOME FUND, INC.,
on behalf of its sole series
--------------------------------
SECRETARY By:
-------------------------------------
Its:
------------------------------------
PILGRIM GOVERNMENT SECURITIES INCOME
FUND, INC., on behalf of its sole series
Attest:
--------------------------------
SECRETARY By:
-------------------------------------
Its:
------------------------------------
B-13
<PAGE>
APPENDIX C
ADDITIONAL INFORMATION REGARDING THE PILGRIM GNMA INCOME FUND
(THE "FUND")
SHAREHOLDER GUIDE
PILGRIM PURCHASE OPTIONS(TM)
This Proxy Statement/Prospectus relates to six separate classes of the
Fund: Class A, Class B, Class C, Class M, Class Q and Class T, each of which
represents an identical interest in the Fund's investment portfolio, but are
offered with different sales charges and distribution fee (Rule 12b-1)
arrangements. As described below and elsewhere in this Proxy Statement/
Prospectus, the contingent deferred sales load structure and conversion
characteristics of the Fund shares that will be issued to you in the
Reorganization will be the same as those that apply to Pilgrim GSIF shares held
by you immediately prior to the Reorganization, and the period that you held
shares of Pilgrim GSIF will be included in the holding period of the Fund for
purposes of calculating contingent deferred sales charges and determining
conversion rights. Purchases of the shares of the Fund after the Reorganization
will be subject to the sales load structure and conversion rights discussed
below.
The sales charges and fees for each Class of shares of the Fund involved in
the Reorganization are shown and contrasted in the chart below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS M CLASS Q CLASS T
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Maximum Initial Sales Charge on
Purchases 4.75%(1) None None 3.25%(1) None None
Contingent Deferred Sales Charge
("CDSC") None(2) 5.00%(3) 1.00%(4) None None 4.00%(5)
Annual Distribution (12b-1) and
Service Fees (6) 0.25% 1.00% 1.00% 0.75% 0.25% 0.65%
Maximum Purchase Unlimited $250,000 Unlimited $1,000,000 Unlimited Unlimited
Automatic Conversion to Class A N/A 8 Years(7) N/A N/A N/A 8 years(7)
</TABLE>
----------
(1) Reduced for purchases of $50,000 and over.
(2) For investments of $1 million or more, a CDSC of no more than 1% may be
assessed on redemptions of shares. See "Class A Shares: Initial Sales
Charge Alternative" in this Appendix C.
(3) Imposed upon redemption within 6 years from purchase. Fee has scheduled
reductions after the first year. See "Class B Shares: Deferred Sales Charge
Alternative" in this Appendix C.
(4) Imposed upon redemption within 1 year from purchase.
(5) Imposed upon redemption within 1 year from purchase. Fee has scheduled
reductions after the first year. See "Class T Shares: Deferred Sales Charge
Alternative" in this Appendix C.
(6) Annual asset-based distribution charge.
(7) Class B and Class T shares of the Fund issued to shareholders of Pilgrim
GSIF in the Reorganization will convert to Class A shares in the eighth
year from the original date of purchase of the Class B or Class T shares of
Pilgrim GSIF.
The relative impact of the initial sales charges and ongoing annual
expenses will depend on the length of time a share is held. 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.
CLASS A SHARES: INITIAL SALES CHARGE ALTERNATIVE. Class A shares of the
Fund are sold at the net asset value ("NAV") per share in effect plus a sales
charge as described in the following table. For waivers or reductions of the
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Class A shares sales charges, see "Special Purchases without a Sales Charge" and
"Reduced Sales Charges" below.
AS A % OF THE AS A %
YOUR INVESTMENT OFFERING PRICE OF NAV
--------------- -------------- ------
Less than $50,000 4.75% 4.99%
$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%
There is no initial sales charge on purchases of $1,000,000 or more.
However, the shares will be subject to a CDSC if they are redeemed within one or
two years of purchase, depending on the amount of the purchase, as follows:
PERIOD DURING
YOUR INVESTMENT CDSC WHICH 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
Class A shares of the Fund issued in connection with the Reorganization
with respect to Class A shares of Pilgrim GSIF that were subject to a CDSC at
the time of the Reorganization, will be subject to a CDSC of up to 1% from the
date of purchase of the original shares of Pilgrim GSIF.
REDUCED SALES CHARGES. An investor may immediately qualify for a reduced
sales charge on a purchase of Class A shares of the Fund or other open-end funds
in the Pilgrim funds and ING funds which offer Class A shares, or shares with
front-end sales charges ("Participating Funds") by completing the Letter of
Intent section of an Application to purchase Fund shares. Executing the Letter
of Intent expresses an intention to invest during the next 13 months a specified
amount, which, if made at one time, would qualify for a reduced sales charge. An
amount equal to the Letter of Intent amount multiplied by the maximum sales
charge imposed on purchases of the Fund and Class will be restricted within your
account to cover additional sales charges that may be due if your actual total
investment fails to qualify for the reduced sales charges. See the Statement of
Additional Information for the Fund for details on the Letter of Intent option
or contact the Shareholder Servicing Agent at (800) 992-0180 for more
information.
A sales charge may also be reduced by taking into account the current value
of your existing holdings in the Fund or any other open-end funds in the Pilgrim
funds or ING funds (excluding the Pilgrim Money Market Fund) ("Rights of
Accumulation"). The reduced sales charges apply to quantity purchases made at
one time or on a cumulative basis over any period of time. See the Statement of
Additional Information for the Fund for details or contact the Shareholder
Servicing Agent at (800) 992-0180 for more information.
For the purposes of Rights of Accumulation and the Letter of Intent
Privilege, shares held by investors in the Pilgrim funds or ING funds which
impose a CDSC may be combined with Class A shares for a reduced sales charge but
will not affect any CDSC which may be imposed upon the redemption of shares of
the Fund which imposes a CDSC.
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SPECIAL PURCHASES WITHOUT A SALES CHARGE. Class A shares may be purchased
without a sales charge by certain individuals and institutions. For additional
information, contact the Shareholder Servicing Agent at (800) 992-0180, or see
the Statement of Additional Information for the Fund.
CLASS B SHARES: DEFERRED SALES CHARGE ALTERNATIVE. Class B shares are
offered at their NAV per share without any initial sales charge. Class B shares
that are redeemed within six years of purchase, however, will be subject to a
CDSC as described in the table that follows. Class B shares of the Fund are
subject to distribution and service fees at an annual rate of 1.00% of the
average daily net assets of the Class, which is higher than the distribution and
service fees of Class A shares. The higher distribution and service fees mean a
higher expense ratio, so Class B shares pay correspondingly lower dividends and
may have a lower NAV than Class A shares. Orders for Class B shares in excess of
$250,000 will be accepted as orders for Class A shares or declined. The amount
of the CDSC is based on the lesser of the NAV of the Class B shares at the time
of purchase or redemption. There is no CDSC on Class B shares acquired through
the reinvestment of dividends and capital gains distributions. The CDSCs are as
follows:
YEAR OF REDEMPTION AFTER PURCHASE CDSC
---------------------------------- ----
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
After Sixth Year None
Class B shares will automatically convert into Class A shares approximately
eight years after purchase. Class B shares of the Fund issued in connection with
the Reorganization with respect to Class B shares of Pilgrim GSIF will convert
to Class A shares eight years after the purchase of the original shares of
Pilgrim GSIF. For additional information on the CDSC and the conversion of Class
B, see the Fund's Statement of Additional Information.
CLASS C SHARES. Class C shares are offered at their NAV per share without
an initial sales charge. Class C shares may be subject to a CDSC of 1% if
redeemed within one year of purchase. The amount of the CDSC is based on the
lesser of the NAV of the Class C shares at the time of purchase or redemption.
There is no CDSC on Class C shares acquired through the reinvestment of
dividends and capital gains distributions.
CLASS M SHARES: INITIAL SALES CHARGE ALTERNATIVE. Class M shares of the
Fund are sold at the NAV per share in effect plus a sales charge as described in
the following table. For waivers or reductions of the Class M Shares sales
charges, see "Special Purchases without a Sales Charge" and "Reduced Sales
Charges" below.
AS A % OF THE AS A %
YOUR INVESTMENT OFFERING PRICE OF NAV
--------------- -------------- ------
Less than $50,000 3.25% 3.36%
$50,000 - $99,999 2.25% 2.30%
$100,000 - $249,999 1.50% 1.52%
$250,000 - $499,999 1.00% 1.01%
$500,000 and over None None
REDUCED SALES CHARGES. An investor may immediately qualify for a reduced
sales charge on a purchase of Class M Shares of the Fund or other open-end funds
in the Pilgrim funds which offer Class M shares, or shares with front-end sales
charges ("Participating Funds") by completing the Letter of Intent section of an
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Application to purchase Fund shares. Executing the Letter of Intent expresses an
intention to invest during the next 13 months a specified amount, which, if made
at one time, would qualify for a reduced sale charge. An amount equal to the
Letter of Intent amount multiplied by the maximum sales charge imposed on
purchases of the Fund and Class will be restricted within your account to cover
additional sales charges that may be due if your actual total investment fails
to qualify for the reduced sales charges. See the Statement of Additional
Information for the Fund for details on the Letter of Intent option or contact
the Shareholder Servicing Agent at (800) 992-0180 for more information.
A sales charge may also be reduced by taking into account the current value
of your existing holdings in the Fund or any other open-end funds in the Pilgrim
funds or ING funds (excluding Pilgrim Money Market Fund) ("Rights of
Accumulation"). The reduced sales charges apply to quantity purchases made at
one time or on a cumulative basis over any period of time. See the Statement of
Additional Information for the Fund for details or contact the Shareholder
Servicing Agent at (800) 992-0180 for more information.
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 M shares for a reduced sales charge but will not affect
any CDSC which may be imposed upon the redemption of shares of the fund which
imposes a CDSC.
SPECIAL PURCHASES WITHOUT A SALES CHARGE. Class M shares may be purchased
without a sales charge by certain individuals and institutions. For additional
information, contact the Shareholder Servicing Agent at (800) 992-0180, or see
the Statement of Additional Information for the Fund.
CLASS Q SHARES. Class Q Shares are offered at NAV 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.
CLASS T SHARES. Class T shares are only available to shareholders that
previously held shares of Class T of Pilgrim GSIF, and may only be obtained by
such shareholders by reinvesting dividends distributed to the Class T
shareholders or by exchanging Class T shares from another fund within the
Pilgrim funds.
Class T shares of the Fund are subject to a distribution fee at an annual
rate of 0.65% of the average daily net assets of the Class.
Class T shares will automatically convert into Class A shares approximately
eight years after purchase except that Class T shares of the GNMA Income Fund
issued in connection with the Reorganization will convert to Class A shares
eight years after the purchase of the original shares of Pilgrim GSIF. For
additional information about Class T shares, see the Pilgrim Prospectus and the
Statement of Additional Information for the Pilgrim funds.
WAIVERS OF CDSC. The CDSC will be waived in the following cases. In
determining whether a CDSC is applicable, it will be assumed that shares held in
the shareholder's account that are not subject to such charge are redeemed
first.
1) The CDSC will be waived in the case of redemption following the death or
permanent disability of a shareholder if made within one year of death or
initial determination of permanent disability. The waiver is available only for
those shares held at the time of death or initial determination of permanent
disability.
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2) The CDSC also may be waived for Class B shares redeemed 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.
3) The CDSC also will be waived in the case of mandatory distributions from
a tax-deferred retirement plan or an IRA.
If you think you may be eligible for a CDSC waiver, contact the Shareholder
Servicing Agent at (800) 992-0180.
REINSTATEMENT PRIVILEGE. Class B, Class C and Class T shareholders who have
redeemed their shares in any open-end Pilgrim fund or ING fund 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. See the Statement of Additional Information
for the Fund for details or contact the Shareholder Servicing Agent at (800)
992-0180 for more information.
RULE 12b-1 PLAN. The Fund has a distribution plan pursuant to Rule 12b-1
under the Investment Company Act of 1940 applicable to each Class of shares of
the Fund ("Rule 12b-1 Plan"). Under the Rule 12b-1 Plan, ING Pilgrim Securities,
Inc. (the "Distributor") may receive from the Fund an annual fee in connection
with the offering, sale and shareholder servicing of the Fund's Class A, Class
B, Class C, Class M, Class Q and Class T shares.
DISTRIBUTION AND SERVICING FEES. As compensation for services rendered and
expenses borne by the Distributor in connection with the distribution of shares
of the Fund and in connection with services rendered to shareholders of the
Fund, the Fund pays the Distributor servicing fees and distribution fees up to
the annual rates set forth below (calculated as a percentage of the Fund's
average daily net assets attributable to that class):
SERVICING FEE DISTRIBUTION FEE
------------- ----------------
Class A 0.25% None
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class M 0.25% 0.50%
Class Q 0.25% None
Class T 0.25% 0.40%
Fees paid under the Rule 12b-1 Plan may be used to cover the expenses of
the Distributor from the sale of Class A, Class B, Class C, Class M, Class Q or
Class T shares of the Fund, including payments to Authorized Dealers, and for
shareholder servicing. Because these fees are paid out of the Fund's assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
OTHER EXPENSES. In addition to the management fee and other fees described
previously, the Fund pays other expenses, such as legal, audit, transfer agency
and custodian fees, proxy solicitation costs, and the compensation of Trustees
who are not affiliated with ING Pilgrim Investments, Inc. ("ING Pilgrim
Investments"). 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.
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PURCHASING SHARES. The Fund reserves the right to liquidate sufficient
shares to recover annual Transfer Agent fees should the investor fail to
maintain his/her account value at a minimum of $1,000.00 ($250.00 for IRAs). The
minimum initial investment in the Fund is $1,000 ($250 for IRAs), and the
minimum for additional investment in the Fund is $100. The minimum initial
investment for a pre-authorized retirement plan is $100, plus monthly
investments of at least $100.
The Fund and the Distributor reserve the right to reject any purchase
order. Please note 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 Investments, Inc. reserves the right to
waive minimum investment amounts.
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.
DETERMINATION OF NET ASSET VALUE. The NAV of each Class of the Fund's
shares is determined daily as of the close of regular trading on the New York
Stock Exchange (usually at 4:00 p.m. New York City time) on each day that it is
open for business. The NAV of each Class represents that Class' pro rata share
of that Fund's net assets as adjusted for any Class specific expenses (such as
fees under a Rule 12b-1 plan), and divided by that Class' outstanding shares. In
general, the value of the Fund's assets is 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 reliable. The NAV per share of each Class of the Fund will
fluctuate in response to changes in market conditions and other factors.
Portfolio securities for which market quotations are readily available are
stated at market value. 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. Valuing securities at
fair value involves greater reliance on judgment than valuing securities that
have readily available market quotations. For information on valuing foreign
securities, see the Fund's Statement of Additional Information.
PRE-AUTHORIZED INVESTMENT PLAN. You may establish a pre-authorized
investment plan to purchase shares with automatic bank account debiting. For
further information on pre-authorized investment plans, contact the Shareholder
Servicing Agent at (800) 992-0180.
RETIREMENT PLANS. The Fund has available prototype qualified retirement
plans for both corporations and for self-employed individuals. Also available
are 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 Company ("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 custodian fee annually for the maintenance of such
accounts.
EXECUTION OF REQUESTS. Purchase and sale requests are executed at the NAV
next 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 "Purchase of 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.
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You will receive a confirmation of each new transaction in your account,
which also will show you the number of shares of the Fund 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 Fund will not be
issued unless you request them in writing.
TELEPHONE ORDERS. The Fund and its 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 Fund and its 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 Fund and its Transfer Agent do not employ these procedures, they may be
liable for any losses due to unauthorized or fraudulent telephone instructions.
Telephone redemptions may be executed on all accounts other than retirement
accounts.
EXCHANGE PRIVILEGES AND RESTRICTIONS
An exchange privilege is available. Exchange requests may be made in
writing to the Transfer Agent or by calling the Shareholder Servicing Agent at
(800) 992-0180. There is no specific limit on exchange frequency; however, the
Fund is intended for long term investment and not as a trading vehicle. ING
Pilgrim Investments reserves the right to prohibit excessive exchanges (more
than four per year). ING Pilgrim Investments reserves the right, upon 60 days'
prior notice, to restrict the frequency of, otherwise modify, or impose charges
of up to $5.00 upon exchanges. The total value of shares being exchanged must at
least equal the minimum investment requirement of the fund into which they are
being exchanged. The Fund may change or cancel its exchange policies at any
time, upon 60 days' written notice to shareholders.
Shares of any Class of the Fund generally may be exchanged for shares of
that same Class of any other open-end Pilgrim fund or ING fund without payment
of any additional sales charge. In most instances if you exchange and
subsequently redeem your shares, any applicable CDSC will be based on the full
period of the share ownership. Shareholders exercising the exchange privilege
with any other open-end Pilgrim fund or ING fund should carefully review the
Prospectus of that fund. Exchanges of shares are sales and may result in a gain
or loss for federal and state income tax purposes. You will automatically be
assigned the telephone exchange privilege unless you mark the box on the Account
Application that signifies you do not wish to have this privilege. The exchange
privilege is only available in states where shares of thefund being acquired may
be legally sold.
You will automatically have the ability to request an exchange by calling
the Shareholder Service Agent at (800) 992-0180 unless you mark the box on the
Account Application that indicates that you do not wish to have the telephone
exchange privilege.
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 or ING 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 Fund reserves 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.
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With respect to Class Q shares, 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 the Fund's performance.
HOW TO REDEEM SHARES
Shares of the Fund will be redeemed at the NAV (less any applicable CDSC
and/or federal income tax withholding) next determined after receipt of a
redemption request in good form on any day the New York Stock Exchange is open
for business.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to have monthly, quarterly,
semi-annual or annual payments in any fixed amount of $100 or more made to
yourself, or to anyone else you properly designate, as long as the account has a
current value of at least $10,000. With respect to Class Q Shares, you may elect
to have monthly, quarterly, semi-annual or annual payments in any fixed amount
of $1,000 or more made to yourself or to anyone else you properly designate, as
long as the account has a current value of at least $250,000. For additional
information, contact the Shareholder Servicing Agent at (800) 992-0180, or see
the Fund's Statement of Additional Information.
PAYMENTS. Payment to shareholders for shares redeemed or repurchased
ordinarily will be made within three days after receipt by the Transfer Agent of
a written request in good order. The Fund may delay the mailing of a redemption
check until the check used to purchase the shares being redeemed has cleared
which may take up to 15 days or more. To reduce such delay, all purchases should
be made by bank wire or federal funds. The Fund may suspend the right of
redemption under certain extraordinary circumstances in accordance with the
Rules of the Securities and Exchange Commission. The Fund intends to pay in cash
for all shares redeemed, but under abnormal conditions that make payment in cash
harmful to the Fund, the Fund may make payment wholly or partly in securities at
their then current market value equal to the redemption price. In such case, the
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.
MANAGEMENT OF THE FUND
INVESTMENT MANAGER. ING Pilgrim Investments has overall responsibility for
the management of the Fund. The Fund and ING Pilgrim Investments have entered
into an agreement that requires ING Pilgrim Investments to provide or oversee
all investment advisory and portfolio management services for the Fund. ING
Pilgrim Investments provides the Fund with office space, equipment and personnel
necessary to administer the Fund. The agreement with ING Pilgrim Investments can
be canceled by the Board of Trustees of the Fund upon 60 days' written notice.
Organized in December 1994, ING Pilgrim Investments is registered as an
investment adviser with the Securities and Exchange Commission. As of September
30, 2000, ING Pilgrim Investments managed over $20.7 billion in assets. ING
Pilgrim Investments bears its expenses of providing the services described
above. Investment management fees are computed and accrued daily and paid
monthly.
Prior to July 26, 2000, Lexington Management Corporation ("Lexington")
served as Investment Manager to the Fund. On July 26, 2000, ReliaStar Financial
Corp., the indirect parent company of ING Pilgrim Investments (as described
below), acquired Lexington Global Asset Managers, Inc., the indirect parent
company of Lexington, and ING Pilgrim Investments, Inc. was approved as
Investment Manager to the Fund.
PARENT COMPANY AND DISTRIBUTOR. ING Pilgrim Investments and the Distributor
are indirect, wholly owned subsidiaries of ING Groep N.V. (NYSE: ING) ("ING
Group"). ING Group is a global financial institution active in the field of
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insurance, banking and asset management in more than 65 countries, with almost
100,000 employees.
SHAREHOLDER SERVICING AGENT. ING Pilgrim Group, Inc. serves as Shareholder
Servicing Agent for the Fund. The Shareholder Servicing Agent is responsible for
responding to written and telephonic inquiries from shareholders. The Fund pays
the Shareholder Servicing Agent a monthly fee on a per-contact basis, based upon
incoming and outgoing telephonic and written correspondence.
PORTFOLIO TRANSACTIONS. ING Pilgrim Investments will place orders to
execute securities transactions that are designed to implement the Fund's
investment objectives and policies. ING Pilgrim Investments will use its
reasonable efforts to place all purchase and sale transactions with brokers,
dealers and banks ("brokers") that provide "best execution" of these orders. In
placing purchase and sale transactions, ING ING Pilgrim Investments may consider
brokerage and research services provided by a broker to ING Pilgrim Investments
or its affiliates, and the Fund may pay a commission for effecting a securities
transaction that is in excess of the amount another broker would have charged if
ING Pilgrim Investments determines in good faith that the amount of commission
is reasonable in relation to the value of the brokerage and research services
provided by the broker. In addition, ING Pilgrim Investments may place
securities transactions with brokers that provide certain services to the Fund.
ING Pilgrim Investments also may consider a broker's sale of Fund shares if ING
Pilgrim Investments is satisfied that the Fund would receive best execution of
the transaction from that broker.
DIVIDENDS, DISTRIBUTIONS & TAXES
DIVIDENDS AND DISTRIBUTIONS. The Fund generally distributes most or all of
its net earnings in the form of dividends. The Fund pays dividends and capital
gains, if any, monthly. Dividends and distributions will be determined on a
Class basis.
Any dividends and distributions paid by the Fund will be automatically
reinvested in additional shares of the respective Class of that Fund, unless you
elect to receive distributions in cash. When a dividend or distribution is paid,
the NAV per share is reduced by the amount of the payment. You may, upon written
request or by completing the appropriate section of the Account Application in
the Pilgrim Prospectus, elect to have all dividends and other distributions paid
on a Class A, B, C, M, Q or T account in the Fund invested into a Pilgrim fund
or ING fund which offers the same Class of shares.
FEDERAL TAXES. The following information is meant as a general summary for
U.S. shareholders. Please see the Fund's Statement of Additional Information for
additional information. You should rely your own tax adviser for advice about
the particular federal, state and local tax consequences to you of investing in
the Fund.
The Fund will distribute most of its net investment income and net capital
gains to its shareholders each year. Although the Fund will not be taxed on
amounts it distributes, 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 the 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 the 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.
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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, the 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.
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FINANCIAL HIGHLIGHTS
The information in the table below, except for the six months ended June 30,
2000, has been audited by KPMG LLP, independent auditors.
<TABLE>
<CAPTION>
Six months ended Year ended December 31,
June 30, 2000 ----------------------------------------------------
(Unaudited) 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 8.08 8.53 8.40 8.12 8.19 7.60
Net investment income (loss) $ 0.27 0.50 0.48 0.51 0.53 0.58
Net realized and unrealized gain (loss) from
investment operations $ 0.04 (0.45) 0.13 0.29 (0.08) 0.59
Total income (loss) from investment operations $ 0.31 0.05 0.61 0.80 0.45 1.17
Less distributions:
Distributions from net investment income $ 0.27 0.50 0.48 0.52 0.52 0.58
Net asset value, end of period $ 8.12 8.08 8.53 8.40 8.12 8.19
Total Return(1) % 3.87 0.58 7.52 10.20 5.71 15.91
Ratios/Supplemental Data:
Net assets, end of period (thousands) $ 357,839 376,580 273,591 158,071 133,777 130,681
Ratio of expenses to average net asset(2) % 1.03 0.99 1.01 1.01 1.05 1.01
Ratio of net investment income (loss) to average
net assets(2) % 6.55 6.04 5.85 6.28 6.56 7.10
Portfolio turnover rate % 51.71 25.10 54.47 134.28 128.76 30.69
</TABLE>
----------
(1) 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.
(2) Annualized for periods less than one year.
C-11
<PAGE>
APPENDIX D
The following is a list of the current funds in the ING Funds, which are
managed by an affiliate of ING Pilgrim Investments, and the Pilgrim Funds, and
the classes of shares that are currently offered by each fund or are expected to
be offered at or shortly after the Reorganization:
FUND CLASSES OFFERED
---- ---------------
ING FUNDS
U.S. EQUITY
Internet Fund A, B and C
Tax Efficient Equity Fund A, B and C
GLOBAL/INTERNATIONAL EQUITY
European Equity Fund A, B and C
Global Communications Fund A, B and C
Global Information Technology Fund A, B and C
FIXED INCOME
High Yield Bond Fund A, B and C
Intermediate Bond Fund A, B and C
Money Market Fund A, B, C and I
National Tax-Exempt Bond Fund A, B and C
PILGRIM FUNDS
U.S. EQUITY
Balanced Fund A, B, C, Q and T
Bank and Thrift Fund A and B
Convertible Fund A, B, C and Q
Corporate Leaders Trust Fund A
Growth and Income Fund A, B, C and Q
Growth + Value Fund A, B, C and Q
Growth Opportunities Fund A, B, C, Q, I and T
LargeCap Growth Fund A, B, C and Q
MagnaCap Fund A, B, C, Q and M
MidCap Growth Fund A, B, C and Q
MidCap Opportunities Fund A, B, C, Q and I
Research Enhanced Index Fund A, B, C, Q and I
SmallCap Growth Fund A, B, C, Q
SmallCap Opportunities Fund A, B, C, Q, I and T
GLOBAL/INTERNATIONAL EQUITY
Asia-Pacific Equity Fund A, B and M
Emerging Countries Fund A, B, C and Q
Gold Fund (to be renamed Precious Metals Fund) A
International Fund A, B, C and Q
International Core Growth Fund A, B, C and Q
International SmallCap Growth Fund A, B, C and Q
International Value Fund A, B, C and Q
Troika Dialog Russia Fund A
Worldwide Growth Fund A, B, C and Q
D-1
<PAGE>
FIXED INCOME
GNMA Income Fund A, B, C, Q, M and T
High Yield Fund A, B, C, Q and M
High Yield Fund II A, B, C, Q and T
Lexington Money Market Trust A
Pilgrim Money Market Fund A, B and C
Strategic Income Fund A, B, C and Q
----------
(1) If approved by shareholders, these Funds will be reorganized into the
Pilgrim MagnaCap Fund.
(2) If approved by shareholders, this Fund will be reorganized into the Pilgrim
Worldwide Growth Fund.
(3) If approved by shareholders, this Fund will be reorganized into the ING
Global Information Technology Fund.
(4) If approved by shareholders, these Funds will be reorganized into the
Pilgrim Emerging Countries Fund.
(5) If approved by shareholders, this Fund will be reorganized into the Pilgrim
Asia-Pacific Equity Fund.
(6) If approved by shareholders, this Fund will be reorganized into the Pilgrim
GNMA Income Fund.
(7) If approved by shareholders, this Fund will be reorganized into the Pilgrim
High Yield Fund.
(8) If approved by shareholders, these Funds will be reorganized into the
Pilgrim High Yield Fund II.
(9) If approved by shareholders, this Fund will be reorganized into the Pilgrim
Gold Fund to be renamed the Pilgrim Precious Metals Fund.
D-2
<PAGE>
APPENDIX E
As of November 1, 2000, the following persons owned beneficially or of
record 5% or more of the outstanding shares of the specified class of Pilgrim
GSIF:
<TABLE>
<CAPTION>
PERCENTAGE OF
CLASS AND TYPE PERCENTAGE OF PERCENTAGE OF FUND AFTER
NAME AND ADDRESS OF OWNERSHIP CLASS FUND REORGANIZATION
---------------- ------------ ----- ---- --------------
<S> <C> <C> <C> <C>
Bear Stearns Securities Corp. FBO
103-01395-29
1 Metrotech Center North Class A
Brooklyn, NY 11201 Record Holder 5.62% 2.70% _______%
First Clearing Corporation Cust FBO
Charles A Banks IRA #1323-3486
4723 East 138th Terrace Class M
Grandview, MO 64030 Record Holder 6.86% 0.03% _______%
George & Florence Leslie Ttees FBO
Leslie Family Trust
PO Box 70400 Class M
Pasadena, CA 91117 Record Holder 9.69% 0.04% _______%
NFSC FBO #APX-682462
Jack Boyle Revocable Inter Vivos
6110 Pleasant Ridge Road, Apt. 5421 Class M
Arlington, TX 76016 Record Holder 5.23% 0.02% _______%
Prudential Securities Inc. FBO
Dr. Antonio Aguirre
Zur Linde-Die Wohnung
Buehlerstr..87 CH-9053 Teufen Class M
Switzerland Record Holder 32.91% 0.14% _______%
Prudential Securities Inc. FBO
Kathleen R. Doyle
PO Box 333 Class M
Laclede, ID 83841 Record Holder 10.64% 0.05% _______%
PaineWebber FBO
Larry Randolph
PO Box 3321 Class M
Weehawken, NJ 07087 Record Holder 8.45% 0.04% _______%
</TABLE>
E-1
<PAGE>
As of November 1, 2000, the following persons owned beneficially or of
record 5% or more of the outstanding shares of the specified class of the GNMA
Income Fund:
<TABLE>
<CAPTION>
PERCENTAGE OF
CLASS AND TYPE PERCENTAGE OF PERCENTAGE OF FUND AFTER
NAME AND ADDRESS OF OWNERSHIP CLASS FUND REORGANIZATION
---------------- ------------ ----- ---- --------------
<S> <C> <C> <C> <C>
First Clearing Corp. FBO #8587-5303
Vendome copper & Brasswork 401k
Thomas & Richard Sherman Ttees
707 Colonel Anderson Pkwy Class B
Louisville, KY 40222 Record Holder 39.51% 0.03% ______%
Primevest Financial Services FBO
Edward Horner #39895526
PO Box 283
400 1st. Street South, Suite 300 Class B
Saint Cloud, MN 56301 Record Holder 22.05% 0.02% ______%
Steven & Jan Wray
585 NW Country View Road Class B
White Salmon, WA 98672 Record Holder 13.22% 0.01% ______%
Thomas M D'Addario Exec
Mario D'Addario
329 Brideport Ave, PO Box 823 Class B
Shelton, CT 06484 Record Holder 15.59% 0.01% ______%
IFTC Cust FBO
Thomas M D'Addario
329 Brideport Ave, PO Box 823 Class B
Shelton, CT 06484 Record Holder 8.16% 0.007% ______%
IFTC Cust FBO
Albert Skarzynski
136 Hawthorne Dr. Class C
Fairfield, CT 06423 Record Holder 10.79% 0.05% ______%
IFTC Cust FBO
Stanley Kravitz
PO Box 5473 Class C
Bridgeport, CT 06610 Record Holder 5.18% 0.02% ______%
IFTC Cust FBO
Felix Amoroso
384 Howe Ave. Class C
Shelton, CT 06484 Record Holder 5.06% 0.02% ______%
Lottie S. Kravitz Family Trust
PO Box 5473 Class C
Bridgeport, CT 06610 Record Holder 5.46% 0.02% ______%
Joyce Webber Family Trust
25 Catright St., Apt. 4D Class C
Bridgeport, CT 06606 Record Holder 7.25% 0.02% ______%
Mary Improta
335 Burnsford Ave. Class C
Bridgeport, CT 06606 Record Holder 5.14% 0.02% ______%
</TABLE>
E-2
<PAGE>
PART B
PILGRIM GOVERNMENT SECURITIES INCOME FUND, INC.
--------------------------------------------------------------------------------
Statement of Additional Information
________ __, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Acquisition of the Assets and Liabilities of By and in Exchange for Shares of
Pilgrim Government Securities Income Fund, Inc. Pilgrim GNMA Income Fund, Inc.
7337 E. Doubletree Ranch Road 7337 E. Doubletree Ranch Road
Scottsdale, Arizona 88258 Scottsdale, Arizona 88258
</TABLE>
This Statement of Additional Information is available to the Shareholders of the
Pilgrim Government Securities Income Fund, Inc. ("Pilgrim GSIF") in connection
with a proposed transaction whereby all of the assets and liabilities of Pilgrim
GSIF, will be transferred to the Pilgrim GNMA Income Fund, Inc. ("GNMA Income
Fund") in exchange for shares of the GNMA Income Fund.
This Statement of Additional Information of the GNMA Income Fund consists of
this cover page and the following documents, each of which was filed
electronically with the Securities and Exchange Commission and is incorporated
by reference herein:
1. The Statement of Additional Information for the GNMA Income Fund dated July
31, 2000, as filed on July 26, 2000, and the Statement of Additional
Information for Pilgrim GSIF dated November 1, 2000, as filed on November
1, 2000.
2. The Financial Statements of the GNMA Income Fund are included in the GNMA
Income Fund Annual Report dated December 31, 1999, as filed on February 28,
2000.
3. The Financial Statements of the GNMA Income Fund are included in the GNMA
Income Fund Semi-Annual Report dated June 30, 2000, as filed on August 31,
2000.
4. The Financial Statements of Pilgrim GSIF are included in the Pilgrim GSIF
Annual Report dated June 30, 2000, as filed on September 7, 2000.
This Statement of Additional Information is not a Prospectus. A Proxy
Statement/Prospectus dated ________ __, 2000, relating to the Reorganization of
Pilgrim GSIF may be obtained, without charge, by writing to Pilgrim at 7337 E.
Doubletree Ranch Road, Scottsdale, Arizona 88258 or calling (800) 992-0180. This
Statement of Additional Information should be read in conjunction with the Proxy
Statement/Prospectus.
1
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
Shown below are financial statements for each Fund and PRO FORMA financial
statements for the combined Fund, assuming the reorganization is consummated, as
of June 30, 2000. The first table presents Statements of Assets and Liabilities
for each Fund (unaudited) and PRO FORMA figures for the combined Fund. The
second table presents Statements of Operations for each Fund (unaudited) and PRO
FORMA figures for the combined Fund. The third table presents Portfolio of
Investments (unaudited) for each Fund and PRO FORMA figures for the combined
Fund. The tables are followed by the Notes to the Pro Forma Financial Statements
(unaudited).
STATEMENTS OF ASSETS AND LIABILITIES AS OF JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
GOV'T SEC PRO FORMA PRO FORMA
GNMA INCOME ADJUSTMENTS COMBINED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Investments at value* $ 385,595,936 $ 107,186,754 $ 492,782,690
Short-term investments -- 4,658,000 4,658,000
Cash 112,649 576 113,225
Receivable for shares sold 1,084,101 3,569,377 4,653,478
Dividends and interest receivable 2,266,204 672,660 2,938,864
Other receivables -- 3,936 3,936
Prepaid expenses -- 61,933 61,933
------------- ------------- ------------- -------------
Total Assets 389,058,890 116,153,236 -- 505,212,126
------------- ------------- ------------- -------------
LIABILITIES:
Payable for investment securities purchased 29,948,883 -- 29,948,883
Payable for fund shares redeemed 623,625 2,570,991 3,194,616
Payable to affiliate 158,211 101,915 260,126
Distributions payable 189,963 -- 189,963
Accrued expenses 299,534 115,198 414,732
------------- ------------- ------------- -------------
Total Liabilities 31,220,216 2,788,104 -- 34,008,320
------------- ------------- ------------- -------------
NET ASSETS $ 357,838,674 $ 113,365,132 $ -- $ 471,203,806
============= ============= ============= =============
NET ASSETS CONSIST OF:
Paid-in capital $ 368,592,225 $ 122,508,204 $ 491,100,429
Undistributed net investment income 331 -- 331
Accumulated net realized loss on investments
and foreign currency translations (5,411,016) (7,375,294) (12,786,310)
Unrealized depreciation of investments
securities sold short, and other assets,
liabilities and forward contracts denominated
in foreign currencies (5,342,866) (1,767,778) (7,110,644)
------------- ------------- ------------- -------------
TOTAL NET ASSETS $ 357,838,674 $ 113,365,132 $ -- $ 471,203,806
============= ============= ============= =============
CLASS A:
Net Assets $ 357,838,674 $ 54,206,175 $ 412,044,849
Shares outstanding 44,054,738 4,545,302 2,144,400 (A) 50,744,440
Net asset value and redemption price per share $ 8.12 $ 11.93 $ 8.12
Maximum offering price per share $ 8.52 $ 12.52 $ 8.52
CLASS B:
Net Assets N/A $ 33,692,207 $ 33,692,207
Shares outstanding N/A 2,834,631 1,314,656 (A) 4,149,287
Net asset value and redemption price per share N/A $ 11.89 $ 8.12
Maximum offering price per share N/A $ 11.89 $ 8.12
CLASS C:
Net Assets N/A $ 2,047,497 $ 2,047,497
Shares outstanding N/A 170,455 81,700 (A) 252,155
Net asset value and redemption price per share N/A $ 12.01 $ 8.12
Maximum offering price per share N/A $ 12.01 $ 8.12
CLASS M:
Net Assets N/A $ 509,983 $ 509,983
Shares outstanding N/A 42,790 20,016 (A) 62,806
Net asset value and redemption price per share N/A $ 11.92 $ 8.12
Maximum offering price per share N/A $ 12.32 $ 8.12
CLASS Q:
Net Assets N/A $ 21,720 $ 21,720
Shares outstanding N/A 1,819 856 (A) 2,675
Net asset value and redemption price per share N/A $ 11.94 $ 8.12
Maximum offering price per share N/A $ 11.94 $ 8.12
CLASS T:
Net Assets N/A $ 22,887,550 $ 22,887,550
Shares outstanding N/A 1,924,439 894,225 2,818,664
Net asset value and redemption price per share N/A $ 11.89 $ 8.12
Maximum offering price per share N/A $ 11.89 $ 8.12
*Cost of Securities $ 390,938,802 $ 108,954,532 $ 499,893,334
</TABLE>
----------
(A) Reflects new shares issued, net of retired shares of the Fund.
(Calculation: Net Assets / NAV per share)
See Accompanying Notes to Unaudited Proforma Financial Statements
2
<PAGE>
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
GOV'T SEC PRO FORMA PRO FORMA
GNMA INCOME ADJUSTMENTS COMBINED
------------- ------------- ------------- -------------
TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
30-JUN 30-JUN 30-JUN 30-JUN
2000 2000 2000 2000
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 26,319,182 $ 3,789,634 $ 30,108,816
------------ ----------- ------------ ------------
Total investment income 26,319,182 3,789,634 30,108,816
------------ ----------- ------------ ------------
EXPENSES:
Investment advisory fees 1,964,310 263,407 (10,232) (A) 2,217,485
Transfer agent expenses 981,409 116,224 1,097,633
Directors' fees 106,129 2,491 (2,491) (B) 106,129
Distribution expenses:
Class A -- 69,487 905,788 (A) 975,275
Class B -- 173,703 173,703
Class C -- 8,927 8,927
Class M -- 4,908 4,908
Class Q -- 5 5
Class T -- 38,778 38,778
Shareholder reporting 67,064 39,349 106,413
Administrative fees -- -- --
Recordkeeping and pricing fees -- 8,994 (8,994) (C) --
Professional fees 40,880 19,934 (15,947) (B) 44,867
Accounting expenses 238,253 -- 238,253
Custodian expenses 55,322 16,274 71,596
Registration fees 73,988 48,021 (24,011) (B) 97,998
Shareholder servicing fees -- 2,551 2,551
Computer processing fees 21,828 -- 4,366 (C) 26,194
Other expenses 65,019 39,432 104,451
------------ ----------- ------------ ------------
Total expenses 3,614,202 852,485 848,479 5,315,166
------------ ----------- ------------ ------------
Less: Earnings credits -- 1,131 1,131
------------ ----------- ------------ ------------
Net expenses 3,614,202 851,354 848,479 5,314,035
------------ ----------- ------------ ------------
Net investment income (loss) 22,704,980 2,938,280 (848,479) 24,794,781
------------ ----------- ------------ ------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized loss from:
Investments (2,747,019) (942,655) (3,689,674)
Net change in unrealized appreciation (depreciation) of:
Investments (7,269,774) 192,297 (7,077,477)
------------ ----------- ------------ ------------
Net (loss) from investments (10,016,793) (750,358) (10,767,151)
------------ ----------- ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 12,688,187 $ 2,187,922 $ (848,479) $ 14,027,630
============ =========== ============ ============
</TABLE>
----------
(A) Reflects adjustment in expenses due to effects of management contract and
12b-1 plan rates.
(B) Reflects adjustment in expenses due to elimination of duplicative services.
(C) Reflects adjustment to concur with GNMA Income Fund expense structure.
See Accompanying Notes to Unaudited Proforma Financial Statements
3
<PAGE>
--------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED)
As of June 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GNMA GOV'T SEC PRO FORMA
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT AMOUNT AMOUNT
------ ------ ------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT SECURITIES: 104.58%
FEDERAL HOME LOAN MORTGAGE CORPORATION: 9.02%
$19,983,920 $19,983,920 6.50% 2016-2019
5,824,121 5,824,121 7.00 2014-2029
3,000,000 3,000,000 7.38 2003
10,354,045 10,354,045 7.50 2014-2030
3,443,717 3,443,717 8.00 2030
133,372 133,372 8.50 2017
164,797 164,797 9.00 2006-2021
502,705 502,705 9.50 2005-2014
59,686 59,686 9.91 2020
FEDERAL NATIONAL MORTGAGE ASSOCIATION: 8.42%
3,595,896 3,595,896 6.00% 2014
3,952,656 3,952,656 6.16 2006
3,698,976 3,698,976 6.35 2004
17,253,256 17,253,256 6.50 2014-2028
2,087,149 2,087,149 7.50 2028
236,339 236,339 8.00 2023
5,023,507 5,023,507 8.50 2009-2021
2,997,329 2,997,329 9.00 2007-2017
280,301 280,301 9.25 2009-2016
94,025 94,025 9.75 2008
575,158 575,158 10.00 2017-2020
271,728 271,728 11.00 2017
398,536 398,536 11.50 2019
35,015 35,015 12.00 2007
69,535 69,535 12.50 2017
236,781 236,781 13.50 2017
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) CERTIFICATES: 86.20%
242,863 242,863 5.50% 2029
580,422 580,422 5.65 2005
18,407,985 18,407,985 6.00(3) 2028
5,139,532 5,139,532 6.25 2026-2028
141,373 141,373 6.34 2005
591,917 591,917 6.35 2005
10,925,175 10,925,175 6.50 2026-2029
34,758,270 34,758,270 6.50(3) 2022-2040
12,471,503 12,471,503 6.625 2033-2040
7,056,742 7,056,742 6.65 2013-2039
3,585,534 3,585,534 6.67 2040
6,313,600 6,313,600 6.687 2030
410,874 410,874 6.70 2014
20,515,723 20,515,723 6.75 2013-2039
665,719 665,719 6.75(1) 2030-2031
2,905,417 2,905,417 6.81 2039
3,204,815 3,204,815 6.82 2034
1,837,929 1,837,929 6.87 2039
9,231,058 9,231,058 6.875 2029-2040
3,013,015 3,013,015 6.95 2029
3,823,531 3,823,531 7.00 2016-2026
48,909,885 48,909,885 7.00(2),(3) 2027-2039
195,183 195,183 7.05(1) 2029
3,478,376 3,478,376 7.05 2029
5,170,446 5,170,446 7.10 2034
503,554 503,554 7.10(1) 2034
9,112,341 9,112,341 7.125 2039
2,291,272 2,291,272 7.20 2034
5,292,140 5,292,140 7.25 2022-2029
18,806,315 18,806,315 7.45 2029
7,275,843 7,275,843 7.50 2023-2028
5,680,432 5,680,432 7.50(3) 2013-2031
12,695,413 12,695,413 7.625 2014-2038
11,126,336 11,126,336 7.65 2012-2041
16,412,760 16,412,760 7.65(1) 2041
728,862 728,862 7.70 2013
6,167,315 6,167,315 7.75 2014-2036
357,091 357,091 7.80 2019
14,646,619 14,646,619 7.875 2021-2038
5,806,374 5,806,374 7.90 2029
658,520 658,520 8.00 2023-2024
473,818 473,818 8.00(1) 2014-2038
34,087,291 34,087,291 8.00(3) 2024-2038
669,626 669,626 8.05 2019-2021
4,128,167 4,128,167 8.10 2012-2038
5,059,821 5,059,821 8.125 2038
9,488,324 9,488,324 8.15 2011-2015
7,812,631 7,812,631 8.20 2011-2013
951,000 951,000 8.25(1) 2041
5,967,706 5,967,706 8.25(3) 2017-2041
14,321,461 14,321,461 8.50 2012-2032
6,839,565 6,839,565 8.75 2017-2027
2,266,683 2,266,683 9.00 2020-2034
599,988 599,988 9.00 2013-2022
1,409,424 1,409,424 9.25 2030
347,097 347,097 9.25 2016-2021
1,000,130 1,000,130 10.25 2029
56,495 56,495 13.00 2026-2029
TOTAL U.S. GOVERNMENT SECURITIES
(cost: $388,495,052, $105,215,841, $493,710,893)
U.S. GOVERNMENT OBLIGATIONS: 0.52%
$1,500,000 $1,500,000 U.S. Treasury Bills, 6.02%, due 12/07/00
1,000,000 1,000,000 U.S. Treasury Bonds, 5.875%, due 11/15/04
TOTAL U.S. GOVERNMENT OBLIGATIONS
(cost $2,443,750)
COLLATERALIZED MORTGAGE OBLIGATIONS: 0.42%
MORTGAGE -- COMMERCIAL: 0.42%
$1,985,494 $1,985,494 Small Business Investment, Cos., 8.017%, due 02/10/10
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(cost $1,985,494)
TOTAL LONG-TERM INVESTMENTS
(cost: $390,938,802, $108,954,532, $499,893,334)
SHORT-TERM INVESTMENTS: 0.99%
$4,658,000 $4,658,000 State Street Bank & Trust 6.200% due 07/03/00
(Collateralized by $4,695,000 U.S. Treasury
Notes, 5.500% Due 07/31/01 Market Value, $4,753,688)
TOTAL SHORT-TERM INVESTMENTS
(cost: $4,658,000)
TOTAL INVESTMENTS IN SECURITIES (cost $390,938,802,
$113,612,532, $504,551,334)
Other Assets and Liabilities - Net
TOTAL NET ASSETS
GNMA GOV'T SEC PRO FORMA
VALUE VALUE VALUE
------------ ------------ ------------
U.S. GOVERNMENT SECURITIES: 104.58%
FEDERAL HOME LOAN MORTGAGE CORPORATION: 9.02%
6.50% 2016-2019 $19,184,255 $19,184,255
7.00 2014-2029 5,687,559 5,687,559
7.38 2003 3,028,710 3,028,710
7.50 2014-2030 10,281,068 10,281,068
8.00 2030 3,463,071 3,463,071
8.50 2017 135,539 135,539
9.00 2006-2021 168,625 168,625
9.50 2005-2014 520,915 520,915
9.91 2020 62,677 62,677
------------ ------------ ------------
-- 42,532,419 42,532,419
------------ ------------ ------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION: 8.42%
6.00% 2014 3,397,007 3,397,007
6.16 2006 3,748,229 3,748,229
6.35 2004 3,600,144 3,600,144
6.50 2014-2028 16,395,822 16,395,822
7.50 2028 2,059,118 2,059,118
8.00 2023 239,244 239,244
8.50 2009-2021 5,096,030 5,096,030
9.00 2007-2017 3,041,829 3,041,829
9.25 2009-2016 290,369 290,369
9.75 2008 97,193 97,193
10.00 2017-2020 605,788 605,788
11.00 2017 282,979 282,979
11.50 2019 435,899 435,899
12.00 2007 36,541 36,541
12.50 2017 74,218 74,218
13.50 2017 260,914 260,914
------------ ------------ ------------
-- 39,661,324 39,661,324
------------ ------------ ------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) CERTIFICATES: 86.20%
5.50% 2029 215,845 215,845
5.65 2005 483,016 483,016
6.00(3) 2028 16,984,574 16,984,574
6.25 2026-2028 4,824,025 4,824,025
6.34 2005 125,733 125,733
6.35 2005 537,715 537,715
6.50 2026-2029 10,343,989 10,343,989
6.50(3) 2022-2040 32,355,393 32,355,393
6.625 2033-2040 11,559,462 11,559,462
6.65 2013-2039 6,556,137 6,556,137
6.67 2040 3,346,845 3,346,845
6.687 2030 5,845,952 5,845,952
6.70 2014 386,603 386,603
6.75 2013-2039 19,296,933 19,296,933
6.75(1) 2030-2031 621,402 621,402
6.81 2039 2,745,619 2,745,619
6.82 2034 3,035,537 3,035,537
6.87 2039 1,693,193 1,693,193
6.875 2029-2040 8,720,396 8,720,396
6.95 2029 2,875,531 2,875,531
7.00 2016-2026 3,731,252 3,731,252
7.00(2),(3) 2027-2039 47,629,024 47,629,024
7.05(1) 2029 185,484 185,484
7.05 2029 3,301,192 3,301,192
7.10 2034 4,926,453 4,926,453
7.10(1) 2034 479,791 479,791
7.125 2039 8,756,322 8,756,322
7.20 2034 2,218,227 2,218,227
7.25 2022-2029 5,156,827 5,156,827
7.45 2029 18,471,186 18,471,186
7.50 2023-2028 7,229,249 7,229,249
7.50(3) 2013-2031 5,651,760 5,651,760
7.625 2014-2038 12,608,995 12,608,995
7.65 2012-2041 10,931,309 10,931,309
7.65(1) 2041 15,940,893 15,940,893
7.70 2013 732,958 732,958
7.75 2014-2036 6,198,329 6,198,329
7.80 2019 362,112 362,112
7.875 2021-2038 14,811,393 14,811,393
7.90 2029 5,848,064 5,848,064
8.00 2023-2024 667,004 667,004
8.00(1) 2014-2038 473,871 473,871
8.00(3) 2024-2038 34,566,221 34,566,221
8.05 2019-2021 685,851 685,851
8.10 2012-2038 4,205,569 4,205,569
8.125 2038 5,159,398 5,159,398
8.15 2011-2015 9,683,973 9,683,973
8.20 2011-2013 7,990,837 7,990,837
8.25(1) 2041 960,510 960,510
8.25(3) 2017-2041 6,112,780 6,112,780
8.50 2012-2032 14,876,417 14,876,417
8.75 2017-2027 7,098,169 7,098,169
9.00 2020-2034 2,355,922 2,355,922
9.00 2013-2022 626,025 626,025
9.25 2030 1,478,133 1,478,133
9.25 2016-2021 360,991 360,991
10.25 2029 1,082,320 1,082,320
13.00 2026-2029 63,588 63,588
------------ ------------ ------------
TOTAL U.S. GOVERNMENT SECURITIES
(cost: $388,495,052, $105,215,841, $493,710,893) 383,150,201 23,022,098 406,172,299
------------ ------------ ------------
U.S. GOVERNMENT OBLIGATIONS: 0.52%
U.S. Treasury Bills, 6.02%, due 12/07/00 1,461,345 1,461,345
U.S. Treasury Bonds, 5.875%, due 11/15/04 984,390 984,390
------------ ------------ ------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(cost $2,443,750) 2,445,735 -- 2,445,735
------------ ------------ ------------
COLLATERALIZED MORTGAGE OBLIGATIONS: 0.42%
MORTGAGE -- COMMERCIAL: 0.42%
Small Business Investment, Cos., 8.017%, due 02/10/10 1,970,913 1,970,913
------------ ------------ ------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(cost $1,985,494) -- 1,970,913 1,970,913
------------ ------------ ------------
TOTAL LONG-TERM INVESTMENTS
(cost: $390,938,802, $108,954,532, $499,893,334) 385,595,936 107,186,754 492,782,690
------------ ------------ ------------
SHORT-TERM INVESTMENTS: 0.99%
State Street Bank & Trust 6.200% due 07/03/00
(Collateralized by $4,695,000 U.S. Treasury
Notes, 5.500% Due 07/31/01 Market Value, $4,753,688) 4,658,000 4,658,000
------------ ------------ ------------
TOTAL SHORT-TERM INVESTMENTS
(cost: $4,658,000) -- 4,658,000 4,658,000
------------ ------------ ------------
TOTAL INVESTMENTS IN SECURITIES ($390,938,802,
$113,612,532, $504,551,334) 105.57% $385,595,936 $111,844,754 $497,440,690
Other Assets and Liabilities - Net -5.57% (27,757,262) 1,520,378 (26,236,884)
------- ------------ ------------ ------------
TOTAL NET ASSETS 100.00% $357,838,674 $113,365,132 $471,203,806
======= ============ ============ ============
</TABLE>
----------
(1) Construction loan securities issued on a when-issued basis.
(2) When-issued securities.
(3) Some or all of this security is segregated for construction loan and
when-issued securities.
4
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Basis of Combination:
On November 2, 2000, the Boards of Pilgrim GNMA Income Fund ("GNMA Income
Fund") and Pilgrim Government Securities Income Fund ("Government Securities
Income Fund"), approved an Agreement and Plan of Reorganization (the "Plan")
whereby, subject to approval by the shareholders of Government Securities Income
Fund, GNMA Income Fund will acquire all the assets of Government Securities
Income Fund subject to the liabilities of such Fund, in exchange for a number of
shares equal to the pro rata net assets of shares of the GNMA Income Fund (the
"Merger").
The Merger will be accounted for as a tax free merger of investment
companies. The pro forma combined financial statements are presented for the
information of the reader and may not necessarily be representative of what the
actual combined financial statements would have been had the reorganization
occurred at June 30, 2000. The unaudited pro forma portfolio of investments, and
statement of assets and liabilities reflect the financial position of GNMA
Income Fund and Government Securities Income Fund at June 30, 2000. The
unaudited pro forma statement of operations reflects the results of operations
of GNMA Income Fund and Government Securities Income Fund for the year ended
June 30, 2000. These statements have been derived from the Funds' respective
books and records utilized in calculating daily net asset value at the dates
indicated above for GNMA Income Fund and Government Securities Income Fund under
generally accepted accounting principles. The historical cost of investment
securities will be carried forward to the surviving entity and results of
operations of GNMA Income Fund for pre-combination periods will not be restated.
The pro forma portfolio of investments, and statements of assets and
liabilities and operations should be read in conjunction with the historical
financial statements of the Funds incorporated by reference in the Statements of
Additional Information.
Note 2 - Security Valuation:
U.S. Government obligations are valued by using market quotations or
independent pricing services which use prices provided by market-makers or
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics. Securities for which market quotations
are not readily available are valued at their respective fair values as
determined in good faith and in accordance with policies set by the Board of
Directors. Investments in securities maturing in less than 60 days are valued at
cost, which, when combined with accrued interest, approximates market value.
Note 3 - Capital Shares:
The pro forma net asset value per share assumes additional shares of common
stock issued in connection with the proposed acquisition of Government
Securities Income Fund by GNMA Income Fund as of June 30, 2000. The number of
additional shares issued was calculated by dividing the net asset value of each
Class of Government Securities Income Fund by the respective Class net asset
value per share of GNMA Income Fund.
Note 4 - Pro Forma Adjustments:
The accompanying pro forma financial statements reflect changes in fund
shares as if the merger had taken place on June 30, 2000. Government Securities
Income Fund expenses were adjusted assuming GNMA Income Fund's fee structure was
in effect for the year ended June 30, 2000.
5
<PAGE>
Note 5 - Merger Costs:
Merger costs are estimated at approximately $125,000 and are not included
in the pro forma statement of operations since these costs are not reoccurring.
These costs represent the estimated expense of both Funds carrying out their
obligations under the Plan and consist of management's estimate of legal fees,
accounting fees, printing costs and mailing charges related to the proposed
merger. ING Pilgrim Investments, Investment Adviser to the Funds, will bear half
the cost of the Reorganization. The Funds will bear the other half of the
expenses relating to the proposed Reorganization.
Note 6 - Federal Income Taxes:
It is the policy of the Funds, to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute substantially all of their net investment income and any net
realized gains to their shareholders. Therefore, a federal income tax or excise
tax provision is not required. In addition, by distributing during each calendar
year substantially all of its net investment income and net realized capital
gains, each Fund intends not to be subject to any federal excise tax.
The Board of Directors intends to offset any net capital gains with any
available capital loss carryforward until each carryforward has been fully
utilized or expires. The amount of capital loss carryforward which may offset
GNMA Income Fund's capital gains in any given year may be limited as a result of
previous reorganizations. In addition, no capital gain distribution shall be
made until the capital loss carryforward has been fully utilized or expires.
6
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Article Seventh of the Articles of Incorporation provides to the fullest
extent that limitations on the liability of directors and officers are permitted
by the Maryland General Corporation Law, no director or officer of the
corporation shall have any liability to the corporation or its stockholders for
damages. This limitation on liability applies to events occurring at the time a
person serves as a director or officer of the corporation whether or not such
person is a director or officer at the time of any proceeding in which liability
is asserted. The corporation shall indemnify and advance expenses to its
currently acting and its former directors to the fullest extent that
indemnification of directors is permitted by the Maryland General Corporation
Law. The corporation shall indemnify and advance expenses to its officers to the
same extent as its directors and to such further extent as is consistent with
the law. The Board of Directors may, through a by-law, resolution or agreement,
make further provisions for indemnification of directors, officers, employees
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.
1
<PAGE>
ITEM 16. EXHIBITS
(1) (A) Form of Amended and Restated Articles of Incorporation - Filed as an
exhibit to Post-Effective Amendment No. 23 to Registrant's Form N-1A
Registration Statement on July 26, 2000 and incorporated herein by
reference.
(B) Form of Articles Supplementary designating Classes A, B, C and Q -
Filed as an exhibit to Post-Effective Amendment No. 23 to Registrant's
Form N-1A Registration Statement on July 26, 2000 and incorporated
herein by reference.
(C) Form of Articles Supplementary designating Classes M and T
(2) Form of Bylaws - Filed as an exhibit to Post-Effective Amendment No. 23 to
Registrant's Form N-1A Registration Statement on July 26, 2000 and
incorporated herein by reference.
(3) Not Applicable
(4) Form of Agreement and Plan of Reorganization between the Pilgrim Government
Securities Income Fund, Inc. and the Pilgrim GNMA Income Fund, Inc.
(5) See Exhibits 1 and 2
(6) (A) Form of Investment Management Agreement between Registrant and ING
Pilgrim Investments, Inc.
(B) Form of Expense Limitation Agreement between Registrant and Pilgrim
Investments, Inc. - Filed as an exhibit to Post-Effective Amendment
No. 23 to Registrant's Form N-1A Registration Statement on July 26,
2000 and incorporated herein by reference.
(7) Form of Underwriting Agreement between Registrant and ING Pilgrim
Securities, Inc.
(8) Not Applicable
(9) (A) Form of Custodian Agreement between Registrant and State Street Bank
and Trust Company - Filed as an exhibit to Post-Effective Amendment
No. 23 to Registrant's Form N-1A Registration Statement on July 26,
2000 and incorporated herein by reference.
(B) Form of Administration Agreement between Registrant and Pilgrim Group,
Inc. - Filed as an exhibit to Post-Effective Amendment No. 23 to
Registrant's Form N-1A Registration Statement on July 26, 2000 and
incorporated herein by reference.
(10) (A) Form of Service and Distribution Plan for Class A Shares - Filed as an
exhibit to Post-Effective Amendment No. 23 to Registrant's Form N-1A
Registration Statement on July 26, 2000 and incorporated herein by
reference.
(B) Form of Service and Distribution Plan for Class B Shares - Filed as an
exhibit to Post-Effective Amendment No. 23 to Registrant's Form N-1A
Registration Statement on July 26, 2000 and incorporated herein by
reference.
2
<PAGE>
(C) Form of Service and Distribution Plan for Class C Shares - Filed as an
exhibit to Post-Effective Amendment No. 23 to Registrant's Form N-1A
Registration Statement on July 26, 2000 and incorporated herein by
reference.
(D) Form of Service and Distribution Plan for Class M Shares
(E) Form of Service and Distribution Plan for Class T Shares
(F) Form of Shareholder Service Plan for Class Q Shares - Filed as an
exhibit to Post-Effective Amendment No. 23 to Registrant's Form N-1A
Registration Statement on July 26, 2000 and incorporated herein by
reference.
(G) Form of Multiple Class Plan Adopted Pursuant to Rule 18f-3 - Filed as
an exhibit to Post-Effective Amendment No. 23 to Registrant's Form
N-1A Registration Statement on July 26, 2000 and incorporated herein
by reference.
(11) Form of Opinion and Consent of Counsel
(12) Form of Opinion and Consent of Counsel supporting tax matters and
consequences
(13) Not Applicable
(14) Consent of Independent Auditors
(15) Not Applicable
(16) Filed herewith
(17) Not Applicable
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act 17 CFR
230.145(c), the reoffering prospectus will contain the information called for by
the applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form N-14 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Phoenix and State of Arizona on the 4th day of December, 2000.
PILGRIM GNMA INCOME FUND, INC.
By: /s/ James M. Hennessy
------------------------------------
James M. Hennessy
Senior Executive Vice President &
Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Director and Chairman December 4, 2000
------------------------
John G. Turner*
Director and President December 4, 2000
------------------------ (Chief Executive Officer)
Robert W. Stallings*
Director December 4, 2000
------------------------
Al Burton*
Director December 4, 2000
------------------------
Paul S. Doherty *
Director December 4, 2000
------------------------
Robert B. Goode *
Director December 4, 2000
------------------------
Alan L. Gosule *
Director December 4, 2000
------------------------
Walter H. May*
Director December 4, 2000
------------------------
Jock Patton*
4
<PAGE>
Director December 4, 2000
------------------------
David W.C. Putnam*
Director December 4, 2000
------------------------
John R. Smith*
Director December 4, 2000
------------------------
David W. Wallace*
Senior Vice President and December 4, 2000
------------------------ Principal Financial Officer
Michael J. Roland*
* By: /s/ James M. Hennessy
----------------------
James M. Hennessy
Attorney-in-Fact**
----------
** Executed pursuant to powers of attorney filed herewith.
5
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Robert W. Stallings, James M. Hennessy, Jeffrey S. Puretz and Karen L.
Anderberg, and each of them his true and lawful attorney-in-fact as agent with
full power of substitution and resubstitution of him in his name, place, and
stead, to sign any and all registration statements on Form N-14 applicable to
Pilgrim GNMA Income Fund, Inc. and any amendment or supplement thereto, and to
file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agent, or his substitutes, may lawfully do or
cause to be done by virtue hereof.
Dated: November 10, 2000
/s/ John G. Turner /s/ Alan L. Gosule
------------------------------ ---------------------------------
John G. Turner Alan L. Gosule
/s/ Robert W. Stallings /s/ Walter H. May
------------------------------ ---------------------------------
Robert W. Stallings Walter H. May
/s/ Al Burton /s/ Jock Patton
------------------------------ ---------------------------------
Al Burton Jock Patton
/s/ Paul S. Doherty /s/ David W.C. Putnam
------------------------------ ---------------------------------
Paul S. Doherty David W.C. Putnam
/s/ Robert B. Goode, Jr. /s/ John R. Smith
------------------------------ ---------------------------------
Robert B. Goode, Jr. John R. Smith
/s/ David W. Wallace
------------------------------
David W. Wallace
6
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Robert W. Stallings, James M. Hennessy, Jeffrey S. Puretz and Karen L.
Anderberg, and each of them his true and lawful attorney-in-fact as agent with
full power of substitution and resubstitution of him in his name, place, and
stead, to sign any and all registration statements on Form N-14 applicable to
Pilgrim GNMA Income Fund, Inc. and any amendment or supplement thereto, and to
file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agent, or his substitutes, may lawfully do or
cause to be done by virtue hereof.
Dated: November 14, 2000 /s/ Michael J. Roland
----------------------------------------
Michael J. Roland
7
<PAGE>
EXHIBIT INDEX
(4) Form of Agreement and Plan of Reorganization between the Pilgrim
Government Securities Income Fund, Inc. and the Pilgrim GNMA Income
Fund, Inc.
(6)(A) Form of Investment Management Agreement between Registrant and ING
Pilgrim Investments, Inc.
(7) Form of Underwriting Agreement between Registrant and ING Pilgrim
Securities
(11) Form of Opinion and Consent of Counsel
(12) Form of Opinion and Consent of Counsel supporting tax matters and
consequences
(14) Consent of Independent Auditors
<PAGE>
PILGRIM GOVERNMENT SECURITIES INCOME FUND, INC.
PROXY FOR A SPECIAL MEETING OF SHAREHOLDERS ON ________ ___, 2001
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoint(s) Robert W. Stallings and James M. Hennessy or
any one or more of them, proxies, with full power of substitution, to vote all
shares of the Pilgrim Government Securities Income Fund, Inc. (the "Fund") which
the undersigned is entitled to vote at the Special Meeting of Shareholders of
the Fund to be held at the offices of the Fund at 7337 E. Doubletree Ranch Road,
Scottsdale, Arizona 88258 on ________ ___, 2001 at ______ a.m., local time, and
at any adjournment thereof.
This proxy will be voted as instructed. If no specification is made, the proxy
will be voted "FOR" the proposals.
Please vote, date and sign this proxy and return it promptly in the enclosed
envelope.
Please indicate your vote by an "x" in the appropriate box below.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSAL:
1. To approve an Agreement and Plan of Reorganization providing for the
acquisition of all of the assets of the Fund by the Pilgrim GNMA Income Fund in
exchange for shares of common stock of the Pilgrim GNMA Income Fund and the
assumption by the Pilgrim GNMA Income Fund of all of the liabilities of the
Fund.
For [ ] Against [ ] Abstain [ ]
This proxy must be signed exactly as your name(s) appears hereon. If as an
attorney, executor, guardian or in some representative capacity or as an officer
of a corporation, please add titles as such. Joint owners must each sign.
----------------------------------- -----------------------------------
Signature Date
----------------------------------- -----------------------------------
Signature (if held jointly) Date
