As filed with the Securities and Exchange Commission on December 21, 1999
Securities Act File No. 002-91302
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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 GOVERNMENT SECURITIES INCOME FUND, INC.
(Exact Name of Registrant as Specified in Charter)
40 North Central Avenue, Suite 1200, Phoenix, AZ 85004
(Address of Principal Executive Offices) (Zip Code)
(800) 992-0180
(Registrant's Area Code and Telephone Number)
James M. Hennessy, Esq.
Pilgrim Investments, Inc.
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004
(Name and Address of Agent for Service)
With copies to:
Jeffrey S. Puretz, Esq.
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 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 20, 2000
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 Fund
and
Pilgrim Government Securities Income Fund
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004
(800) 992-0180
February 8, 2000
Dear Shareholder:
Your Board of Trustees/Directors has called a Special Meeting of
Shareholders of the Pilgrim Government Securities Fund (formerly, the Northstar
Government Securities Fund) and the Pilgrim Government Securities Income Fund
(the "Funds"), as applicable, each to be held at 10:00 a.m., local time, on
March 24, 2000 at 40 North Central Avenue, Suite 1200, Phoenix, AZ 85004.
The Board of Trustees of the Pilgrim Government Securities Fund and the
Board of Directors of the Pilgrim Government Securities Income Fund each have
approved a reorganization of the Pilgrim Government Securities Fund into the
Pilgrim Government Securities Income Fund, which is managed by Pilgrim
Investments, Inc. and is part of the Pilgrim group of funds (the
"Reorganization"). The Pilgrim Government Securities Income Fund has investment
objectives and policies that are similar in many respects to those of Pilgrim
Government Securities Fund. 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 Trustees of the Pilgrim
Government Securities Fund and the Board of Directors of the Pilgrim Government
Securities Income Fund each 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 applicable Meeting in person; however, we urge
you in any event to vote your shares by completing and returning the enclosed
proxy 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 MARCH 23, 2000.
The Funds are using Shareholder Communications Corporation, a professional
proxy solicitation firm, to assist shareholders in the voting process. As the
date of the meetings 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 Fund
and
Pilgrim Government Securities Income Fund
40 North Central Avenue, Suite 1200
Phoenix, AZ 85004
(800) 992-0180
NOTICE OF SPECIAL MEETINGS OF SHAREHOLDERS OF
PILGRIM GOVERNMENT SECURITIES FUND
AND
PILGRIM GOVERNMENT SECURITIES INCOME FUND
TO BE HELD ON MARCH 24, 2000
To the Shareholders:
Special Meetings of Shareholders of the Pilgrim Government Securities Fund
(formerly, Northstar Government Securities Fund) and the Pilgrim Government
Securities Income Fund will be held on March 24, 2000 at 10:00 a.m., local time,
at 40 North Central Avenue, Suite 1200, Phoenix, AZ 85004.
The purposes of the Special Meeting of the Pilgrim Government Securities
Fund are as follows:
1. To approve an Agreement and Plan of Reorganization providing for the
acquisition of all of the assets and liabilities of Pilgrim Government
Securities Fund by Pilgrim Government Securities Income Fund; and
2. To transact such other business as may properly come before the Special
Meeting of Shareholders or any adjournments thereof.
The purposes of the Special Meeting of the Pilgrim Government Securities
Income Fund are as follows:
1. To approve an Agreement and Plan of Reorganization providing for the
acquisition of all of the assets and liabilities of the Pilgrim Government
Securities Fund by the Pilgrim Government Securities Income Fund; and
2. To transact such other business as may properly come before the Special
Meeting of Shareholders or any adjournment thereof.
Shareholders of record at the close of business on January 24, 2000 are
entitled to notice of, and to vote at, their respective meeting. Your attention
is called to the accompanying Proxy Statement/Prospectus. Regardless of whether
you plan to attend your 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 your meeting, you may change your
vote, if desired, at that time.
By Order of the Board of Trustees/Directors
James M. Hennessy,
Secretary
February 8, 2000
<PAGE>
TABLE OF CONTENTS
INTRODUCTION................................................................ 1
SUMMARY..................................................................... 3
INVESTMENT OBJECTIVES AND POLICIES.......................................... 5
Comparison of Objectives and Primary Investment Strategies........ 5
Comparison of Portfolio Characteristics........................... 7
Relative Performance.............................................. 8
Comparison of Risks Involved in Investing in the Funds............ 8
Comparison of Securities and Investment Techniques................ 9
COMPARISON OF FEES AND EXPENSES............................................. 14
Annual Fund Operating Expenses.................................... 15
Expense Limitation Arrangements................................... 16
Transaction Fees on New Investments............................... 17
ADDITIONAL INFORMATION ABOUT PILGRIM GSIF................................... 18
Investment Personnel.............................................. 18
Performance of the Pilgrim GSIF................................... 19
INFORMATION ABOUT THE REORGANIZATION........................................ 21
ADDITIONAL INFORMATION ABOUT THE FUNDS...................................... 24
GENERAL INFORMATION......................................................... 25
APPENDIX A.................................................................. A-1
APPENDIX B.................................................................. B-1
APPENDIX C.................................................................. C-1
APPENDIX D.................................................................. D-1
<PAGE>
PROXY STATEMENT/PROSPECTUS
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON
MARCH 24, 2000
PILGRIM GOVERNMENT SECURITIES FUND
(formerly Northstar Government Securities Fund)
relating to the reorganization into
PILGRIM GOVERNMENT SECURITIES INCOME FUND
(COLLECTIVELY, THE "FUNDS")
INTRODUCTION
This Proxy Statement/Prospectus provides you with information about a
proposed transaction. This transaction involves the transfer of all of the
assets and liabilities of Pilgrim Government Securities Fund (formerly Northstar
Government Securities Fund) ("Government Securities Fund") to Pilgrim Government
Securities Income Fund ("Pilgrim GSIF") in exchange for shares of Pilgrim GSIF
(the "Reorganization"). Government Securities Fund would then distribute to you
your portion of the shares of Pilgrim GSIF it received in the Reorganization.
The result would be a liquidation of Government Securities Fund. You would
receive shares of the Pilgrim GSIF having an aggregate value equal to the
aggregate value of the shares of Government Securities Fund held by you as of
the close of business on the business day preceding 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 Government Securities Fund are being asked
to approve a transaction that will result in your holding shares of Pilgrim
GSIF, this Proxy Statement also serves as a Prospectus for Pilgrim GSIF.
This Proxy Statement/Prospectus, which you should retain for future
reference, contains important information about Pilgrim GSIF 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") and the Statement of Additional
Information for Pilgrim group of funds dated January 4, 2000, each of 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 Pilgrim GSIF dated June 30, 1999, which
covers Classes A, B and C, is included herewith and is incorporated herein by
reference. You may receive a copy of the most recent annual report for either of
the Funds and a copy of 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
Pilgrim GSIF from the SEC's 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.
<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 A.
THE PROPOSED REORGANIZATION
On November 16, 1999, the Board of Trustees of Government Securities Fund
and the Board of Directors of Pilgrim GSIF each approved an Agreement and Plan
of Reorganization (the "Reorganization Agreement"). Subject to shareholder
approval of both Funds, the Reorganization Agreement provides for:
* the transfer of all of the assets of Government Securities Fund to
Pilgrim GSIF, in exchange for shares of Pilgrim GSIF;
* the assumption by Pilgrim GSIF of all of the liabilities of Government
Securities Fund;
* the distribution of the Pilgrim GSIF to the shareholders of Government
Securities Fund; and
* complete liquidation of Government Securities Fund (the
"Reorganizaton").
The Reorganization is expected to be effective upon the opening of business
on March 27, 2000, 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
and Class T shares of Government Securities Fund would become a shareholder of
the same Class of Pilgrim GSIF. Each shareholder would hold, immediately after
the Closing, shares of each Class of Pilgrim GSIF having an aggregate value
equal to the aggregate value of the shares of that same Class of Government
Securities Fund held by that shareholder as of the close of business on the
business day preceding the Closing.
The Reorganization is intended to eliminate duplication of costs and other
inefficiencies arising from having two substantially similar mutual funds within
the same group of funds. Shareholders in Government Securities Fund (as well as
those in Pilgrim GSIF) are expected to benefit from the elimination of this
duplication and from the larger asset base that will result from the
Reorganization.
Approval of the Reorganization Agreement requires the affirmative vote of:
(i) a majority of the outstanding shares of Government Securities Fund and (ii)
a majority of the outstanding shares of Pilgrim GSIF.
AFTER CAREFUL CONSIDERATION, THE BOARD OF TRUSTEES OF GOVERNMENT SECURITIES
FUND AND THE BOARD OF DIRECTORS OF PILGRIM GSIF EACH UNANIMOUSLY APPROVED THE
PROPOSED REORGANIZATION. EACH BOARD RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSED
REORGANIZATION.
2
<PAGE>
In considering whether to approve the Reorganization, you should note that:
* Government Securities Fund and Pilgrim GSIF have substantially the
same investment objectives and policies. Government Securities Fund
seeks high current income and conservation of principal. Pilgrim GSIF
seeks high current income, consistent with liquidity and preservation
of capital. Each of the Funds primarily invests in securities issued
or guaranteed by the U.S. Government and its agencies or
instrumentalities.
* The proposed Reorganization offers actual or potential reductions in
total operating expenses for shareholders of each of the Funds.
Combining the Funds should lower expenses because of economies of
scale realized from a larger asset base. This chart compares the
current operating expenses, management fees, and distribution and
shareholder service fees of the Funds.
<TABLE>
<CAPTION>
Operating Management Distribution and
Expenses(3) Fees(4) Shareholders Fees(4)
-------------------------- ----------- --------------------------
Class of Shares A B C T All Classes A B C T
-------------------------- ----------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pilgrim GSIF(1) 1.40% 2.15% 2.15% N/A 0.50% 0.25% 1.00% 1.00% N/A
Government
Securities Fund(2)
* before waiver 1.35% 2.06% 2.12% 1.69% 0.65% 0.30% 1.00% 1.00% 0.65%
* after waiver 1.20% 1.91% 1.97% 1.54% 0.50% 0.30% 1.00% 1.00% 0.65%
</TABLE>
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(1) Pilgrim Investments limits the expenses of Pilgrim GSIF pursuant to
the terms of the Investment Management Agreement see "Comparison of
Fees and Expenses - Expense Limitation Arrangements" for more
information.
(2) The "after waiver" Operating Expenses and Management Fees for the
Government Securities Fund reflect a voluntary management fee waiver
of 0.15%.
(3) Operating Expenses are expressed as a ratio of expenses to average
daily net assets ("expense ratio") based on the one-year period ending
June 30, 1999.
(4) Fees are expressed as an annual rate of average daily net assets.
This chart shows an estimate of the likely expenses after the
Reorganization.
<TABLE>
<CAPTION>
Operating Management Distribution and
Expenses Fees Shareholders Fees
-------------------------- ----------- --------------------------
Class of Shares A B C T All Classes A B C T
-------------------------- ----------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Combined Funds
(pro forma) 1.07% 1.82% 1.82% 1.47% 0.50% 0.25% 1.00% 1.00% 0.65%
</TABLE>
* An expense limitation arrangement is in place for Pilgrim GSIF, under which
Pilgrim Investments limits the ordinary operating expenses borne by the
Fund. The expense limitation arrangement is described below in the section
"Expense Limitation Arrangements" and under the table "Annual Fund
Operating Expenses." The current expense limitation agreement for Pilgrim
GSIF will terminate only with the termination or amendment of the advisory
contract with Pilgrim Investments.
3
<PAGE>
* The current sales load structure for the Funds is identical.
For further information on fees and expenses, see "Comparison of Fees and
Expenses."
* The Funds have affiliated management. Pilgrim Investments, Inc. ("Pilgrim
Investments"), 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004,
is the investment manager to Pilgrim GSIF. Pilgrim Advisors, Inc. ("Pilgrim
Advisors"), (formally Northstar Investment Management Corporation), 40
North Central Avenue, Suite 1200, Phoenix, Arizona 85004, is the investment
manager for Government Securities Fund. Both are affiliated subsidiaries of
the same holding company, ReliaStar Financial Corp. Because these firms
share investment resources, the investment personnel who manage the Funds
currently are the same.
PURCHASE, REDEMPTION, AND EXCHANGE INFORMATION
The purchase, redemption and exchange provisions and privileges for
Government Securities Fund and Pilgrim GSIF are currently the same. Prior to
November 1, 1999, there were differences in these provisions, including
differences in sales loads. As a result, the contingent deferred sales load
structure of the Government Securities Fund shares held by you prior to November
1, 1999, will apply to the Pilgrim GSIF shares issued to you in the
Reorganization. In addition, you will receive credit for the period that you
held your Government Securities Fund shares for purposes of calculating any
contingent deferred sales charges and determining conversion rights with regard
to Pilgrim GSIF shares you acquire in the Reorganization. Similar to Class B
shares of Government Securities Fund, Class B shares of Pilgrim GSIF will
convert to Class A eight years after their purchase date.
Purchases of shares of Pilgrim GSIF after the Reorganization will be
subject to the sales load structure and conversion characteristics of Pilgrim
GSIF. For additional information on purchase, redemption and exchange procedures
see "Comparison of Fees and Expenses" and "Appendix B - Additional Information
Regarding Pilgrim GSIF."
FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
The Funds expect that the Reorganization will be considered a tax-free
reorganization within the meaning of section 368(a)(1) of the Internal Revenue
Code of 1986, as amended (the "Code"). As such you will not recognize gain or
loss as a result of the Reorganization. See "Information About The
Reorganization - Tax Considerations."
4
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
COMPARISON OF OBJECTIVES AND PRIMARY INVESTMENT STRATEGIES
The investment objectives, policies and restrictions of the Funds are
substantially similar, although there are certain differences. There can be no
assurance that either Fund will achieve its stated objective.
INVESTMENT OBJECTIVE
Government Securities Fund and Pilgrim GSIF have substantially the same
investment objectives and policies.
* Government Securities Fund seeks high current income and conservation
of principal.
* Pilgrim GSIF seeks high current income, consistent with liquidity and
preservation of capital.
PRIMARY INVESTMENT STRATEGIES
* Both of the Funds primarily invest in securities issued or guaranteed
by the U.S. Government and its agencies or instrumentalities.
PILGRIM GSIF
* Generally, Pilgrim GSIF normally invests at least 70% of its total
assets in securities issued or guaranteed by the U.S. Government and
the following agencies or instrumentalities of the U.S. Government:
the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA"), and the Federal Home Loan
Mortgage Corporation ("FHLMC").
* Such securities include direct obligations of the U.S. Treasury and
mortgage-backed securities. Pilgrim GSIF may fall below the 70%
threshold due to changes in the value of the Pilgrim GSIF's holdings
or the sale of securities to meet redemptions, in which case the
Pilgrim GSIF will purchase only U.S. Government securities until the
70% level is restored.
* The remainder of Pilgrim GSIF's assets may be invested in securities
issued by other agencies and instrumentalities of the U.S. Government
and in instruments collateralized by securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities. The
Pilgrim GSIF's adviser determines the composition of the Pilgrim
GSIF's portfolio on the basis of its judgment of existing market
conditions, such as the general direction of interest rates, trends in
creditworthiness, expected inflation, supply and demand of fixed
income securities, and other factors.
5
<PAGE>
GOVERNMENT SECURITIES FUND
* Under normal conditions, Government Securities Fund holds at least 65%
of its total assets in securities supported by the full faith and
credit of the U.S. government.
* The Pilgrim Government Securities Fund will not invest more than 20%
of its assets in securities issued by a single instrumentality or
agency not supported by the full faith and credit of the U.S.
government.
OTHER INVESTMENT STRATEGIES
* Pilgrim GSIF may enter into reverse repurchase agreements, dollar roll
transactions or pairing off transactions.
* Pilgrim GSIF does not invest in highly leveraged derivatives, such as
swaps, interest-only or principal-only stripped mortgage-backed
securities, or interest rate futures contracts.
* Government Securities Fund may invest in mortgage-backed, zero coupon
and other securities, including derivatives.
DURATION
* Pilgrim GSIF 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 June 30, 1999, the dollar-weighted average duration of
the Lehman Intermediate Treasury Index was 3.06 years.
* Government Securities Fund, depending on interest rates and market
opportunities, invests in U.S. government securities that generally
have short and intermediate terms to maturity. The average duration of
Government Securities Fund will generally be three to four years.
Following the Reorganization and in the ordinary course of business as a
mutual fund, certain holdings of Government Securities Fund that were
transferred to Pilgrim GSIF in connection with the Reorganization may be sold.
Such sales may result in increased transactional costs for Pilgrim GSIF, and the
realization of taxable gains or losses.
6
<PAGE>
COMPARISON OF PORTFOLIO CHARACTERISTICS
The following table compares certain characteristics of the portfolios of
the Funds as of June 30, 1999:
PILGRIM GSIF GOVERNMENT SECURITIES FUND
------------ --------------------------
Net Assets $34,242,820 $98,888,680
Number of Holdings 75 24
Average Credit Quality AAA AAA
Portfolio Turnover Rate
(12 months ended 6/30/99) 58% 40%
As a percentage of net assets:
* Treasury bonds, bills and
notes 8.5% 0.0%
* Mortgage-Related Securities 90.0% 96.8%
* U.S. Gov. Securities not
backed by full faith and
credit 62.5% 35.9%
* Corporate Debt 0.0% 0.0%
* Short-term Investments 4.60% 2.20%
* Others Assets and
Liabilities, net (3.10%) 0.80%
Top 10 Holdings GNMA 6.50%, due 12.8% FNMA 6.50%, due 18.6%
(as a % of net assets) 2/15/26 11/01/13
FHLMC 7.01%, due 9.5% GNMA 7.00%, due 15.2%
7/11/07 10/20/28
FNMA 6.50%, due 8.4% GNMA 7.00%, due 9.1%
10/01/28 9/20/28
FNMA 6.50%, due 8.3% GNMA 7.00%, due 8.5%
12/01/28 12/15/28
FNMA 7.50%, due 7.4% GNMA 7.50%, due 8.1%
5/01/28 12/15/28
FNMA 10.50%, due 3.1% GNMA 7.50%, due 7.1%
1/20/21 10/15/28
US Treasury Bond 4.875%, 2.9% FHLMC 6.50%, due 5.7%
3/31/01 9/15/24
FNMA 5.64%, due 2.8% FNMA 9.00%, due 4.6%
12/10/08 6/01/07
FNMA 11.25%, due 2.7% FNMA 8.50%, due 4.1%
2/15/16 11/01/09
US Treasury Bond, 5.25%, 2.7% GNMA 7.00%, due 3.8%
2/15/29 ---- 2/15/26 ----
60.6% 84.8%
7
<PAGE>
RELATIVE PERFORMANCE
The following table shows, for each calendar year since 1989, the average
annual total return for (a) Class A shares of Pilgrim GSIF, (b) Class A and
Class T shares of Government Securities Fund, as outlined below in footnote 2,
(c) the Lehman Government/Mortgage Index, and (d) the Lehman Intermediate
Treasury Index. Performance of the Funds does not reflect the deduction of sales
loads in the table below. The Lehman Government/Mortgage Index and the Lehman
Intermediate Treasury Index have an inherent performance advantage over the
Funds, since they have no cash in their portfolios, and incur no operating
expenses. An investor cannot invest 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 LEHMAN
GOVERNMENT GOVERNMENT/ INTERMEDIATE
CALENDAR YEAR/ SECURITIES MORTGAGE TREASURY
PERIOD ENDED PILGRIM GSIF FUND(2) INDEX(3) INDEX(4)
- ------------ ------------ ------- -------- --------
12/31/89 12.92% 11.73% 14.60% 12.69%
12/31/90 8.03% 8.57% 10.73% 9.45%
12/31/91 11.90% 14.73% 15.71% 14.10%
12/31/92 7.46% 9.77% 6.96% 6.95%
12/31/93 4.71% 18.48% 6.84% 8.22%
12/31/94 (3.61)% (9.82)% (1.61)% (1.76)%
12/31/95 14.51% 22.90% 16.80% 14.42%
12/31/96 2.56% 0.57% 5.35% 3.98%
12/31/97 7.85% 7.46% 9.49% 7.69%
12/31/98 5.61% 5.27% 6.98% 8.62%
09/30/99(1) (0.88)% (1.53)% 1.47% 0.52%
- ----------
(1) Not annualized.
(2) Performance for the periods 1989 through 1995 are based upon the
performance of the Class T shares of the Fund. Performance for the periods
1996 through 1999 are based upon the performance of the Class A shares of
the Fund, which commenced operations on June 5, 1995.
(3) The Lehman Government/Mortgage Index is comprised of debt securities issued
by the U.S. Government, its agencies and instrumentalities, as well as
mortgage pass-through instruments issued by FNMA, FHLMC and GNMA.
(4) The Lehman Intermediate Treasury Index is comprised solely of U.S.
Treasuries with maturities of under ten years.
COMPARISON OF RISKS INVOLVED IN INVESTING IN THE FUNDS
Because the Funds share similar investment objectives and policies, the
risks of an investment in the Funds are substantially similar. The principal
risk of an investment in either Fund is fluctuation in the net asset value of
the Fund's shares. Market conditions, investment policies, portfolio management,
and other factors affect such fluctuations.
8
<PAGE>
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
normally are subject to less credit risks than 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.
* 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 mortgage-related securities which may be
considered derivatives. These types of derivatives are subject to the risk
of changes in the market price of the security and the risk of loss due to
changes in interest rates. The use of these derivatives may reduce returns
for the Funds.
COMPARISON OF SECURITIES AND INVESTMENT TECHNIQUES
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.
9
<PAGE>
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 security 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
Both the Pilgrim GSIF and the Government Securities Fund may invest up to
15% of their 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.
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.
USE OF DERIVATIVES
Derivative instruments are securities that derive their value from the
performance of an underlying asset, usually take the form of a contract to buy
or sell an asset or commodity either now or in the future, but mortgage and
other asset-backed securities may also be considered derivatives. Other types of
derivatives include options, futures contracts, options on futures and forward
contracts. Derivative instruments may be used for a variety of reasons,
including to enhance return, hedge certain market risks, or provide a substitute
for purchasing or selling particular securities. Derivatives may provide a
cheaper, quicker or more specifically focused way for the Fund to invest than
"traditional" securities would.
Each of the Funds may invest in derivatives instruments. Pilgrim GSIF 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. The risks of
these instruments is described above. However, Pilgrim GSIF may not invest in
highly leveraged derivatives, such as swaps, interest-only or principal-only
stripped mortgage-backed securities or interest rate futures contracts.
10
<PAGE>
Derivatives in which Government Securities Fund may invest can be volatile
and involve various types and degrees of risk, depending upon the
characteristics of the particular derivative and the portfolio as a whole.
Derivatives permit a fund to increase or decrease the level of risk, or change
the character of the risk, to which its portfolio is exposed in much the same
way as the fund can increase or decrease the level of risk, or change the
character of the risk, of its portfolio by making investments in specific
securities. SEE ALSO "Interest Rate Futures" below.
INTEREST RATE FUTURES
Pilgrim GSIF may not invest in futures contracts. Government Securities
Fund may invest in financial futures contracts, including interest rate futures.
An interest rate futures contract obligates the seller of the contract to
deliver, and the purchaser to take delivery of, the U.S. Government securities
called for in the contract at a specified future time and at a specified price.
An option on a financial futures contract gives the purchaser the right to
assume a position in the contract (a long position if the option is a call and
short position if the option is a put) at a specified exercise price at any time
during the period of the option.
FLOATING OR VARIABLE RATE INSTRUMENTS
Both Funds may purchase floating or variable rate bonds, which normally
provide that the holder can demand payment of the obligation on short notice at
par with accrued interest. Floating or variable rate instruments provide for
adjustments in the interest rate at specified intervals (weekly, monthly,
semiannually, etc.).
LENDING PORTFOLIO SECURITIES
To generate additional income, both Funds 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 Funds an irrevocable letter of credit equal in
value to at least 100% of the value of the securities loaned. During the time
portfolio securities are on loan, the borrower pays the Funds any interest paid
on such securities, and the Funds may invest the cash collateral and earn
additional income, or it may receive an agreed-upon amount of interest income
from the borrower who has delivered equivalent collateral or a letter of credit.
Loans are subject to termination at the option of the Funds or the borrower at
any time. 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.
BORROWING
Both Funds may borrow money from banks solely for temporary or emergency
purposes. Government Securities Fund may not borrow in an amount exceeding
one-third of the value of its total assets. Pilgrim GSIF may not borrow in an
amount in excess of 10% of the value of its total assets. For Pilgrim GSIF, no
additional investment may be made while any such borrowings are in excess of 5%
of total assets. Leveraging by means of borrowing may exaggerate the effect of
any increase or decrease in the value of portfolio securities or a 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.
11
<PAGE>
LOAN PARTICIPATIONS AND ASSIGNMENTS
Pilgrim GSIF may not invest in loan participations and loan assignments.
Government Securities Fund may invest in loan participations and loan
assignments. Generally, there is no liquid market for such instruments. The lack
of a liquid secondary market may have an adverse impact on the value of such
securities and Government Securities Fund's ability to dispose of particular
assignments or participations when necessary to meet redemptions of the Fund's
shares, to meet the Fund's liquidity needs or when necessary in response to a
specific economic event, such as deterioration in the creditworthiness of the
borrower. The lack of a liquid secondary market for assignments and
participations also may make it more difficult for Government Securities Fund to
value these securities for purposes of calculating its net asset value.
Loan participations and assignments are also subject to the credit risk of
nonpayment of scheduled interest or principal payments. Issuers of these
instruments tend to be companies that have either issued debt securities that
are rated lower than investment grade, I.E., rated lower than "Baa" by Moody's
Investors Service or "BBB" by Standard & Poor's, or, if they had issued debt
securities, such debt securities would likely be rated lower than investment
grade. In the event a borrower fails to pay scheduled interest or principal
payments on a loan participation or assignment held by the Fund, that Fund could
experience a reduction in its income and a decline in the market value of the
loan participation or assignment, and may experience a decline in the NAV of the
Fund's shares or the amount of its dividends. Further, the liquidation of the
collateral underlying an assignment (to which the Fund may have certain rights)
may not satisfy the borrower's obligation to the Fund in the event of
non-payment of scheduled interest or principal, and the collateral may not be
readily liquidated.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS
Both Funds may enter into reverse repurchase agreement transactions. Such
transactions involve the sale of U.S. Government securities held by the
particular Fund, with an agreement that the Fund will repurchase such securities
at an agreed upon price and date. A Fund may employ reverse repurchase
agreements when necessary to meet unanticipated net redemptions so as to avoid
liquidating other portfolio investments during unfavorable market conditions. At
the time a Fund 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 may be
considered a form of borrowing, and together with other permitted borrowings,
may constitute up to 33 1/3% of the Fund's total assets. Leveraging by means of
borrowing may exaggerate the effect of any increase or decrease in the value of
portfolio securities or a 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.
12
<PAGE>
Both Funds may enter into dollar roll transactions, which involve the sale
by the particular Fund with an agreement that the Fund will repurchase
substantially similar securities at an agreed upon price and date. Dollar roll
transactions may be used, in part, to manage prepayment risks with respect to
mortgage securities issued by GNMA, FNMA and FHLMC. In a dollar roll
transaction, the mortgage securities that are repurchased may bear the same
interest rate as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories. During the period
between the sale and repurchase, the Fund will not be entitled to receive
interest and principal payments on the securities sold. Proceeds of the sale
will be invested in short-term instruments, and the income from these
investments, together with any additional fee income received on the sale, could
generate income for the Fund exceeding the yield on the sold security. When
either 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.
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 repurchase
agreements and dollar-roll transactions, as leveraging techniques, may increase
a Fund's yield in the manner described above; however, such transactions also
increase a Fund's risk to capital and may result in a loss of principal.
ZERO COUPON SECURITIES
Pilgrim GSIF may not invest in zero coupon securities. Government
Securities Fund may invest in zero coupon securities, including zero coupon
Treasury securities which consist of Treasury bills or stripped interest or
principal components of U.S. Treasury bonds or notes. Zero coupon securities are
sold at a discount (usually substantial) and redeemed at face value at their
maturity date without interim cash payments of interest or principal. Because of
these features, the market prices of zero coupon securities are generally more
volatile than the market prices of securities that have a similar maturity but
that pay interest periodically. Zero coupon securities are likely to respond to
a greater degree to interest rate changes than are non-zero coupon securities
with similar maturity and credit qualities.
13
<PAGE>
COMPARISON OF FEES AND EXPENSES
The following describes and compares the fees and expenses that you may pay
if you buy and hold shares of the Funds. It is expected that combining the Funds
will allow shareholders to realize economies of scale. For further information
on the fees and expenses of Pilgrim GSIF, see "Appendix B Additional Information
Regarding Pilgrim Government Securities Income Fund."
OPERATING EXPENSES
The operating expenses of Government Securities Fund, expressed as a ratio
of expenses to average daily net assets ("expense ratio") currently are lower
than those of Pilgrim GSIF.
* After a voluntary management fee waiver by Pilgrim Advisors, the net
expenses for the Class A, Class B and Class C shares of Government
Securities Fund for the year ending June 30, 1999, are lower by 0.20%,
0.24% and 0.18%, respectively, than those of the same classes of Pilgrim
GSIF.
* After a voluntary management fee waiver by Pilgrim Advisors, the management
fee for the Government Securities Fund for the year ending June 30, 1999
was the same as the management fee for Pilgrim GSIF.
* The fees for distribution and shareholder servicing for Pilgrim GSIF are
the same as Government Securities Fund, with the exception of Class A which
are 0.05% lower for Pilgrim GSIF.
It is expected that combining the Funds will lower operating expenses to a
level cheaper than the operating expenses of either Fund prior to the
Reorganization. For more information, see estimated PRO FORMA expenses in the
table, "Annual Fund Operating Expenses."
An expense limitation arrangement is in place for Pilgrim GSIF, under which
Pilgrim Investments limits the ordinary operating expenses borne by the Fund.
The expense limitation arrangement is described below in the section "Expense
Limitation Arrangements" and under the table "Annual Fund Operating Expenses."
The current expense limitation agreement for Pilgrim GSIF will terminate only
with the termination or amendment of the advisory contract with Pilgrim
Investments.
The current expenses of each Fund and estimated PRO FORMA expenses giving
effect to the proposed Reorganization are shown in the table below. Expenses for
the Funds are based on the operating expenses incurred for the year ending June
30, 1999. PRO FORMA fees show estimated fees of Pilgrim GSIF after giving effect
to the proposed reorganization. PRO FORMA numbers are estimated in good faith
and are hypothetical.
14
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets,
shown as a ratio of expenses to average daily net assets)(1)
<TABLE>
<CAPTION>
DISTRIBUTION
AND
SHAREHOLDER TOTAL FUND FEE WAIVER
MANAGEMENT SERVICING OTHER OPERATING BY NET FUND
FEES (12b-1) FEES(2) EXPENSES EXPENSES ADVISER(3) EXPENSES(3)
---------- --------------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Pilgrim GSIF 0.50% 0.25% 0.65% 1.40% -- 1.40%
Government Securities Fund 0.65% 0.30% 0.40% 1.35% -- --
Pro Forma 0.50% 0.25% 0.32% 1.07% -- 1.07%
CLASS B
Pilgrim GSIF 0.50% 1.00% 0.65% 2.15% -- 2.15%
Government Securities Fund 0.65% 1.00% 0.41% 2.06% -- --
Pro Forma 0.50% 1.00% 0.32% 1.82% -- 1.82%
CLASS C
Pilgrim GSIF 0.50% 1.00% 0.65% 2.15% -- 2.15%
Government Securities Fund 0.65% 1.00% 0.47% 2.12% -- --
Pro Forma 0.50% 1.00% 0.32% 1.82% -- 1.82%
CLASS T
Pilgrim GSIF N/A N/A N/A N/A N/A N/A
Government Securities Fund 0.65% 0.65% 0.39% 1.69% -- --
Pro Forma 0.50% 0.65% 0.32% 1.47% -- 1.47%
</TABLE>
- ----------
(1) Pilgrim GSIF's fiscal year ends on June 30, while Government Securities
Fund's fiscal year ends on December 31. To compare the expenses of the two
Funds, expenses are shown for each Fund, and on a pro forma basis, based
upon expenses incurred by each Fund for the 12 months ended June 30, 1999.
(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. (NASD).
(3) Pursuant to the terms of the Investment Management Agreement, Pilgrim
Investments will 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 average daily net asset value on the first $40 million
in net assets and 1.00% of average daily net assets in excess of $40
million. This reimbursement policy cannot be changed unless the Investment
Management Agreement is amended, which would require shareholder approval.
Figures for the Government Securities Fund are before a voluntary
management fee waiver by Pilgrim Advisors of 0.15%. After that waiver, the
management fee was 0.50% and the net fund expenses were 1.20% for Class A,
1.91% for Class B, 1.97% for Class C and 1.54% for Class T.
EXAMPLE
This example is intended to help you compare the cost of investing in the
Funds and in the combined Funds on a PRO FORMA basis. The example assumes that
you invest $10,000 in each Fund and in the surviving fund after the
Reorganization for the time periods indicated. For Government Securities Fund,
expenses prior to a voluntary fee waiver by Pilgrim Advisors are presented. The
Example also assumes that your investment has a 5% return each year and that the
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 such period shown; your actual costs may be higher or lower.
15
<PAGE>
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES PRO FORMA
INCOME FUND GOVERNMENT SECURITIES 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 $611 $897 $1,204 $2,075 $606 $882 $1,179 $2,022 $579 $799 $1,037 $1,719
Class B 718 973 1,354 2,292 709 946 1,308 2,208* 685 873 1,185 1,940*
Class C 318 673 1,154 2,483 315 664 1,139 2,452 285 573 985 2,137
Class T N/A N/A N/A N/A 572 733 918 1,908* 550 665 803 1,649*
</TABLE>
- ----------
* The ten year calculations for Class B and Class T shares assume conversions
of the Class B and Class T shares to Class A shares at the end of the
eighth year following the date of purchase.
** Estimated.
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES PRO FORMA
INCOME FUND GOVERNMENT SECURITIES 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 $611 $897 $1,204 $2,075 $606 $882 $1,179 $2,022 $579 $799 $1,037 $1,719
Class B 218 673 1,154 2,292* 209 646 1,108 2,208* 185 573 985 1,940*
Class C 218 673 1,154 2,483 215 664 1,139 2,452 185 573 985 2,137
Class T N/A N/A N/A N/A 172 533 918 1,908* 150 465 803 1,649*
</TABLE>
- ----------
* The ten year calculations for Class B and Class T shares assume conversions
of the Class B and Class T shares to Class A shares at the end of the
eighth year following the date of purchase.
** Estimated.
EXPENSE LIMITATION ARRANGEMENTS
Pursuant to the terms of the Investment Management Agreement, Pilgrim
Investments is required to reimburse the 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 average daily net asset value on the first $40 million in net
assets and 1.00% of average daily net assets in excess of $40 million. This
reimbursement policy cannot be changed unless the Investment Management
Agreement is amended, which would require shareholder approval.
Pilgrim Advisors has waived a portion of its management fee for the
Government Securities Fund. After the waiver of 0.15%, the management fee would
be 0.50% and the total fund operating expenses would be 1.20% for Class A, 1.91%
for Class B, 1.97% for Class C and 1.54% for Class T. This fee waiver is
voluntary and is not a contractual commitment, and can be terminated by Pilgrim
Advisors at any time.
16
<PAGE>
GENERAL INFORMATION
Class A, Class B, Class C and Class T shares of Pilgrim GSIF 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 Government Securities Fund held by that shareholder immediately prior to the
Reorganization.
In addition, the period that the shareholder held shares of Government
Securities Fund will be included in the holding period of Pilgrim GSIF shares
for purposes of calculating any contingent deferred sales charge. Similarly,
Class B and Class T shares of Pilgrim GSIF issued to a shareholder in connection
with the Reorganization that were purchased prior to November 1, 1999, will
convert to Class A shares eight years after the date that the corresponding
Class B or Class T shares of Government Securities Fund were purchased by the
shareholder. Purchases of shares of Pilgrim GSIF after the Reorganization will
be subject to the sales load structure described in the table below for Pilgrim
GSIF. This is the same sales load structure that is currently in effect for
Government Securities Fund.
TRANSACTION FEES ON NEW INVESTMENTS
(fees paid directly from your investment)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS T
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price) 4.75(1) None 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) 4.00%
</TABLE>
Neither Pilgrim GSIF nor Government Securities Fund has any redemption fees,
exchange fees or sales charges on reinvested dividends.
- ----------
(1) Reduced for purchases of $50,000 and over. See "Class A Shares: Initial
Sales Charge Alternative" in Appendix B.
(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 B.
(3) The fee has scheduled reductions after the first year. See "Class B Shares:
Deferred Sales Charge Alternative" in Appendix B and "Deferred Sales
Charges" in the Pilgrim Prospectus.
(4) Imposed upon redemptions within 1 year from purchase.
SPECIAL RULES FOR SHARES OF THE GOVERNMENT SECURITIES FUND
PURCHASED PRIOR TO NOVEMBER 1, 1999
Prior November 1, 1999, the contingent deferred sales charge on
purchases of Class A shares of Government Securities Fund in excess of $1
million was different than the contingent deferred sales charge on similar
purchases of Pilgrim GSIF. Shareholders of Government Securities Fund that
17
<PAGE>
purchased Class A shares subject to a contingent deferred sales charge prior to
November 1, 1999 will continue to be subject to the contingent deferred sales
charge in place when those shares were purchased. The contingent deferred sales
charge on such purchases before and after November 1, 1999 were as follows:
TIME PERIOD DURING
CDSC WHICH CDSC APPLIES
------------------------ -----------------------
11/01/ 1999 Before 11/01/ 1999 Before
and after 11/01/ 1999 and after 11/01/1999
--------- ----------- --------- ----------
CDSC on Purchases of :
$1,000,000 to $2,499,999 1.00% 1.00% 24 Months 18 Months
$2,500,000 to $4,999,999 0.50% 0.50% 12 Months 18 Months
$5,000,000 and over 0.25% 0.25% 12 Months 18 Months
In addition, prior to November 1, 1999, the contingent deferred sales
charge on purchases of Class B shares of Government Securities Fund was
different than the contingent deferred sales charge on similar purchases of
Pilgrim GSIF. Shareholders of Government Securities Fund that purchased Class B
shares subject to a contingent deferred sales charge prior to November 1, 1999
will continue to be subject to the contingent deferred sales charge in place
when those shares were purchased. The contingent deferred sales charge on such
purchases before and after November 1, 1999 were as follows:
YEARS AFTER CDSC ON SHARES
PURCHASE BEING SOLD
-------------- --------------------------
11/01/ 1999 Before
and After 11/01/ 1999
--------- -----------
1st Year 5% 5%
2nd Year 4% 4%
3rd year 3% 3%
4th Year 3% 2%
5th Year 2% 2%
6th Year 1% --
After 6th Year -- --
ADDITIONAL INFORMATION
ABOUT PILGRIM GSIF AND GOVERNMENT SECURITIES FUND
INVESTMENT PERSONNEL
The following individuals share responsibility for the day-to-day
management of Pilgrim GSIF and Government Securities Fund:
* Robert K. Kinsey, Vice President of Pilgrim Investments, has served as
Senior Portfolio Manager of Pilgrim GSIF since May 24, 1999. Prior to
joining Pilgrim Investments, Mr. Kinsey was a Vice President and Fixed
Income Portfolio Manager for Federated Investors from January 1995 to March
1999. From July 1992 to January 1995, Mr. Kinsey was a Principal and
Portfolio Manager for Harris Investment Management.
* Charles G. Ullerich, Vice President of Pilgrim Investments, has served as a
Portfolio Manager of Pilgrim GSIF since September 1996 and served as
Assistant Portfolio Manager of that Fund from August 1995 to September
1996. Prior to joining Pilgrim Investments, Mr. Ullerich was Vice President
of Treasury Services for First Liberty Bank of Macon, GA since 1991, where
he was Portfolio Manager for a mortgage and treasury securities portfolio.
18
<PAGE>
PERFORMANCE OF THE FUNDS
The bar charts and tables shown below provide an indication of the risks of
investing in the Funds by showing (on a calendar year basis) changes in each
Fund's annual total return from year to year and by showing (on a calendar year
basis) how each Fund's average annual returns for one year, five years and ten
years (or, as applicable, since inception) compare to those of three broad-based
securities market indices the Lehman Brothers Government/Mortgage Index, the
Lehman Brothers Intermediate Treasury Index and the Lehman Brothers Intermediate
U.S. Government Index. The Funds' past performance is not necessarily an
indication of how the Fund will perform in the future.
The information in the bar chart below for Pilgrim GSIF is based on the
performance of the Class A shares of Pilgrim GSIF, although the bar chart does
not reflect the deduction of the sales load on Class A shares. If Pilgrim GSIF's
bar chart included the sales load, returns of that Fund would be less than those
shown.
PILGRIM GSIF
CALENDAR YEAR-BY-YEAR RETURNS*
1989 12.92%
1990 8.03%
1991 11.90%
1992 7.46%
1993 4.71%
1994 -3.61%
1995 14.51%
1996 2.56%
1997 7.85%
1998 5.61%
- ----------
* During the period shown in the chart, Pilgrim GSIF's best quarterly
performance was 7.76%% for the quarter ended June 30, 1989, and the Pilgrim
GSIF's worst quarterly performance was -2.66% for the quarter ended March
31, 1994. For the period January 1, 1999 through September 30, 1999, the
total return of the Pilgrim GSIF's was -0.88%.
The information in the bar chart below for Government Securities Fund is
based on the performance of the Class T shares of that Fund.
19
<PAGE>
GOVERNMENT SECURITIES FUND
CALENDAR YEAR-BY-YEAR RETURNS*
1989 11.73%
1990 8.57%
1991 14.73%
1992 9.77%
1993 18.48%
1994 (9.82)%
1995 22.90%
1996 0.57%
1997 7.46%
1998 5.27%
- ----------
* Performance for the periods 1989 through 1995 are based upon the
performance of the Class T Shares of the Fund. Performance for the periods
1996 through 1998 are based upon the performance of the Class A shares of
the Fund, which commenced operations on June 5, 1995. During the period
shown in the chart, the Government Securities Fund's best quarterly
performance was ____% for the quarter ended ___________, 199_, and the
Government Securities Fund's worst quarterly performance was _____% for the
quarter ended ________, 199_. For the period January 1, 1999 through
September 30, 1999, the total return of the Government Securities Fund was[
]%.
The tables below shows the average annual total returns of the Funds if you
average out actual performance over various lengths of time, compared to three
unmanaged indices. The indices have an inherent performance advantage 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.
The performance reflected in the table below for Pilgrim GSIF assumes the
deduction of the maximum sales charge in all cases.
20
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
OF PILGRIM GSIF
for the periods ended December 31, 1998(1)
- --------------------------------------------------------------------------------
SINCE INCEPTION OF
CLASS B
1 YEAR 5 YEARS 10 YEARS(6) (7/17/95)
------ ------- -------- ---------
Class A(2) 0.63% 4.20% 6.56% --
Class B(3) -0.15% -- -- 4.42%
Lehman Government/
Mortgage Index(4) 8.62% 6.45% 8.34% 7.20%
Lehman Intermediate
Treasury Index(5) 6.98% 5.98% 7.38% 7.24%
- ----------
(1) Class C Shares of the Pilgrim GSIF were not offered during the period ended
December 31, 1998.
(2) Reflects deduction of sales charge of 4.75%.
(3) Reflects deduction of deferred sales charge of 5% and 3% for the 1 year and
since inception returns, respectively.
(4) The Lehman Government/Mortgage Index is comprised of debt securities issued
by the U.S. Government, its agencies and instrumentalities, as well as
mortgage pass-through instruments issued by FNMA, FHLMC and GNMA.
(5) The Lehman Intermediate Treasury Index is comprised solely of U.S.
Treasuries with maturities of under ten years. Information on the Lehman
Intermediate Treasury Index is presented because effective May 24, 1999,
the Pilgrim GSIF seeks an average portfolio duration within +/- 20% of the
duration of that index. Previously, the Pilgrim GSIF's average portfolio
maturity was generally longer.
(6) The Pilgrim GSIF 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 Pilgrim GSIF's
performance was higher than it would have been had it adhered to its
borrowing restriction.
The performance reflected in the table below for Government Securities Fund
assumes the deduction of the maximum sales charge in all cases.
AVERAGE ANNUAL TOTAL RETURNS
OF GOVERNMENT SECURITIES FUND
for the periods ended December 31, 1998
- --------------------------------------------------------------------------------
SINCE INCEPTION OF
CLASS A, B, AND C
1 YEAR 5 YEARS 10 YEARS (6/5/95)
------ ------- -------- --------
Class A(1) 0.22% -- -- 5.11%
Class B(2) -0.44% -- -- 5.36%
Class C(3) 3.37% -- -- 5.78%
Class T 0.90% 4.59% 8.52% --
Lehman Intermediate U.S.
Government Index(4) 8.49% 6.45% 8.34% [ ]
- ----------
(1) Reflects deduction of sales charge of 4.75%.
(2) Reflects deduction of deferred sales charge of 5% and 3% for the 1 year and
since inception returns, respectively.
(3) Reflects deduction of deferred sales charge of 1% for the 1 year return.
(4) The Lehman Intermediate U.S. Government Index measures the performance of
U.S. Treasury bonds and U.S. Government agency bonds.
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The table below shows the performance of Pilgrim GSIF if sales charges are
not reflected.
PILGRIM GSIF
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998(1)
- --------------------------------------------------------------------------------
SINCE INCEPTION OF
CLASS B
1 YEAR 5 YEARS 10 YEARS (7/17/95)
------ ------- -------- ---------
Class A 5.61% 5.22% 7.07% --
Class B 4.82% -- -- 5.19%
- ----------
(1) Class C Shares of the Fund were not offered during the period ended
December 31, 1998.
The table below shows the performance of Government Securities Fund if
sales charges are not reflected.
GOVERNMENT SECURITIES FUND
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
- --------------------------------------------------------------------------------
SINCE INCEPTION OF
CLASS A, B, AND C
1 YEAR 5 YEARS 10 YEARS (6/5/95)
------ ------- -------- --------
Class A -- --
Class B -- --
Class C -- --
Class T
Additional information about Pilgrim GSIF is included in Appendix B to this
Proxy/Prospectus. Additional information about Government Securities Fund is
included in Pilgrim Prospectus dated January 4, 2000.
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INFORMATION ABOUT THE REORGANIZATION
THE REORGANIZATION AGREEMENT
The Reorganization Agreement provides for the transfer of all of the assets
and liabilities of Government Securities Fund to Pilgrim GSIF in exchange for
Class A, Class B, Class C and Class T shares in Pilgrim GSIF. Government
Securities Fund will distribute the shares of Pilgrim GSIF received in the
exchange to the shareholders of Government Securities Fund and then Government
Securities Fund will be liquidated.
After the Reorganization, each shareholder of Government Securities Fund
will own shares in Pilgrim GSIF having an aggregate value equal to the aggregate
value of each respective class of shares of Pilgrim GSIF held by that
shareholder as of the close of business on the business day preceding the
Closing. Shareholders of Class A, B, C or T shares of Government Securities Fund
will receive shares of the corresponding Class of Pilgrim GSIF. In the interest
of economy and convenience, shares of Pilgrim GSIF generally will not be
represented by physical certificates.
Until the Closing, shareholders of Government Securities Fund will continue
to be able to redeem their shares. Redemption requests received after the
Closing will be treated as requests received by the Pilgrim GSIF 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 each of the
Funds. The Reorganization Agreement also requires that 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 Reorganization Agreement. The Reorganization Agreement may be
terminated by mutual agreement of the parties or on certain other grounds. For a
complete description of the terms and conditions of the Reorganization, see the
Reorganization Agreement at Appendix A.
REASONS FOR THE REORGANIZATION
On October 29, 1999, the parent corporation of Pilgrim Advisors, formerly
Northstar Investment Management Corporation, acquired Pilgrim Capital
Corporation. Pilgrim Capital Corporation was the parent to Pilgrim Investments
investment manager to a group of funds that are called the Pilgrim Funds. As a
result of that transaction, Pilgrim Investments and Pilgrim Advisors are now
affiliated subsidiaries of the same holding company. Additionally, each
Northstar Fund changed its name so that it is now called "Pilgrim." Many of the
mutual funds advised by Pilgrim Advisors and Pilgrim Investments share similar
investment objectives, strategies and risks. Because Pilgrim GSIF may invest in
substantially the same types of securities as Government Securities Fund, the
two Funds would be duplicative in the same group of funds. Therefore, it was
determined that the Funds should be reorganized to realize economic efficiencies
that would benefit the shareholders of both funds by spreading costs across a
larger, combined asset base.
The proposed Reorganization was presented to the Board of Trustees of
Government Securities Fund for consideration and approval at a meeting on
November 16, 1999, and to the Board of Directors of Pilgrim GSIF for
consideration and approval at a meeting on November 16, 1999. For the reasons
discussed below, the Trustees, including all of the Trustees who are not
"interested persons" (as defined in the Investment Company Act of 1940) of
Government Securities Fund, determined that the interests of the shareholders of
Government Securities Fund will not be diluted as a result of the proposed
23
<PAGE>
Reorganization, and that the proposed Reorganization is in the best interests of
Government Securities Fund and its shareholders. Similarly, the Directors,
including all of the Directors who are not "interested persons" (as defined in
the Investment Company Act of 1940) 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 Government Securities Fund'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 Class A, Class B, Class C and Class T
shareholders of Pilgrim GSIF, these shareholders will continue to be able to
exchange into other mutual funds in the larger Pilgrim group of funds that offer
the same class of shares in which such shareholder is currently invested. A list
of the current Pilgrim group of funds, and their available classes, is attached
as Appendix C.
BOARD CONSIDERATION
The Board of Trustees of Government Securities Fund and the Board of
Directors of Pilgrim GSIF, in recommending the proposed transaction, considered
a number of factors, including the following:
(1) expense ratios and information regarding fees and expenses of
Government Securities Fund and Pilgrim GSIF, including the expense
limitation arrangements offered by Pilgrim Investments;
(2) estimates that show that combining the Funds would result in lower
expense ratios because of the economies of scale;
(3) elimination of duplication of costs, market confusion and
inefficiencies of having two similar funds;
(4) shareholders who purchased shares of Government Securities Fund prior
to November 1, 1999 would retain the sales charge structure in place
prior to that date;
(5) the Reorganization would not dilute the interests of Government
Securities Fund's or Pilgrim GSIF's current shareholders;
(6) the relative investment performance and risks of Pilgrim GSIF as
compared to Government Securities Fund;
(7) the similarity of Pilgrim GSIF's investment objectives, policies and
restrictions with those of Government Securities Fund and the fact
that the Funds are duplicative within the overall group of funds;
(8) the tax-free nature of the Reorganization to Government Securities
Fund and their shareholders.
THE TRUSTEES OF GOVERNMENT SECURITIES FUND AND THE BOARD OF DIRECTORS OF
PILGRIM GSIF RECOMMEND THAT SHAREHOLDERS OF THE GOVERNMENT SECURITIES FUND AND
PILGRIM GSIF, RESPECTIVELY, APPROVE THE REORGANIZATION.
24
<PAGE>
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 (the "Code"). Accordingly, pursuant to this treatment, neither
the Government Securities Fund nor its shareholders nor the Pilgrim GSIF 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 Price & Rhoads 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, the Government Securities Fund
will pay a dividend or dividends which, together with all previous dividends,
will have the effect of distributing to its shareholders all of the Government
Securities Fund'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 the Government Securities Fund's shareholders.
As of ________ ___, 1999, Government Securities Fund had accumulated
capital loss carryforwards in the amount of approximately $________. After the
Reorganization, these losses will be available to Pilgrim GSIF to offset its
capital gains, although the amount of these losses which may offset Pilgrim
GSIF's capital gains in any given year may be limited. As a result of this
limitation, it is possible that Pilgrim GSIF may not be able to use these losses
as rapidly as Government Securities Fund might have, and part of these losses
may not be useable at all. The ability of Pilgrim GSIF 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 capital loss carryforwards currently
are available only to shareholders of Government Securities Fund. After the
Reorganization, however, these benefits will inure to the benefit of all
shareholders of Pilgrim GSIF.
EXPENSES OF THE REORGANIZATION
The Funds will bear the expenses relating to the proposed Reorganization,
including but not limited to the costs of the proxy solicitation, which will be
allocated ratably on the basis of their relative net asset values immediately
before Closing.
25
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ADDITIONAL INFORMATION ABOUT THE FUNDS
FORM OF ORGANIZATION
Pilgrim GSIF is the only series of Pilgrim Government Securities Income
Fund, Inc., a California corporation. Government Securities Fund is the only
series of Pilgrim Government Securities Fund, which is a Massachusetts business
trust. Pilgrim Government Securities Income Fund, Inc. and Pilgrim Government
Securities Fund are each governed by a Board of Directors or Trustees, as
applicable. Government Securities Fund has twelve Trustees and Pilgrim GSIF has
thirteen Directors, which include the twelve members of the Board of Government
Securities Fund.
DISTRIBUTOR
Pilgrim Securities, Inc. (the "Distributor"), whose address is 40 North
Central Avenue, Suite 1200, Phoenix, Arizona 85004, is the principal distributor
for Pilgrim GSIF and Government Securities Fund. Formerly, Northstar
Distributors, Inc. served as distributor for Government Securities Fund.
However, on November 16, 1999, Northstar Distributors, Inc. merged with the
Distributor.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund pays dividends from net investment income and net capital gains,
if any, on a monthly basis. For each Fund, dividends and distributions are
determined on a class basis. Dividends and distributions of Pilgrim GSIF are
automatically reinvested in additional shares of the respective class of that
Fund, unless the shareholder elects to receive distributions in cash.
If the Reorganization Agreement is approved by Government Securities Fund's
shareholders, then as soon as practicable before the Closing, Government
Securities Fund will pay its shareholders a cash distribution of all
undistributed 1999 net investment income and undistributed realized net capital
gains.
26
<PAGE>
CAPITALIZATION
The following table shows on an unaudited basis the capitalization of
Government Securities Fund and Pilgrim GSIF as of June 30, 1999 and on a PRO
FORMA basis as of June 30, 1999 giving effect to the Reorganization:
NET ASSET VALUE SHARES
NET ASSETS PER SHARE OUTSTANDING
---------- --------- -----------
PILGRIM GSIF
Class A $21,059,544 $12.35 1,705,530
Class B $12,425,538 $12.30 1,009,878
Class C $ 6,943 $12.43 558
Class T N/A N/A N/A
GOVERNMENT SECURITIES FUND
Class A $28,130,539 $ 8.83 3,184,230
Class B $27,274,295 $ 8.86 3,079,559
Class C $ 2,465,476 $ 8.84 278,980
Class T $41,018,370 $ 8.85 4,634,517
PRO FORMA - PILGRIM GSIF INCLUDING GOVERNMENT SECURITIES FUND
Class A $49,190,083 $12.35 3,983,003
Class B $39,699,833 $12.30 3,227,629
Class C $ 2,472,419 $12.43 198,907
Class T $41,018,370 $12.35 3,321,326
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 February 8, 2000.
Shareholders of Government Securities Fund and 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 Pilgrim Advisors, Pilgrim Investments and its affiliates, without
additional compensation, may solicit proxies in person or by telephone,
telegraph, facsimile, or oral communication. The Funds have retained Shareholder
Communications Corporation, a professional proxy solicitation firm, to assist
with any necessary solicitation of proxies. Shareholders of Government
Securities Fund and 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 Government Securities Fund or Pilgrim GSIF, as applicable, a
written revocation or duly executed proxy bearing a later date. In addition, any
shareholder who attends the Meeting of Government Securities Fund or Pilgrim
GSIF, as applicable, 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 Government Securities Fund or the
Board of Pilgrim GSIF that may be presented at their respective Meeting.
27
<PAGE>
VOTING RIGHTS
Shares of Pilgrim GSIF entitle their holders to one vote per share as to
any matter on which the holder is entitled to vote. Shares of the Government
Securities Fund entitle their holders to one vote per share as to any matter on
which the holder is entitled to vote and each fractional share shall be entitled
to a proportionate fractional vote. Shares have noncumulative voting rights and
no preemptive or subscription rights.
Shareholders of each of the Funds at the close of business on January 24,
2000 (the "Record Date") will be entitled to be present and give voting
instructions for the Funds at their respective Meetings with respect to their
shares owned as of that Record Date. As of the Record Date, _________ shares of
the Government Securities Fund were outstanding and entitled to vote and
_________ shares of the Pilgrim GSIF were outstanding and entitled to vote.
Approval of the Reorganization requires the affirmative vote of a majority
of the outstanding shares of each of the Funds.
Each Fund must have a quorum to conduct its business at the Special
Meeting. The holders of a MAJORITY of outstanding shares present in person or by
proxy shall constitute a quorum. In the absence of a quorum, a majority of
outstanding shares of either Fund entitled to vote, in person or by proxy, may
adjourn the meeting from time to time until a quorum shall be present. An
adjournment of the Special Meeting for one of the Funds shall not prevent the
other Fund from holding its Special Meeting.
Shareholders of Pilgrim GSIF may vote part of the shares in favor of the
proposal and refrain from voting the remaining shares or vote them against the
proposal, but if the shareholder fails to specify the number of shares which the
shareholder is voting affirmatively it will be conclusively presumed that the
shareholder's approving vote is with respect to total shares that the
shareholder is entitled to vote.
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. Prior
to the Meeting, the Funds expect that broker-dealer firms holding their shares
of the Funds in "street name" for their customers will request voting
instructions from their customers and beneficial owners.
To the knowledge of Government Securities Fund, as of December 1, 1999, no
current Trustee of Government Securities Fund owns 1% or more of the outstanding
shares of the Fund and the officers and Trustees of Government Securities Fund
own, as a group, less than 1% of the shares of the Fund.
28
<PAGE>
To the knowledge of Pilgrim GSIF, as of December 1, 1999, no current
Director of Pilgrim GSIF owns 1% or more of the outstanding shares of the Fund
and the officers and Directors of Pilgrim GSIF own, as a group, less than 1% of
the shares of the Fund.
Appendix D hereto lists the persons that, as of November 22, 1999, owned
beneficially, or of record 5% or more of the outstanding shares of any Class of
Government Securities Fund or Pilgrim GSIF.
OTHER MATTERS TO COME BEFORE THE SPECIAL MEETING.
The Funds do not know of any matters to be presented at the Meetings other
than those described in this Proxy Statement/Prospectus. If other business
should properly come before the Meetings, the proxy holders will vote thereon in
accordance with their best judgment.
SHAREHOLDER PROPOSALS
The Funds are not required to hold regular annual meetings and, in order to
minimize their costs, do not intend to hold meetings of shareholders unless so
required by applicable law, regulation, regulatory policy or if otherwise deemed
advisable by the Funds' 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
Pilgrim Advisors will furnish, without charge, a copy of the most recent
Annual Report regarding Government Securities 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 40 North Central Avenue, Suite
1200, Phoenix, Arizona 85004 or at (800) 992-0180.
Pilgrim Investments will furnish, without charge, a copy of the most recent
Annual Report regarding Pilgrim GSIF 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 40 North Central Avenue, Suite 1200, Phoenix,
Arizona 85004 or at (800) 992-0180.
IN ORDER THAT THE PRESENCE OF A QUORUM AT THE MEETINGS MAY BE ASSURED,
PROMPT EXECUTION AND RETURN OF THE ENCLOSED PROXY IS REQUESTED. A
SELF-ADDRESSED, POSTAGE-PAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
James M. Hennessy, Secretary
February 8, 2000
40 North Central Avenue
Phoenix, AZ 85004
29
<PAGE>
APPENDIX A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this _____ day of _____________, 1999, by and between Pilgrim Government
Securities Income Fund, Inc. (the "Acquiring Fund"), a California corporation
with its principal place of business at 40 North Central Avenue, Suite 1200,
Phoenix, Arizona 85004 and Pilgrim Government Securities Fund (the "Acquired
Fund"), a Massachusetts business trust with its principal place of business at
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004.
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 and Class T voting shares of common stock (no par value per share) 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 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 Fund 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 Trustees of the Acquired Fund, 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 and the
Acquiring 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 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
A-1
<PAGE>
paragraph 2.1, by the net asset value of one Acquiring Fund Share of the same
class, computed 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. 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").
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. 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 and Class T Acquiring Fund Shares to be so credited to
Class A, Class B, Class C 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 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 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. Shares of the Acquiring Fund will be issued in
the manner described in the Acquiring Fund's then-current prospectus and
statement of additional information.
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 Acquired Fund's assets to be acquired by the Acquiring
Fund hereunder shall be the value of such assets 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
A-2
<PAGE>
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Acquiring Fund's Articles of Incorporation and then-current
prospectus or statement of additional information, 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 and Class T
Acquiring Fund Share shall be the net asset value per share computed with
respect to that class as of immediately after the close of business of the New
York Stock Exchange and after the declaration of any dividends on the Valuation
Date, using the valuation procedures set forth in the Acquiring Fund's Articles
of Incorporation and then-current prospectus or statement of additional
information and valuation procedures established by the Acquiring Fund's Board
of Directors.
2.3 The number of the Class A, Class B, Class C 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 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 Acquiring Fund's
designated record keeping agent.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be March ___, 2000, 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 Acquiring Company shall direct State Street Bank and Trust Company,
as custodian for the Acquired Fund (the "Custodian"), to deliver, at the
Closing, a certificate of an authorized officer stating that (i) the Acquired
Fund's portfolio securities, cash, and any other assets ("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 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"), shall direct the
Custodian to deliver as of the Closing Date by book entry in accordance with the
customary practices of such depositories and the custodian for Acquiring Fund.
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
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ownership of outstanding Class A, Class B, Class C 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 Acquired 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 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 Acquiring Fund and Board of Trustees of the Acquired Fund, 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 The Acquired Fund represents and warrants to the Acquiring Fund as
follows:
(a) The Acquired Fund is a business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts with power under
the Acquired Fund's Declaration of Trust to own all of its properties and assets
and to carry on its business as it is now being conducted;
(b) The Acquired Fund 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
its shares under the Securities Act of 1933, as amended ("1933 Act"), are 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 Acquired Fund's assets to be transferred to the Acquiring Fund
pursuant to paragraph 1.2 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;
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(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 its Declaration of Trust or By-Laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which 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 or decree to which the Acquired Fund is a party or by
which it is bound;
(g) The Acquired Fund has no material contracts or other commitments (other
than this Agreement) that will be terminated with liability to it prior to the
Closing Date;
(h) Except as otherwise disclosed in writing to and accepted by 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 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 Schedule of Investments of the Acquired Fund at
December 31, 1998 have been audited by PricewaterhouseCoopers LLP, independent
accountants, 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 December 31, 1998, 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 and 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 the requirements of
Subchapter M of the Code for qualification as a regulated investment company and
has elected to be treated as such, has been eligible to and has computed 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
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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;
(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 Fund (recognizing that, under Massachusetts law,
it is theoretically possible that shareholders of the Acquired Fund could, under
certain circumstances, be held personally liable for obligations of the Acquired
Fund) 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 Trustees 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 "Acquired Fund 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 Acquired
Fund 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 The Acquiring Fund represents and warrants to the Acquired Fund as
follows:
(a) The Acquiring Fund is a corporation duly organized and validly existing
under the laws of the State of California with power under the Acquiring Fund'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 Fund 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
its shares under the 1933 Act are in full force and effect;
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(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
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 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 Fund is a party or by which it is bound;
(g) Except as otherwise disclosed in writing to and accepted by 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 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 Schedule of Investments of the Acquiring Fund at June
30, 1999 have been audited by KPMG LLP, independent accountants, and is 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 June 30, 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
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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 and reports of
the Acquiring 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 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, the Acquiring Fund has met the
requirements of Subchapter M of the Code for qualification as a regulated
investment company and has elected to be treated as such, has been eligible to
and has computed 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, and will
do so for the taxable year including 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 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 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 Fund 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, the Acquired
Fund Proxy Statement and the proxy statement of the Acquiring Fund (the latter
referred to herein as the "Acquiring Fund Proxy Statement") 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
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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 materially
misleading provided, however, that the representations and warranties in this
subparagraph (p) shall not apply to statements in or omissions from the
Registration Statement and the Acquiring Fund Proxy 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.
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 Each of the Acquired Fund and the Acquiring Fund will call a meeting of
its shareholders 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 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 Acquired Fund Proxy Statement referred to in paragraph
4.1(p) and the Acquiring Fund Proxy Statement referred to in paragraph 4.2(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 and the Acquiring 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 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.
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5.9 The Acquired Fund covenants that it 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 Fund may
reasonably deem necessary or desirable in order to vest in and confirm the
Acquiring Fund's title to and possession of all the assets and otherwise 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.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of the Acquired Fund to consummate the transactions
provided for herein shall be subject, at the Acquired Fund's election, to the
performance by 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 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 Fund shall have delivered to the Acquired Fund 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 Fund and dated as of the Closing Date, to the effect that the
representations and warranties 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 Fund shall reasonably request;
6.3 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 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 Fund to complete the transactions provided
for herein shall be subject, at the Acquiring Fund's election to the performance
by 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 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;
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7.2 The Acquired Fund 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 Fund;
7.3 The Acquired Fund 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 Fund and dated as of the Closing Date, to the
effect that the representations and warranties 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 Fund shall reasonably request;
7.4 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 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;
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 do not exist 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 (i) the requisite vote of the holders of the outstanding shares of
the Acquired Fund in accordance with the provisions of the Acquired Fund's
Declaration of Trust, By-Laws, applicable Massachusetts law and the 1940 Act,
and certified copies of the resolutions evidencing such approval shall have been
delivered to the Acquiring Fund, and (ii) the requisite vote of the holders of
the outstanding shares of the Acquiring Fund in accordance with the provisions
of the Acquiring 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 Acquired Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor
the Acquired Fund 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;
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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 Fund or the Acquired Fund 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 Price & Rhoads
addressed to the Acquiring Fund and Acquired Fund 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, unless, based on the
circumstances existing at the time of the Closing, Dechert Price & Rhoads
determines that the transaction contemplated by this Agreement does not qualify
as such. The delivery of such opinion is conditioned upon receipt by Dechert
Price & Rhoads of representations it shall request of the Acquiring Fund and the
Acquired Fund. Notwithstanding anything herein to the contrary, neither the
Acquiring Fund nor the Acquired Fund may waive the condition set forth in this
paragraph 8.5.
9. BROKERAGE FEES AND EXPENSES
9.1 The Acquiring Fund represents and warrants to the 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 paid by
the Acquired Fund and the Acquiring Fund pro rata based upon the relative net
assets of the Funds as of the close of business on the record date for
determining the shareholders of the Acquired Fund and the Acquiring 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 and Acquiring 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
the other party 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 Fund and the Acquired Fund 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.
A-12
<PAGE>
11. TERMINATION
This Agreement and the transactions contemplated hereby may be terminated
and abandoned by mutual agreement of the parties hereto or by either party by
resolution of the party's Board of Trustees or Directors, at any time prior to
the Closing Date, if circumstances should develop that, in the opinion of such
Board, make proceeding with the Agreement inadvisable.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of the
Acquired Fund and the Acquiring Fund; provided, however, that following the
meeting of the shareholders of the Acquiring Fund and the Acquired Fund called
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 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.
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 prepaid
telegraph, telecopy or certified mail addressed to the Acquiring Fund or to the
Acquired Fund, 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004,
attn: James M. Hennessy, in each case with a copy to Dechert Price & Rhoads,
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 Delaware 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.
14.5 It is expressly agreed that the obligations of the parties hereunder
shall not be binding upon any of the Trustees, shareholders, nominees, officers,
agents, or employees of the Acquired Fund personally, but shall bind only the
trust property of the Acquired Fund, as provided in the Declaration of Trust of
the Acquired Fund. The execution and delivery by such officers shall not be
deemed to have been made by any of them individually or to impose any liability
on any of them personally, but shall bind only the trust property of the
Acquired Fund as provided in its Declaration of Trust.
A-13
<PAGE>
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 GOVERNMENT SECURITIES
INCOME FUND, INC.
By:
-------------------------------- -------------------------------
SECRETARY
Its:
-------------------------------- -------------------------------
Attest: PILGRIM GOVERNMENT SECURITIES
INCOME FUND, INC.
By:
-------------------------------- -------------------------------
SECRETARY
Its:
-------------------------------- -------------------------------
A-14
<PAGE>
APPENDIX B
ADDITIONAL INFORMATION REGARDING
PILGRIM GOVERNMENT SECURITIES INCOME FUND
(THE "FUND")
SHAREHOLDER GUIDE
PILGRIM PURCHASE OPTIONS(TM)
This Proxy Statement/Prospectus relates to four separate classes of the
Fund: Class A, Class B, Class C 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
issued to you in the Reorganization will be the same as those that applied to
the Government Securities Fund shares held by you immediately prior to the
Reorganization, and the period that you held the Government Securities Fund
shares will be included in the holding period of the Fund shares 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 Fund also offers Class M and Q shares, which have different sales
charge and distribution fee arrangements than the Classes discussed in this
Proxy Statement/Prospectus. The sales charges and fees for Class A, Class B,
Class C and Class T shares are shown and contrasted in the chart below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS T
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Initial Sales Charge on Purchases 4.75% (1) None None N/A
CDSC None(2) 5.00%(3) 1.00%(4) N/A
Annual Distribution (12b-1) Fee and Service(5) 0.25% 1.00% 1.00% 0.65%
Maximum Purchase Unlimited $250,000 Unlimited Unlimited
Automatic Conversion to Class A N/A 8 Years(6) N/A 8 Years(6)
</TABLE>
- ----------
(1) Imposed upon purchase. 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 that were purchased without an initial
sales charge. See "Class A shares: Initial Sales Charge Alternative."
(3) Imposed upon redemption within 6 years from purchase. Shares exchanged from
the Government Securities Fund are subject to CDSC until after the fifth
year from purchase. Fee has scheduled reductions after the first year. See
"Class B shares: Deferred Sales Charge Alternative."
(4) Imposed upon redemption within 1 year from purchase.
(5) Annual asset-based distribution charge.
(6) Class B and Class T shares of the Pilgrim GSIF issued to shareholders of
the Government Securities Fund 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 the Government Securities Fund, as applicable.
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 in excess of $250,000 will be accepted as orders for Class A shares or
declined.
B-1
<PAGE>
CLASS A SHARES
INITIAL SALES CHARGE ALTERNATIVE
Class A 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 A shares sales charges, see "Special Purchases without a Sales Charge"
and "Reduced Sales Charges."
AS A % OF DEALERS' REALLOWANCE
OFFERING AS A % AS A % OF
YOUR INVESTMENT PRICE OF NAV OFFERING PRICE
--------------- ----- ------ --------------
Less than $50,000 4.75% 4.99% 4.25%
$50,000 - $99,999 4.50% 4.71% 4.00%
$100,000 - $249,999 3.50% 3.63% 3.00%
$250,000 - $499,999 2.50% 2.56% 2.25%
$500,000 - $1,000,000 2.00% 2.04% 1.75%
There is no initial sales charge on purchases of $1,000,000 or more.
However, the Distributor will pay Authorized Dealers of record commissions at
the rates shown in the table below for investments subject to a CDSC. If shares
are redeemed within one or two years of purchase, depending on the amount of the
purchase, a CDSC will be imposed on certain redemptions as follows:
PERIOD DURING
YOUR INVESTMENT CDSC WHICH CDSC APPLIES
--------------- ---- ------------------
$1,000,000 but less than $2,499,999 1.00% 2 years
$2,500,000 but less than $4,999,999 0.50% 1 year
$5,000,000 and over 0.25% 1 year
However, Class A shares of the Fund issued in connection with the
Reorganization with respect to Class A shares of the Government Securities Fund
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 the
Government Securities Fund.
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
group of 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 amount multiplied by the maximum sales charge imposed on purchases of the
applicable 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.
B-2
<PAGE>
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
group of 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 Pilgrim Funds which impose a CDSC may be
combined with Class A or Class M shares for a reduced sales charge but will not
affect any CDSC which may be imposed upon the redemption of shares of the Fund
which imposes a CDSC.
SPECIAL PURCHASE WITHOUT A SALES CHARGE
Class A shares may be purchased at NAV without a sales charge by certain
individuals and institutions. For additional information, contact the
Shareholder Servicing Agent at (800) 992-0180, or see the Fund's Statement of
Additional Information.
CLASS B SHARES
DEFERRED SALES CHARGE ALTERNATIVE
Class B shares may be purchased at their NAV per share without a sales
charge at the time of purchase. 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 a distribution fee at an
annual rate of 1.00% of the average daily net assets of the Class, which is
higher than the distribution fees of Class A shares. The higher distribution
fees mean a higher expense ratio, so Class B shares pay correspondingly lower
dividends and may have a lower NAV than Class A shares. In connection with sales
of Class B shares, the Distributor compensates Authorized Dealers at a rate of
4% of purchase payments subject to a CDSC. 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 determined as a percentage of the lesser of the NAV of the
Class B shares at the time of purchase or redemption. No charge will be imposed
for any net increase in the value of shares purchased during the preceding six
years in excess of the purchase price of such shares or for shares acquired
either by reinvestment of net investment income dividends or capital gain
distributions. The percentage used to calculate the CDSC will depend on the
number of years since you invested the dollar amount being redeemed according to
the following table:
B-3
<PAGE>
YEAR OF REDEMPTION AFTER PURCHASE CDSC
--------------------------------- ----
First .................................... 5%
Second.................................... 4%
Third..................................... 3%
Fourth.................................... 3%
Fifth..................................... 2%
Sixth..................................... 1%
Seventh and following..................... 0%
However, Class B shares of the Fund issued in connection with the
Reorganization with respect to Class B shares of the Government Securities Fund
that were purchased prior to November 1, 1999 and were subject to a CDSC at the
time of the Reorganization will be subject to the CDSC in place when those
shares were purchased.
Class B shares will automatically convert into Class A shares eight years
after purchase, except that Class B shares of the Fund issued in connection with
the Reorganization with respect to Class B shares of the Government Securities
Fund will convert to Class A shares eight years after the purchase of the
original shares of the Government Securities Fund. 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 redeemed within one year are assessed a CDSC of 1%. Class C
shares are offered at their net asset value per share without an initial sales
charge. The Distributor pays a commission of 1% to financial institutions that
initiate purchases of Class C shares.
CLASS T SHARES
Class T shares are only available to shareholders that previously held
shares of Class T of the Government Securities Fund, 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 group of 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 Government
Securities Income Fund issued in connection with the Reorganization will convert
to Class A shares eight years after the purchase of the original shares of the
Target Funds. For additional information about Class T shares, see the Pilgrim
Prospectus and the Statement of Additional Information for the Pilgrim group of
funds.
B-4
<PAGE>
WAIVERS OF CDSC
The CDSC on Class A, Class B or Class C shares 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 on Class A, Class B or Class C shares 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.
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 and Class C shareholders who have redeemed their shares in any
open-end Pilgrim Fund may reinvest some or all of the proceeds in the same share
class within 90 days without a sales charge. Reinstated Class B and Class C
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.
RULE 12b-1 PLAN
The Fund has a distribution plan pursuant to Rule 12b-1 under the 1940 Act
applicable to each class of shares of the Fund ("Rule 12b-1 Plan"). Under the
Rule 12b-1 Plan, 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 and Class T shares.
B-5
<PAGE>
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 services rendered
to shareholders, 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 T 0.25% 0.50%
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 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.
Under the Rule 12b-1 Plan, ongoing payments will be made on a quarterly
basis to Authorized Dealers for distribution and shareholder servicing as set
forth below.
SERVICING FEE DISTRIBUTION FEE
------------- ----------------
Class A 0.25% 0.00%
Class B 0.25% 0.00%
Class C 0.25% 0.75%
Class T 0.25% 0.15%
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 Directors who are not
affiliated with Pilgrim Investments. Most of Fund expenses are allocated
proportionately among all of the outstanding shares of the Fund. However, the
Rule 12b-1 Plan fees for each class of shares are charged proportionately only
to the outstanding shares of that class.
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 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-US banks (even if payment may be effected through a US bank)
will not be accepted. Pilgrim Investments reserves the right to waive minimum
investment amounts.
B-6
<PAGE>
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.
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. Investors Fiduciary Trust Company
("IFTC") acts as the custodian under these plans. For further information,
contact the Shareholder Servicing Agent at (800) 992-0180. IFTC currently
receives a $12 custodian fee annually for the maintenance of such accounts.
DETERMINATION OF NET ASSET VALUE
The net asset value (NAV) per share of each class of the Fund's shares is
determined each business day 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 it is open
for business. The NAV per share of each Class of the Fund is calculated by
taking the value of the Fund's assets attributable to that Class, subtracting
the Fund's liabilities attributable to that Class, and dividing by the number of
shares of that Class that are outstanding.
In general, assets are valued based on actual or estimated market value,
with special provisions for assets not having readily available market
quotations, and short-term debt securities, and for situations where market
quotations are deemed unreliable. The NAV per share of each class of the Fund
will fluctuate in response to the 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. In other cases, securities are valued at their fair value as
determined in good faith by the Board of Directors, although the actual
calculations will be made by persons acting under the supervision of the Board.
For information on valuing foreign securities, see the Fund's Statement of
Additional Information.
EXECUTION OF REQUESTS
Purchase and sale requests are executed at the next NAV determined after
the order is received in proper form by the Transfer Agent or the 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
B-7
<PAGE>
purchase by wire, you must submit an application form in a timely fashion. If an
order or payment by wire is received after the close of regular trading on the
New York Stock Exchange (normally 4:00 p.m. Eastern Time), the shares will not
be credited until the next business day.
You will receive a confirmation of each new transaction in your account,
which also will show you the number of 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 restrictions 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. Pilgrim
Investments reserves the right to prohibit excessive exchanges (no more than
four per year). Pilgrim Investments reserves the right, upon 60 days prior
notice, to restrict the frequency or 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.
Shares of one class of the Fund may be exchanged for shares of any other
open-end Pilgrim Fund without payment of any additional sales charge. In
addition, Class T shares of any fund may be exchanged for Class B shares of the
Pilgrim Money Market Fund. 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 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 the fund being acquired may be legally sold.
B-8
<PAGE>
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. The 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.
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 in excess of $100 made to yourself, or to anyone else you
properly designate, as long as the account has a current value of at least
$10,000. For additional information, contact he 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. 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. 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.
B-9
<PAGE>
MANAGEMENT OF THE FUND
INVESTMENT MANAGER
Pilgrim Investments has overall responsibility for the management of the
Fund. The Fund and Pilgrim Investments have entered into an agreement that
requires Pilgrim Investments to provide or oversee all investment advisory and
portfolio management services for the Fund. The agreement also requires Pilgrim
Investments to assist in managing and supervising all aspects of the general
day-to-day business activities and operations of the Fund, including custodial,
transfer agency, dividend disbursing, accounting, auditing, compliance and
related services. Pilgrim Investments provides the Fund with office space,
equipment and personnel necessary to administer the Fund. The agreement with
Pilgrim Investments can be canceled by the Board of Directors of the Fund upon
60 days written notice. Organized in December 1994, Pilgrim Investments is
registered as an investment adviser with the Securities and Exchange Commission.
As of September 30, 1999, Pilgrim Investments managed over $7.7 billion in
assets. Pilgrim Investments acquired certain assets of the previous advisers to
certain of the Funds in separate transactions that closed on April 7, 1995 and
May 24, 1999. Pilgrim Investments bears its expenses of providing the services
described above. Investment management fees are computed and accrued daily and
paid monthly.
PARENT COMPANY AND DISTRIBUTOR
Pilgrim Investments and the Distributor, the Fund's principal underwriter,
are indirect, wholly owned subsidiaries of ReliaStar Financial Corp. (NYSE: RLR)
("ReliaStar"). Through its subsidiaries, ReliaStar offers individuals and
institutions life insurance and annuities, employee benefits products and
services, life and health reinsurance, retirement plans, mutual funds, bank
products and personal finance education.
In addition to providing for the expenses discussed above, the Rule 12b-1
Plan also recognizes that Pilgrim Investments may use its investment management
fees or other resources to pay expenses associated with activities primarily
intended to result in the promotion and distribution of the Fund's shares. The
Distributor will, from time to time, pay to Authorized Dealers in connection
with the sale or distribution of shares of the Fund material compensation, which
includes, but is not limited to, cash, merchandise, trips and financial
assistance in connection with pre-approved conferences or seminars, sales or
training programs for invited sales personnel, payment for travel expenses
(including meals and lodging) incurred by sales personnel to various locations
for such seminars or training programs, seminars for the public, advertising and
sales campaigns regarding the Fund or other open-end Pilgrim funds and/or events
sponsored by Authorized Dealers. In addition, the Distributor may, at its own
expense, pay concessions in addition to those described above to dealers that
satisfy certain criteria established from time to time by the Distributor. These
conditions relate to increasing sales of shares of the Fund over specified
periods and to certain other factors. Salespersons and any other person entitled
to receive any compensation for selling or servicing Fund shares may receive
different compensation with respect to one particular class of shares over
another in the Fund.
B-10
<PAGE>
SHAREHOLDER SERVICING AGENT
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
Pilgrim Investments will place orders to execute securities transactions
that are designed to implement the Fund's investment objectives and policies.
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, Pilgrim
Investments may consider brokerage and research services provided by a broker to
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 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, Pilgrim Investments
may place securities transactions with brokers that provide certain services to
the Fund. Pilgrim Investments also may consider a broker's sale of Fund shares
if 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 has a policy of paying monthly dividends from its net investment
income and paying capital gains, if any, annually. 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 this Proxy Statement/Prospectus, elect to have all
dividends and other distributions paid on a Class A, B, C or T account in the
Fund invested into a Pilgrim Fund which offers Class A, B, C or T Shares. Both
accounts must be of the same class.
B-11
<PAGE>
FEDERAL TAXES
Dividends paid out of the Fund's investment company taxable income
(including dividends, interest and short-term capital gains) will be taxable to
a U.S. shareholder as ordinary income. If a portion of the Fund's income
consists of dividends paid by U.S. corporations, a portion of the dividends paid
by the Fund may be eligible for the corporate dividends-received deduction.
Distributions of net capital gains (the excess of net long-term capital gains
over net short-term capital losses), if any, designated as capital gain
dividends will be taxable as long-term capital gains, regardless of how long the
shareholder has held the Fund's shares.
All dividends and capital gains are taxable whether they are reinvested or
received in cash, unless you are exempt from taxation or entitled to tax
deferral. Dividends declared in October, November, or December with a record
date in such month and paid during the following January will be treated as
having been paid by the Fund and received by shareholders on December 31 of the
calendar year in which declared, rather than the calendar year in which the
dividends are actually received.
Upon the sale or other disposition of shares of the Fund, a shareholder may
realize a gain or loss which will be a capital gain or loss if the shares are
held as a capital asset and, if so, may be eligible for reduced federal tax
rates, depending on the shareholder's holding period for the shares.
This is a brief summary of some of the tax laws that affect your investment
in the Fund. Please see the Fund's Statement of Additional Information and your
tax adviser for further information.
YEAR 2000 COMPLIANCE
[Like other financial organizations, the Fund could be adversely affected
if the computer systems used by the Fund's service providers do not properly
process and calculate date-related information after January 1, 2000. This is
commonly known as the "Year 2000 Problem." The Year 2000 Problem could have a
negative impact on handling securities trades, payment of interest and
dividends, pricing, and account services. Pilgrim Investments has taken steps
that it believes are reasonably designed to address the Year 2000 Problem with
respect to computer systems that it uses and to obtain reasonable assurances
that comparable steps have been taken by the Fund's other major service
providers. It is not anticipated that the Fund will directly bear any material
costs associated with Pilgrim Investments and the Fund's other service providers
efforts to become Year 2000 compliant. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact to the
Fund nor can there be any assurance that the Year 2000 Problem will not have an
adverse effect on the companies whose securities are held by the Fund or on
global markets or economies, generally.]
B-12
<PAGE>
FINANCIAL HIGHLIGHTS
PILGRIM GOVERNMENT
SECURITIES
INCOME FUND
- --------------------------------------------------------------------------------
The information in the table below has been audited by KPMG LLP, independent
auditors.
<TABLE>
<CAPTION>
Class A
------------------------------------------------------
Year Ended June 30,
------------------------------------------------------
1999 1998 1997 1996 1995(a)
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 12.88 $ 12.71 $ 12.59 $ 12.97 $ 12.73
- ---------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income 0.76 0.64 0.69 0.75 0.84
- ---------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (0.52) 0.30 0.20 (0.32) 0.24
- ---------------------------------------------------------------------------------------------------
Total from investment operations 0.24 0.94 0.89 0.43 1.08
- ---------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income 0.77 0.77 0.73 0.75 0.84
- ---------------------------------------------------------------------------------------------------
Tax return of capital -- -- 0.04 0.06 --
- ---------------------------------------------------------------------------------------------------
Net asset value, end of period $ 12.35 $ 12.88 $ 12.71 $ 12.59 $ 12.97
===================================================================================================
TOTAL RETURN(c) 1.89% 7.63% 7.33% 3.34% 8.96%
- ---------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $ 21,060 $ 23,682 $29,900 $ 38,753 $ 43,631
- ---------------------------------------------------------------------------------------------------
Ratios to average net assets:
Net expenses after expense
reimbursement (d) 1.40% 1.50% 1.42% 1.51% 1.40%
- ---------------------------------------------------------------------------------------------------
Gross expenses prior to expense
reimbursement (d) 1.40% 1.58% 1.42% 1.57% 1.54%
- ---------------------------------------------------------------------------------------------------
Net investment income after
expense reimbursement (d) 6.05% 5.13% 5.78% 5.64% 6.37%
- ---------------------------------------------------------------------------------------------------
Portfolio turnover rate 58% 134% 172% 170% 299%
- ---------------------------------------------------------------------------------------------------
</TABLE>
(a) Pilgrim Investments, Inc., the Fund's Investment Manager, acquired certain
assets of Pilgrim Management Corporation, the Fund's former Investment
Manager, in a transaction that closed on April 7, 1995.
(b) Commencement of offering shares.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return information for less than one year is not
annualized.
(d) Annualized.
B-13
<PAGE>
<TABLE>
<CAPTION>
CLASS B CLASS C CLASS M
- ------------------------------------------- ---------- -----------------------------------------
July 17, June 11, July 17,
Year Ended June 30, 1995(b) to 1999(b) to Year Ended June 30, 1995(b) to
- ------------------------------- June 30, June 30, ----------------------------- June 30,
1999 1998 1997 1996 1999 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 12.84 $ 12.68 $ 12.59 $ 12.95 $ 12.24 $ 12.88 $ 12.72 $ 12.59 $ 12.95
- -------- ------- -------- ------- -------- ------- ------- ------- --------
0.69 0.60 0.67 0.66 2.05 0.69 0.64 0.70 0.68
- -------- ------- -------- ------- -------- ------- ------- ------- --------
(0.54) 0.24 0.11 (0.37) (1.86) (0.52) 0.23 0.14 (0.36)
- -------- ------- -------- ------- -------- ------- ------- ------- --------
0.15 0.84 0.78 0.29 0.19 0.17 0.87 0.84 0.32
- -------- ------- -------- ------- -------- ------- ------- ------- --------
0.69 0.68 0.69 0.65 -- 0.71 0.71 0.70 0.68
- -------- ------- -------- ------- -------- ------- ------- ------- --------
-- -- -- -- -- -- -- 0.01 --
- -------- ------- -------- ------- -------- ------- ------- ------- --------
$ 12.30 $ 12.84 $ 12.68 $ 12.59 $ 12.43 $ 12.34 $ 12.88 $ 12.72 $ 12.59
======== ======= ======== ======= ======== ======= ======= ======= ========
1.09% 6.78% 6.38% 2.25% 1.55% 1.31% 7.02% 6.88% 2.52%
- -------- ------- -------- ------- -------- ------- ------- ------- --------
$ 12,426 $ 3,220 $ 1,534 $ 73 $ 7 $ 751 $ 224 $ 61 $ 24
- -------- ------- -------- ------- -------- ------- ------- ------- --------
2.15% 2.25% 2.17% 2.26% 2.15% 1.90% 2.00% 1.92% 2.01%
- -------- ------- -------- ------- -------- ------- ------- ------- --------
2.15% 2.29% 2.17% 2.41% 2.15% 1.90% 2.05% 1.92% 2.16%
- -------- ------- -------- ------- -------- ------- ------- ------- --------
5.30% 4.24% 4.92% 4.98% 5.30% 5.57% 4.29% 5.25% 5.73%
- -------- ------- -------- ------- -------- ------- ------- ------- --------
58% 134% 172% 170% 58% 58% 134% 172% 170%
- -------- ------- -------- ------- -------- ------- ------- ------- --------
</TABLE>
B-14
<PAGE>
FINANCIAL HIGHLIGHTS
PILGRIM
GOVERNMENT SECURITIES
FUND
- --------------------------------------------------------------------------------
The following chart shows the fund's financial performance by share class. The
1998, 1997, 1996 and 1995 figures have been audited by PricewaterhouseCoopers
LLP, whose report, along with the fund's financial statements, are included in
the annual report, which is available upon request.
The figures prior to 1995 were audited by other independent accountants.
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------- ---------------------------------------
January 1, January 1,
1999 to Year Ended December 31, 1999 to Year Ended December 31,
June 30, ---------------------------- June 30, ----------------------------
1999 1998 1997 1996 1995(1) 1999 1998 1997 1996 1995(1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating performance
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value at the
beginning of the period $ 9.38 9.53 9.48 10.07 9.51 $ 9.40 9.55 9.48 10.07 9.51
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income $ 0.27 0.49 0.68 0.63 0.34 $ 0.23 0.51 0.52 0.57 0.30
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments $ (0.50) -- -- (0.60) 0.59 $(0.49) (0.09) 0.11 (0.60) 0.59
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations $ (0.23) 0.49 0.68 0.03 0.93 $(0.26) 0.42 0.63 (0.03) 0.89
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends from net investment income $ (0.32) (0.64) (0.63) (0.62) (0.37) $(0.28) (0.57) (0.56) (0.56) (0.33)
- ---------------------------------------------------------------------------------------------------------------------------------
Total distributions $ (0.32) (0.64) (0.63) (0.62) (0.37) $(0.28) (0.57) (0.56) (0.56) (0.33)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value at the end of the period $ 8.83 9.38 9.53 9.48 10.07 $ 8.86 9.40 9.55 9.48 10.07
- ---------------------------------------------------------------------------------------------------------------------------------
Total investment return(2) (2.54)% 5.27 7.46 0.57 10.04 2.76% 4.49 6.93 (0.15) 9.61
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets at the end of the period ($000s) $28,131 31,181 1,744 14,185 3,235 $27,274 27,250 13,503 9,135 2,790
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets 1.20% 1.17 1.15 1.09 1.20(3) 1.91% 1.90 1.89 1.80 1.70(3)
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of expense reimbursement
to average net assets -- 0.15 0.17 0.20 0.20(3) -- 0.15 0.17 0.20 0.20(3)
- ---------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income (loss)
to average net assets 5.94% 6.18 6.44 6.85 6.01(3) 5.23% 5.55 5.50 6.05 5.20(3)
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 40% 304 129 101 295 40% 304 129 101 295
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Classes A, B & C commenced on June 5, 1995.
(2) Assumes dividends have been reinvested and does not reflect the effect of
sales charges.
(3) Annualized.
B-15
<PAGE>
<TABLE>
<CAPTION>
CLASS C CLASS T
- ----------------------------------------- ------------------------------------------------------
January 1, January 1,
1999 to Year Ended December 31, 1999 to Year Ended December 31,
June 30, ------------------------------- June 30, -------------------------------------------
1999 1998 1997 1996 1995(1) 1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
$ 9.38 9.54 9.47 10.07 9.51 $ 9.39 9.55 9.48 10.07 8.74 10.32
- ---------------------------------------------------------------------------------------------------
$ 0.24 0.45 0.59 0.58 0.30 $ 0.25 0.58 0.57 0.60 0.58 0.56
- ---------------------------------------------------------------------------------------------------
$(0.50) (0.05) 0.04 (0.62) 0.59 $(0.49) (0.14) 0.10 (0.59) 1.35 (1.56)
- ---------------------------------------------------------------------------------------------------
$(0.26) 0.40 0.63 (0.04) 0.89 $(0.24) 0.44 0.67 0.01 1.93 (1.00)
- ---------------------------------------------------------------------------------------------------
$(0.28) (0.56) (0.56) (0.56) (0.33) $(0.30) (0.60) (0.60) (0.60) (0.60) (0.57)
- ---------------------------------------------------------------------------------------------------
$(0.28) (0.56) (0.56) (0.56) (0.33) $(0.30) (0.60) (0.60) (0.60) (0.60) (0.58)
- ---------------------------------------------------------------------------------------------------
$ 8.84 9.38 9.54 9.47 10.07 $ 8.85 9.39 9.55 9.48 10.07 8.74
- ---------------------------------------------------------------------------------------------------
2.81% 4.35 6.93 (0.21) 9.61 (2.69)% 4.84 7.38 0.32 22.90 (9.82)
- ---------------------------------------------------------------------------------------------------
$2,465 2,652 542 1,147 8 $41,018 49,713 89,939 112,126 150,951 152,608
- ---------------------------------------------------------------------------------------------------
1.97% 1.90 1.85 1.80 1.68(3) 1.54% 1.55 1.45 1.30 1.30 1.29
- ---------------------------------------------------------------------------------------------------
-- 0.15 0.17 0.21 0.20(3) --% 0.15 0.20 0.21 0.20 0.20
- ---------------------------------------------------------------------------------------------------
5.15% 5.44 5.67 6.22 5.28(3) 5.60% 5.97 5.99 6.37 6.23 6.00
- ---------------------------------------------------------------------------------------------------
40% 304 129 101 295 40% 304 129 101 295 315
- ---------------------------------------------------------------------------------------------------
</TABLE>
B-16
<PAGE>
APPENDIX C
The following is a list of the current funds in the Pilgrim group of 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
- ---- ---------------
Pilgrim MagnaCap Fund A, B, C, M and Q
Pilgrim LargeCap Leaders Fund A, B, C, M and Q
Pilgrim Research Enhanced Index Fund A, B, C, I and Q
Pilgrim Growth Opportunities Fund A, B, C, I, Q and T
Pilgrim LargeCap Growth Fund A, B, C and Q
Pilgrim MidCap Value Fund A, B, C, M, and Q
Pilgrim MidCap Opportunities Fund A, B, C, I and Q
Pilgrim MidCap Growth Fund A, B, C and Q
Pilgrim Growth + Value Fund A, B, C and Q
Pilgrim SmallCap Opportunities Fund A, B, C, I, Q and T
Pilgrim SmallCap Growth Fund A, B, C and Q
Pilgrim Bank and Thrift Fund A and B
Pilgrim Worldwide Growth Fund A, B, C and Q
Pilgrim International Value Fund A, B, C and Q
Pilgrim International Core Growth Fund A, B, C and Q
Pilgrim International SmallCap Growth Fund A, B, C and Q
Pilgrim Emerging Markets Value Fund A, B and C
Pilgrim Emerging Countries Fund A, B, C and Q
Pilgrim Asia-Pacific Equity Fund A, B and M
Pilgrim Government Securities Income Fund A, B, C, M, Q and T
Pilgrim Government Securities Fund(1) A, B, C and T
Pilgrim Strategic Income Fund A, B, C and Q
Pilgrim High Yield Fund A, B, C, M and Q
Pilgrim High Yield Fund II A, B, C, Q and T
Pilgrim High Yield Fund III(2) A, B, C and T
Pilgrim High Total Return Fund A, B and C
Pilgrim High Total Return Fund II A, B and C
Pilgrim Money Market Fund A, B and C
Pilgrim Balanced Fund A, B, C, Q and T
Pilgrim Income & Growth Fund(3) A, B and C
Pilgrim Balance Sheet Opportunities Fund(3) A, B, C and T
Pilgrim Convertible Fund A, B, C and Q
- ----------
(1) Subject to shareholder approval, this fund will be reorganized into the
Pilgrim Government Securities Income Fund.
(2) Subject to shareholder approval, this fund will be reorganized into the
Pilgrim High Yield Fund II.
(3) Subject to shareholder approval, these funds will be reorganized into the
Pilgrim Balanced Fund.
C-1
<PAGE>
APPENDIX D
As of November 22, 1999, the following persons owned of record 5% or more
of the outstanding shares of the specified class of each of Government
Securities Fund:
<TABLE>
<CAPTION>
% OF CLASS % OF FUND % OF FUND
BEFORE BEFORE AFTER
NAME AND ADDRESS CLASS REORGANIZATION REORGANIZATION REORGANIZATION
- ---------------- ----- -------------- -------------- --------------
<S> <C> <C> <C>
Merrill Lynch Pierce Fenner B 25.12% 7.30%
& Smith, For the Sole Benefit
of Its Customers,
Attn: Fund Admin
4800 Deer Lake Drive E 2nd Floor
Jacksonville, FL 32246-6484
First Clearing Corporation C 8.08% 0.16%
W Dean Bidgood, Jr. IRA
C/o Bidgood & Associates
2605 Meridian Pkwy, Suite 200
Merrill Lynch Pierce Fenner & Smith, C 39.18% 0.76%
For the Sole Benefit of Its Customers,
Attn: Fund Admin
4800 Deer Lake Drive E 2nd Floor
Jacksonville, FL 32246-6484
</TABLE>
As of November 22, 1999, the following persons owned beneficially or of
record 5% or more of the outstanding shares of the specified class of Pilgrim
GSIF:
<TABLE>
<CAPTION>
% OF CLASS % OF FUND % OF FUND
BEFORE BEFORE AFTER
NAME AND ADDRESS CLASS REORGANIZATION REORGANIZATION REORGANIZATION
- ---------------- ----- -------------- -------------- --------------
<S> <C> <C> <C>
Red Lake County Court House A 6.98% 4.15%
Attn: Jay Gilemette
Red Lake Falls, MN 56750
Merrill Lynch Pierce Fenner & Smith, A 24.18% 14.36%
For the Sole Benefit of Its Customers,
Attn: Fund Admin
4800 Deer Lake Drive E 2nd Floor
Jacksonville, FL 32246-6484
Merrill Lynch Pierce Fenner & Smith, B 49.31% 18.03%
For the Sole Benefit of Its Customers,
Attn: Fund Admin
4800 Deer Lake Drive E 2nd Floor
Jacksonville, FL 32246-6484
</TABLE>
D-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Merrill Lynch Pierce Fenner & Smith, C 62.69% 0.91%
For the Sole Benefit of Its Customers,
Attn: Fund Admin
4800 Deer Lake Drive E 2nd Floor
Jacksonville, FL 32246-6484
Gail C. Mazur IRA C 17.66% 0.26%
11 Nettlecreek Rd.
Fairport, NY 14450
George E Leslie & Florence E M 5.39% 0.14%
Leslie Family Trust
PO Box 70400
Pasadena, CA 91117
Carol A McArthur M 8.31% 0.22%
Separate Property
395 Sawdust Rd Suite 2153
The Woodlands, TX 77380
Donaldson Lufkin Jenrette FBO M 20.19% 0.52%
Cheryl E Kantor
633 W Southern Ave, Unit 1139
Tempe, AZ 85282
Doris J Lubell M 6.24% 0.16%
200 E 94th St Apt 1411
New York, NY 10128
Dr. Antonio Aguirre M 18.30% 0.47%
Zeisselstr 8
60138 Frankfurt AM
Germany
</TABLE>
D-2
<PAGE>
PILGRIM GOVERNMENT SECURITIES FUND
PROXY FOR A SPECIAL MEETING OF SHAREHOLDERS SCHEDULED FOR MARCH 24, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
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 Fund (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 40 North Central Avenue, Suite
1200, Phoenix, Arizona 85004, and which is scheduled for March 24, 2000 at 10:00
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 TRUSTEES 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 Pilgrim Government Securities Fund by
Pilgrim Government Securities Income Fund in exchange for shares of common
stock of Pilgrim Government Securities Income Fund and the assumption by
Pilgrim Government Securities Income Fund of all of the liabilities of
Pilgrim Government Securities 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
<PAGE>
PILGRIM GOVERNMENT SECURITIES INCOME FUND
PROXY FOR A SPECIAL MEETING OF SHAREHOLDERS SCHEDULED FOR MARCH 24, 2000
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 (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 40 North Central Avenue, Suite
1200, Phoenix, Arizona 85004, and which is scheduled for March 24, 2000 at 10:00
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 Pilgrim Government Securities Fund by
Pilgrim Government Securities Income Fund in exchange for shares of common
stock of Pilgrim Government Securities Income Fund and the assumption by
Pilgrim Government Securities Income Fund of all of the liabilities of
Pilgrim Government Securities 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
<PAGE>
PART B
PILGRIM GOVERNMENT SECURITIES INCOME FUND, INC.
Statement of Additional Information
January 20, 2000
<TABLE>
<CAPTION>
<S> <C>
Acquisition of the Assets and Liabilities of By and in Exchange for Shares of
Pilgrim Government Securities Fund Pilgrim Government Securities Income Fund
40 North Central Avenue, Suite 1200 40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004 Phoenix, Arizona 85004
</TABLE>
This Statement of Additional Information is available to the Shareholders of
Pilgrim Government Securities Fund (formerly, Northstar Government Securities
Fund) in connection with a proposed transaction whereby all of the assets and
liabilities of Pilgrim Government Securities Fund will be transferred to Pilgrim
Government Securities Income Fund, Inc. in exchange for shares of Pilgrim
Government Securities Income Fund, Inc.
This Statement of Additional Information of the Pilgrim Government Securities
Income Fund, Inc. 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 Pilgrim Government Securities
Income Fund and Pilgrim Government Securities Fund dated January 4, 2000,
as filed on December __, 1999.
2. The Financial Statements of Pilgrim Government Securities Income Fund
included in the Annual Report of Pilgrim Government Securities Income Fund
dated June 30, 1999, as filed on September 9, 1999.
3. The Financial Statements of Pilgrim Government Securities Fund included in
the Annual Report to Shareholders of the Northstar Funds dated December 31,
1998, as filed on March 1, 1999.
4. The Financial Statements of Pilgrim Government Securities Fund included in
the Semi-Annual Report to Shareholders of the Northstar Funds dated June
30, 1999, as filed on August 31, 1999.
This Statement of Additional Information is not a prospectus. A Prospectus/Proxy
Statement dated January 20, 2000 relating to the reorganization of the Pilgrim
Government Securities Fund may be obtained, without charge, by writing to
Pilgrim at 40 North Central Avenue, Suite 1200, Phoenix, AZ or calling (800)
992-0180. This Statement of Additional Information should be read in conjunction
with the Prospectus/Proxy Statement.
B-1
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
GOVERNMENT GOVERNMENT
SECURITIES SECURITIES PRO FORMA PRO FORMA
INCOME FUND FUND ADJUSTMENTS COMBINED
-----------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities at market value* $33,733,730 $96,407,874 $130,141,604
Short-term investments at amortized cost 1,581,000 2,143,000 3,724,000
Cash 15,348 517,562 532,910
Receivables:
Fund shares sold 6,979 281,648 288,627
Dividends and interest 344,116 572,359 916,475
Investment securities sold 99,205 0 99,205
Prepaid expenses 29,389 20,827 50,216
-----------------------------------------------------------
Total Assets 35,809,767 99,943,270 135,753,037
-----------------------------------------------------------
LIABILITIES:
Payable for investment securities purchased 583,786 0 583,786
Payable for fund shares redeemed 918,806 435,178 1,353,984
Payable to affiliate 350 116,765 117,115
Other accrued expenses and liabilities 64,005 66,021 130,026
Written Options Outstanding 0 436,626 436,626
-----------------------------------------------------------
Total Liabilities 1,566,947 1,054,590 2,621,537
-----------------------------------------------------------
NET ASSETS $34,242,820 $98,888,680 $133,131,500
===========================================================
NET ASSETS CONSIST OF:
Paid-in capital $41,473,586 $124,719,140 $166,192,726
Overdistributed net investment income 0 (519,986) (519,986)
Accumulated net realized loss on investments
and foreign currency transactions (6,627,609) (22,985,171) (29,612,780)
Net unrealized depreciation of investments
and other assets, liabilities (603,157) (2,325,303) (2,928,460)
-----------------------------------------------------------
Net Assets $34,242,820 $98,888,680 $133,131,500
===========================================================
CLASS A:
Net Assets $21,059,544 $28,130,539 $49,190,083
Shares authorized ($0.00 par value) 1,000,000,000 unlimited 1,000,000,000
Shares outstanding 1,705,530 3,184,230 (906,757)(A) 3,983,003
Net asset value and redemption price per share $12.35 $8.83 $12.35
Maximum offering price per share $12.97 $9.27 $12.97
CLASS B:
Net Assets $12,425,538 $27,274,295 $39,699,833
Shares authorized ($0.00 par value) 1,000,000,000 unlimited 1,000,000,000
Shares outstanding 1,009,878 3,079,559 (861,808)(A) 3,227,629
Net asset value and redemption price per share $12.30 $8.86 $12.30
Maximum offering price per share $12.30 $8.86 $12.30
CLASS C:
Net Assets $6,943 $2,465,476 $2,472,419
Shares authorized ($0.00 par value) 1,000,000,000 unlimited 1,000,000,000
Shares outstanding 558 278,980 (80,631)(A) 198,907
Net asset value and redemption price per share $12.43 $8.84 $12.43
Maximum offering price per share $12.43 $8.84 $12.43
CLASS M:
Net Assets $750,795 N/A $750,795
Shares authorized ($0.00 par value) 1,000,000,000 N/A 1,000,000,000
Shares outstanding 60,827 N/A 60,827
Net asset value and redemption price per share $12.34 N/A $12.34
Maximum offering price per share $12.76 N/A $12.76
CLASS T:
Net Assets N/A $41,018,370 $41,018,370
Shares authorized ($0.00 par value) N/A unlimited unlimited
Shares outstanding N/A 4,634,517 (1,313,191)(A) 3,321,326
Net asset value and redemption price per share N/A $8.85 $12.35
Maximum offering price per share N/A $8.85 $12.35
* Cost of Securities $ 34,336,887 $100,168,651 $ 134,505,538
</TABLE>
(A) Reflects new shares issued, net of retired shares of the Fund.
See Accompanying Notes to Financial Statements
B-2
<PAGE>
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
GOVERNMENT GOVERNMENT
SECURITIES SECURITIES PRO FORMA PRO FORMA
INCOME FUND FUND ADJUSTMENTS COMBINED
------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1999 1999 1999
------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest 2,829,050 7,746,439 10,575,489
------------------------------------------------------
Total investment income 2,829,050 7,746,439 10,575,489
------------------------------------------------------
EXPENSES:
Investment management fees 189,816 697,601 (160,985)(A) 726,432
Distribution expenses 185,172 685,861 (15,531)(A) 855,502
Transfer agent and registrar fees 130,781 135,970 266,751
Registration and filing fees 40,037 36,348 (36,348)(B) 40,037
Custodian fees 28,474 47,848 76,322
Professional fees 15,608 17,949 (15,608)(B) 17,949
Administrative fees 0 131,114 (131,114)(A) 0
Other Expenses 38,806 47,241 86,047
Directors' fees 1,863 8,452 (1,863)(B) 8,452
-------------------------------------------------------
Total expenses 630,557 1,808,384 (361,449) 2,077,492
-------------------------------------------------------
Less:
Waived and reimbursed fees 0 160,985 (160,985)(C) 0
Earnings credits 3,531 0 3,531
-------------------------------------------------------
Net expenses 627,026 1,647,399 (200,464) 2,073,961
-------------------------------------------------------
Net investment income (loss) 2,202,024 6,099,040 200,464 8,501,528
-------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS
ON INVESTMENTS:
Net realized loss from:
Investments (852,058) (3,402,111) (4,254,169)
Net change in unrealized depreciation of:
Investments (887,365) (3,479,898) (4,367,263)
-------------------------------------------------------
Net loss from investments (1,739,423) (6,882,009) (8,621,432)
-------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $462,601 $(782,969) $200,464 $(119,904)
=======================================================
</TABLE>
(A) Reflects adjustment in expenses due to effects of proposed contract rate.
(B) Reflects adjustment in expenses due to elimination of duplicative services.
(C) Reflects change in the amounts to be waived or reimbursed by Pilgrim
Investments, Inc. to keep the Fund at its proposed expense limit.
See Accompanying Notes to Financial Statements
B-3
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Basis of Combination:
On November 16, 1999, the Boards of Pilgrim Government Securities Income
Fund ("Pilgrim GSIF") and Pilgrim Government Securities Fund (formerly Northstar
Government Securities Fund) ("Government Securities Fund"), approved an
Agreement and Plan of Reorganization (the "Plan") whereby, subject to approval
by the shareholders of Government Securities Fund, Pilgrim GSIF will acquire all
the assets of the Government Securities 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 Pilgrim GSIF (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, 1999. The unaudited pro forma portfolio of investments, and
statement of assets and liabilities reflect the financial position of Pilgrim
GSIF and Government Securities Fund at June 30, 1999. The unaudited pro forma
statement of operations reflects the results of operations of the Pilgrim GSIF
and the Government Securities Fund for the year ended June 30, 1999. 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
Pilgrim GSIF and Government Securities 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 Pilgrim GSIF 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:
Investments in equity securities traded on a national securities exchange
or included on the NASDAQ National Market System are valued at the last reported
sale price. Securities traded on an exchange of NASDAQ for which there has been
no sale and securities traded in the over-the-counter-market are valued at the
mean between the last reported bid and ask prices. All investments quoted in
foreign currencies will be valued daily in U.S. Dollars on the basis of the
foreign currency exchange rates prevailing at the time such valuation is
determined by each Fund's Custodian. 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 Fund by Pilgrim GSIF as of June 30, 1999. The number of additional
shares issued was calculated by dividing the net asset value of each Class of
Government Securities Fund by the respective Class net asset value per share of
Pilgrim GSIF.
Note 4 - Pro Forma Operation Expenses:
The accompanying pro forma financial statements reflect changes in fund
shares as if the merger had taken place on June 30, 1999. Government Securities
Fund expenses were adjusted assuming Pilgrim GSIF's fee structure was in effect
for the year ended June 30, 1999.
B-4
<PAGE>
Note 5 - Merger Costs:
Merger costs are estimated at approximately $61,077 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.
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. In addition, no capital gain distribution shall be made
until the capital loss carryforward has been fully utilized or expires.
B-5
<PAGE>
Pro Forma - Government Securities Income Fund & Government Securities Fund
PORTFOLIO OF INVESTMENTS
As of June 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/CONTRACTS MARKET VALUE
-------------------------------- ----------------------------------
GOVERNMENT GOVERNMENT
SECURITIES GOVERNMENT PRO FORMA SECURITIES GOVERNMENT PRO FORMA
INCOME SECURITIES COMBINED SECURITY RATE MATURITY INCOME SECURITIES COMBINED
------ ---------- -------- -------- ---- -------- ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FEDERAL HOME LOAN
MORTGAGE CORPORATION: 7.83%
5,700,000 5,700,000 FHLMC 6.50% 2024 $ 5,680,050 $5,680,050
3,205,000 3,205,000 FHLMC 7.01% 2007 3,208,493 3,208,493
179,598 179,598 FHLMC 8.50% 2017 189,258 189,258
185,701 185,701 FHLMC 9.00% 2006 to 2021 193,386 193,386
629,888 629,888 FHLMC 9.50% 2005 to 2014 663,877 663,877
60,442 60,442 FHLMC 9.91% 2020 64,467 64,467
379,388 379,388 FHLMC 12.25% 2015 428,234 428,234
--------------------------------------
4,747,715 5,680,050 10,427,765
--------------------------------------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION: 34.86%
1,000,000 1,000,000 FNMA 5.64% 2008 932,350 932,350
5,801,775 18,667,703 24,469,478 FNMA 6.50% 2018 to 2028 5,642,381 18,405,235 24,047,616
2,470,073 2,470,073 FNMA 7.50% 2028 2,496,306 2,496,306
302,915 302,915 FNMA 8.00% 2023 311,285 311,285
508,924 6,623,604 7,132,528 FNMA 8.50% 2009 to 2021 534,164 6,849,253 7,383,417
110,663 4,375,094 4,485,757 FNMA 9.00% 2007 to 2017 117,129 4,524,109 4,641,238
298,701 298,701 FNMA 9.25% 2009 to 2016 316,073 316,073
100,937 100,937 FNMA 9.75% 2008 108,201 108,201
844,745 844,745 FNMA 10.00% 2007 to 2020 903,195 903,195
956,757 956,757 FNMA 10.50% 2021 1,052,134 1,052,134
422,743 422,743 FNMA 11.00% 2017 459,789 459,789
1,459,134 1,459,134 FNMA 11.25% 2016 1,626,085 1,626,085
609,683 609,683 FNMA 11.50% 2019 673,821 673,821
67,599 67,599 FNMA 12.00% 2007 73,574 73,574
90,528 90,528 FNMA 12.50% 2007 99,435 99,435
496,561 496,561 FNMA 13.00% 2012 563,441 563,441
627,664 627,664 FNMA 13.50% 2007 to 2017 723,784 723,784
--------------------------------------
16,633,147 29,778,597 46,411,744
--------------------------------------
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION: 52.32%
4,461,974 4,461,974 GNMA 6.50% 2026 4,325,497 4,325,497
937,628 45,763,693 46,701,321 GNMA 7.00% 2016 to 2028 929,539 45,194,030 46,123,569
557,909 14,853,767 15,411,676 GNMA 7.50% 2023 to 2028 563,811 15,031,759 15,595,570
848,483 848,483 GNMA 8.00% 2023 to 2024 876,990 876,990
881,440 881,440 GNMA 9.00% 2013 to 2022 938,661 938,661
355,498 355,498 GNMA 9.25% 2016 to 2021 377,391 377,391
973,120 973,120 GNMA 9.50% 2016 to 2019 1,041,119 1,041,119
262,692 262,692 GNMA 11.25% 2011 291,231 291,231
73,473 73,473 GNMA 13.00% 2014 83,896 83,896
--------------------------------------
9,428,135 60,225,789 69,653,924
--------------------------------------
U.S. TREASURY SECURITIES: 2.20%
1,000,000 1,000,000 U.S. Treasury Bonds 5.250% 2029 898,440 898,440
1,100,000 1,100,000 U.S. Treasury Bonds 4.750% 2004 to 2008 1,036,453 1,036,453
1,000,000 1,000,000 U.S. Treasury Bonds 4.875% 2001 989,840 989,840
--------------------------------------
2,924,733 2,924,733
--------------------------------------
Total U.S. Government Securities 33,733,730 95,684,436 129,418,166
--------------------------------------
OPTIONS PURCHASED: .54%
350 350 U.S. Treasury Bonds Futures, September 113.5 Call 5,469 5,469
400 400 U.S. Treasury Bonds Futures, September 124 Call 12,500 12,500
400 400 U.S. Treasury Bonds Futures, September 128 Call 6,250 6,250
272 272 U.S. Treasury Bonds Futures, December 112 Put 323,000 323,000
666 666 U.S. Treasury Bonds Futures, December 122 Call 343,406 343,406
350 350 U.S. Treasury Notes 5 Year Futures,
September 110.5 Call 32,813 32,813
--------------------------------------
723,438 723,438
--------------------------------------
REPURCHASE AGREEMENTS: 2.80%
1,581,000 1,581,000 State Street Bank & Trust Repurchase
Agreement, 4.70% due 07/01/99 1,581,000 1,581,000
(Collateralized by $1,570,000 U.S.
Treasury Notes, 6.375%
due 09/30/01, Market Value $1,614,510)
State Street Bank & Trust Repurchase
Agreement, 4.70% due 07/01/99
(Collateralized by $2,190,000 U.S.
Treasury Notes, 5.375%
2,143,000 2,143,000 due 06/30/00, Market Value $2,188,631) 2,143,000 2,143,000
--------------------------------------
Total Short-Term Investments 1,581,000 2,143,000 3,724,000
--------------------------------------
TOTAL INVESTMENTS IN SECURITIES - 100.55%
(COST $134,505,538) 35,314,730 98,550,874 133,865,604
--------------------------------------
OPTIONS WRITTEN: (.33%)
(700) (700) U.S. Treasury Bonds Futures, September 112 Call (32,813) (32,813)
(272) (272) U.S. Treasury Bonds Futures, September 114 Put (204,000) (204,000)
(666) (666) U.S. Treasury Bonds Futures, September 120 Call (187,313) (187,313)
(800) (800) U.S. Treasury Bonds Futures, September 126 Call (12,500) (12,500)
--------------------------------------
(436,626) (436,626)
--------------------------------------
OTHER ASSETS AND LIABILITIES, NET - (0.22%) (1,071,910) 774,432 (297,478)
--------------------------------------
NET ASSETS - 100.00% $34,242,820 $98,888,680 $133,131,500
======================================
</TABLE>
B-6
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Reference is made to Article VI of the Registrant's By-Laws.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to Directors, 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 policy as expressed in the 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 Director, officer or controlling person of the Registrant in the
successful defense of any action, a suit or proceeding) is asserted by such
Director, 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 Act and will be governed by the final adjudication of
such issue.
ITEM 16. EXHIBITS
(1) (A) Articles of Incorporation (a)
(B) Certificate of Amendment to Articles of Incorporation (a)
(C) Certificate of Determination (a)
(D) Certificate of Determination regarding Class C Shares (d)
(2) Bylaws (a)
(3) Not Applicable
(4) Form of Agreement and Plan of Reorganization
(5) See Exhibits 1 and 2
(6) Form of Investment Management Agreement (e)
(7) (A) Form of Underwriting Agreement (e)
(B) Form of Selling Group Agreement (a)
(8) Not Applicable
(9) (A) Form of Custody Agreement (a)
(B) Form of Recordkeeping Agreement (a)
(10) (A) Form of Service and Distribution Plan for Class A Shares (a)
(B) Form of Service and Distribution Plan for Class B Shares (c)
(C) Form of Service and Distribution Plan for Class M Shares (a)
(D) Form of Service and Distribution Plan for Class C Shares (c)
(E) Form of Service and Distribution Plan for Class T Shares(g)
(F) Form of Amended and Restated Multiple Class Plan Adopted Pursuant
to Rule 18f-3 (d)
(G) Form of Amended and Restated Multiple Class Plan Adopted Pursuant
to Rule 18f-3(g)
(11) Form of Opinion and Consent of Counsel
(12) Form of Opinion and Consent of Counsel supporting tax matters and
consequences
(13) Form of Shareholder Servicing Agreement (d)
(14) Consents of Independent Auditors
(15) Not Applicable
(16) Powers of Attorney
(17) Not Applicable
- ----------
(a) Incorporated by reference to Post-Effective Amendment No. 20 to the
Registration Statement on Form N-1A as filed on October 30, 1997.
(b) Previously filed as an exhibit to Registrant's Registration Statement on
Form N-1A.
(c) Incorporated by reference to Post-Effective Amendment No. 23 to the
Registration Statement on Form N-1A as filed on March 25, 1999.
(d) Incorporated by reference to Post-Effective Amendment No. 24 to the
Registration Statement on Form N-1A as filed on May 24, 1999.
(e) Incorporated by reference to Post-Effective Amendment No. 25 to the
Registration Statement on Form N-1A as filed on September 2, 1999.
(f) Incorporated by reference to Post-Effective Amendment No. 26 to the
Registration Statement on Form N-1A as filed on October 29, 1999.
(g) Incorporated by reference to Post-Effective Amendment No. 27 to the
Registration Statement on Form N-1A as filed on November 5, 1999.
C-1
<PAGE>
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.
C-2
<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 21st day of December, 1999.
PILGRIM GOVERNMENT SECURITIES
INCOME FUND, INC.
By:
------------------------------------
John G. Turner*
Chairman
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
--------- ----- ----
Trustee and President December 21, 1999
- ---------------------------- (Chief Executive Officer)
Robert W. Stallings*
- ---------------------------- Trustee December 21, 1999
Mary A. Baldwin *
- ---------------------------- Trustee December 21, 1999
Al Burton *
- ---------------------------- Trustee December 21, 1999
Paul S. Doherty *
- ---------------------------- Trustee December 21, 1999
Robert B. Goode, Jr. *
- ---------------------------- Trustee December 21, 1999
Alan L. Gosule *
<PAGE>
- ---------------------------- Trustee December 21, 1999
Mark L. Lipson *
- ---------------------------- Trustee December 21, 1999
Walter H. May *
- ---------------------------- Trustee December 21, 1999
Jock Patton *
- ---------------------------- Trustee December 21, 1999
David W.C. Putnam *
- ---------------------------- Trustee December 21, 1999
John R. Smith *
- ---------------------------- Trustee December 21, 1999
John G. Turner *
- ---------------------------- Trustee December 21, 1999
David W. Wallace *
- ---------------------------- Principal Financial December 21, 1999
Michael J. Roland * Officer
* By: /s/ James M. Hennessy
-----------------------------
James M. Hennessy
Attorney-in-Fact**
** Executed pursuant to powers of attorney filed herewith.
<PAGE>
EXHIBIT INDEX
(4) Form of Agreement and Plan of Reorganization
(11) Form of Opinion and Consent of Counsel
(12) Form of Opinion and Consent of Counsel supporting tax matters
and consequences
(14) Consents of Independent Auditors
(16) Powers of Attorney
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this _____ day of _____________, 1999, by and between Pilgrim Government
Securities Income Fund, Inc. (the "Acquiring Fund"), a California corporation
with its principal place of business at 40 North Central Avenue, Suite 1200,
Phoenix, Arizona 85004 and Pilgrim Government Securities Fund (the "Acquired
Fund"), a Massachusetts business trust with its principal place of business at
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004.
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 and Class T voting shares of common stock (no par value per share) 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 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 Fund 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 Trustees of the Acquired Fund, 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 and the
Acquiring 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 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
<PAGE>
class, computed 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. 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").
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. 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 and Class T Acquiring Fund Shares to be so credited to
Class A, Class B, Class C 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 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 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. Shares of the Acquiring Fund will be issued in
the manner described in the Acquiring Fund's then-current prospectus and
statement of additional information.
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 Acquired Fund's assets to be acquired by the Acquiring
Fund hereunder shall be the value of such assets 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 set
forth in the Acquiring Fund's Articles of Incorporation and then-current
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prospectus or statement of additional information, 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 and Class T
Acquiring Fund Share shall be the net asset value per share computed with
respect to that class as of immediately after the close of business of the New
York Stock Exchange and after the declaration of any dividends on the Valuation
Date, using the valuation procedures set forth in the Acquiring Fund's Articles
of Incorporation and then-current prospectus or statement of additional
information and valuation procedures established by the Acquiring Fund's Board
of Directors.
2.3 The number of the Class A, Class B, Class C 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 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 Acquiring Fund's
designated record keeping agent.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be March ___, 2000, 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 Acquiring Company shall direct State Street Bank and Trust Company,
as custodian for the Acquired Fund (the "Custodian"), to deliver, at the
Closing, a certificate of an authorized officer stating that (i) the Acquired
Fund's portfolio securities, cash, and any other assets ("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 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"), shall direct the
Custodian to deliver as of the Closing Date by book entry in accordance with the
customary practices of such depositories and the custodian for Acquiring Fund.
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 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 Acquired 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 bills of sale, checks,
assignments, share certificates, if any, receipts or other documents as such
other party or its counsel may reasonably request.
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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 Acquiring Fund and Board of Trustees of the Acquired Fund, 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 The Acquired Fund represents and warrants to the Acquiring Fund as
follows:
(a) The Acquired Fund is a business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts with power under
the Acquired Fund's Declaration of Trust to own all of its properties and assets
and to carry on its business as it is now being conducted;
(b) The Acquired Fund 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
its shares under the Securities Act of 1933, as amended ("1933 Act"), are 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 Acquired Fund's assets to be transferred to the Acquiring Fund
pursuant to paragraph 1.2 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 its Declaration of Trust or By-Laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which 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 or decree to which the Acquired Fund is a party or by
which it is bound;
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(g) The Acquired Fund has no material contracts or other commitments (other
than this Agreement) that will be terminated with liability to it prior to the
Closing Date;
(h) Except as otherwise disclosed in writing to and accepted by 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 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 Schedule of Investments of the Acquired Fund at
December 31, 1998 have been audited by PricewaterhouseCoopers LLP, independent
accountants, 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 December 31, 1998, 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 and 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 the requirements of
Subchapter M of the Code for qualification as a regulated investment company and
has elected to be treated as such, has been eligible to and has computed 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;
(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 Fund (recognizing that, under Massachusetts law,
it is theoretically possible that shareholders of the Acquired Fund could, under
certain circumstances, be held personally liable for obligations of the Acquired
Fund) 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
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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 Trustees 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 "Acquired Fund 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 Acquired
Fund 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 The Acquiring Fund represents and warrants to the Acquired Fund as
follows:
(a) The Acquiring Fund is a corporation duly organized and validly existing
under the laws of the State of California with power under the Acquiring Fund'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 Fund 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
its shares under the 1933 Act are 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
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;
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(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 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 Fund is a party or by which it is bound;
(g) Except as otherwise disclosed in writing to and accepted by 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 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 Schedule of Investments of the Acquiring Fund at June
30, 1999 have been audited by KPMG LLP, independent accountants, and is 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 June 30, 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 and reports of
the Acquiring 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 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, the Acquiring Fund has met the
requirements of Subchapter M of the Code for qualification as a regulated
investment company and has elected to be treated as such, has been eligible to
and has computed 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, and will
do so for the taxable year including 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
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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 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 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 Fund 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, the Acquired
Fund Proxy Statement and the proxy statement of the Acquiring Fund (the latter
referred to herein as the "Acquiring Fund Proxy Statement") 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 materially
misleading provided, however, that the representations and warranties in this
subparagraph (p) shall not apply to statements in or omissions from the
Registration Statement and the Acquiring Fund Proxy 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.
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 Each of the Acquired Fund and the Acquiring Fund will call a meeting of
its shareholders 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 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.
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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 Acquired Fund Proxy Statement referred to in paragraph
4.1(p) and the Acquiring Fund Proxy Statement referred to in paragraph 4.2(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 and the Acquiring 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 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 Fund covenants that it 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 Fund may
reasonably deem necessary or desirable in order to vest in and confirm the
Acquiring Fund's title to and possession of all the assets and otherwise 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.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of the Acquired Fund to consummate the transactions
provided for herein shall be subject, at the Acquired Fund's election, to the
performance by 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 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 Fund shall have delivered to the Acquired Fund 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 Fund and dated as of the Closing Date, to the effect that the
representations and warranties 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 Fund shall reasonably request;
6.3 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 Fund on or before the Closing Date; and
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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 Fund to complete the transactions provided
for herein shall be subject, at the Acquiring Fund's election to the performance
by 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 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 Fund 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 Fund;
7.3 The Acquired Fund 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 Fund and dated as of the Closing Date, to the
effect that the representations and warranties 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 Fund shall reasonably request;
7.4 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 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;
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 do not exist 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 (i) the requisite vote of the holders of the outstanding shares of
the Acquired Fund in accordance with the provisions of the Acquired Fund's
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Declaration of Trust, By-Laws, applicable Massachusetts law and the 1940 Act,
and certified copies of the resolutions evidencing such approval shall have been
delivered to the Acquiring Fund, and (ii) the requisite vote of the holders of
the outstanding shares of the Acquiring Fund in accordance with the provisions
of the Acquiring 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 Acquired Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor
the Acquired Fund 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 Fund or the Acquired Fund 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 Price & Rhoads
addressed to the Acquiring Fund and Acquired Fund 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, unless, based on the
circumstances existing at the time of the Closing, Dechert Price & Rhoads
determines that the transaction contemplated by this Agreement does not qualify
as such. The delivery of such opinion is conditioned upon receipt by Dechert
Price & Rhoads of representations it shall request of the Acquiring Fund and the
Acquired Fund. Notwithstanding anything herein to the contrary, neither the
Acquiring Fund nor the Acquired Fund may waive the condition set forth in this
paragraph 8.5.
9. BROKERAGE FEES AND EXPENSES
9.1 The Acquiring Fund represents and warrants to the 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 paid by
the Acquired Fund and the Acquiring Fund pro rata based upon the relative net
assets of the Funds as of the close of business on the record date for
determining the shareholders of the Acquired Fund and the Acquiring 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 and Acquiring 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
the other party 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.
11
<PAGE>
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Acquired Fund 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 mutual agreement of the parties hereto or by either party by
resolution of the party's Board of Trustees or Directors, at any time prior to
the Closing Date, if circumstances should develop that, in the opinion of such
Board, make proceeding with the Agreement inadvisable.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of the
Acquired Fund and the Acquiring Fund; provided, however, that following the
meeting of the shareholders of the Acquiring Fund and the Acquired Fund called
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 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.
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 prepaid
telegraph, telecopy or certified mail addressed to the Acquiring Fund or to the
Acquired Fund, 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004,
attn: James M. Hennessy, in each case with a copy to Dechert Price & Rhoads,
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 Delaware 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.
12
<PAGE>
14.5 It is expressly agreed that the obligations of the parties hereunder
shall not be binding upon any of the Trustees, shareholders, nominees, officers,
agents, or employees of the Acquired Fund personally, but shall bind only the
trust property of the Acquired Fund, as provided in the Declaration of Trust of
the Acquired Fund. The execution and delivery by such officers shall not be
deemed to have been made by any of them individually or to impose any liability
on any of them personally, but shall bind only the trust property of the
Acquired Fund as provided in its Declaration of Trust.
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 GOVERNMENT SECURITIES
INCOME FUND, INC.
By:
-------------------------------- -------------------------------
SECRETARY
Its:
-------------------------------- -------------------------------
Attest: PILGRIM GOVERNMENT SECURITIES
INCOME FUND, INC.
By:
-------------------------------- -------------------------------
SECRETARY
Its:
-------------------------------- -------------------------------
[FORM OF OPINION]
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, DC 20006
___________, 2000
Pilgrim Government Securities Income Fund, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
Re: Pilgrim Government Securities Income Fund, Inc.
Dear Sirs:
We have acted as counsel to Pilgrim Government Securities Income Fund,
Inc., a California corporation (the "Company"), and we have a general
familiarity with the Company's business operations, practices and procedures.
You have asked for our opinion regarding the issuance of shares of common stock
by the Company in connection with the acquisition by Pilgrim Government
Securities Income Fund, a series of the Company, of the assets of Pilgrim
Government Securities Fund, which will be registered on a Form N-14 Registration
Statement (the "Registration Statement") to be filed by the Company with the
Securities and Exchange Commission.
We have examined originals or certified copies, or copies otherwise
identified to our satisfaction as being true copies, of various corporate
records of the Company and such other instruments, documents and records as we
have deemed necessary to render this opinion. We have assumed the genuineness of
all signatures, the authenticity of all documents examined by us and the
correctness of all statements of fact contained in those documents.
On the basis of the foregoing, it is our opinion that the shares of common
stock of the Company being registered under the Securities Act of 1933 in the
Registration Statement have been duly authorized and will be legally and validly
issued, fully paid and non-assessable upon transfer of the assets of Pilgrim
Government Securities Fund pursuant to the terms of the Agreement and Plan of
Reorganization included in the Registration Statement.
We hereby consent to use of this opinion as an exhibit to the Registration
Statement and to all references to our firm therein.
Very truly yours,
[FORM OF OPINION]
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, DC 20006
___________, 2000
Pilgrim Government Securities Income Fund, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
Dear Sirs:
You have requested our opinion regarding certain Federal income tax
consequences to Pilgrim Government Securities Fund (the "Target Fund"), a
Massachusetts business trust, to the holders of the shares of the Target Fund
(the "Target Shareholders"), and to Pilgrim Government Securities Income Fund
(the "Acquiring Fund"), the only series of Pilgrim Government Securities Income
Fund, Inc. (the "Acquiring Company"), a California corporation, in connection
with the proposed transfer of substantially all of the properties of the Target
Fund to the Acquiring Fund, in exchange solely for voting shares of common stock
of the Acquiring Fund ("Acquiring Fund Shares") followed by the distribution of
such Acquiring Fund Shares received by the Target Fund in complete liquidation
and termination of the Target Fund (the "Reorganization"), all pursuant to the
Agreement and Plan of Reorganization (the "Agreement") dated as of ________ ___,
1999 between the Target Fund and the Acquiring Fund.
For purposes of this opinion, we have examined and rely upon the Agreement
and the Acquiring Company's registration statement on Form N-14 (Securities Act
File No. 002-91302) (the "Form N-14") and such other documents and instruments
as we deem necessary or appropriate for purposes of rendering this opinion.
This opinion is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), United States Treasury regulations, judicial decisions, and
administrative rulings and pronouncements of the Internal Revenue Service, all
as in effect on the date hereof. This opinion is conditioned upon the
Reorganization taking place in the manner described in the Agreement and the
Form N-14 referred to above, and upon our receipt of satisfactory representation
letters from the Target Fund and from the Acquiring Company on behalf of the
Acquiring Fund.
Based upon the foregoing, it is our opinion that:
1. The acquisition by the Acquiring Fund of substantially all of the
properties of the Target Fund in exchange solely for Acquiring Fund
Shares followed by the distribution of Acquiring Fund Shares to the
shareholders of the Target Fund in exchange for their Target Fund
shares in complete liquidation and termination of the Target Fund will
constitute a reorganization within the meaning of section 368 of the
Code. The Target Fund and the Acquiring Fund will each be "a party to
a reorganization" within the meaning of section 368(b) of the Code.
<PAGE>
2. The Target Fund will not recognize gain or loss upon the transfer of
substantially all of its assets to the Acquiring Fund in exchange
solely for Acquiring Fund Shares or upon distributing to its
shareholders the Acquiring Fund Shares received by the Target Fund in
the transaction pursuant to the Agreement. We do not express any
opinion as to whether any accrued market discount will be required to
be recognized as ordinary income.
3. The Acquiring Fund will recognize no gain or loss upon receiving the
properties of the Target Fund in exchange solely for Acquiring Fund
Shares.
4. The aggregated adjusted basis to the Acquiring Fund of the properties
of the Target Fund received by the Acquiring Fund in the
reorganization will be the same as the aggregate adjusted basis of
those properties in the hands of the Target Fund immediately before
the exchange.
5. The Acquiring Fund's holding periods with respect to the properties of
the Target Fund that the Acquiring Fund acquires in the transaction
will include the respective periods for which those properties were
held by the Target Fund (except where investment activities of the
Acquiring Fund have the effect of reducing or eliminating a holding
period with respect to an asset).
6. The shareholders of the Target Fund will recognize no gain or loss
upon receiving Acquiring Fund Shares solely in exchange for Target
Fund shares.
7. The aggregate basis of the Acquiring Fund Shares received by a
shareholder of the Target Fund in the transaction will be the same as
the aggregate basis of Target Fund shares surrendered by the
shareholder in exchange therefor.
8. A Target Fund shareholder's holding period for the Acquiring Fund
Shares received by the shareholder in the transaction will include the
holding period during which the shareholder held Target Fund shares
surrendered in exchange therefor, provided that the shareholder held
such shares as a capital asset on the date of Reorganization.
We express no opinion as to the federal income tax consequences of the
Reorganization except as expressly set forth above, or as to any transaction
except those consummated in accordance with the Plan.
<PAGE>
Our opinion as expressed herein, is solely for the benefit of the Target
Fund, the Target Fund shareholders, and the Acquiring Fund, and unless we give
our prior written consent, neither our opinion nor this opinion letter may be
quoted in whole or in part or relied upon by any other person.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the references to this firm in the Tax Section. In
giving this consent, we do not admit that we come within the category of persons
whose consent is required under Section 7 of the Securities Act or the rules and
regulations of the Commission thereunder.
Very truly yours,
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement of
Pilgrim Government Securities Income Fund, Inc. on Form N-14 of our report dated
February 5, 1999, on our audit of the financial statements and financial
highlights of The Northstar Funds, which report is included in the Annual Report
to Shareholders for the year ended December 31, 1998, which is also incorporated
by reference into this Registration Statement.
We also consent to the reference to our firm under the caption "Financial
Highlights" in Appendix B to this Registration Statement.
PricewaterhouseCoopers LLP
New York, New York
December 20, 1999
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Pilgrim Government Securites Income Fund, Inc.:
In connection with the combined registration statement/proxy statement on Form
N-14 for the Pilgrim Government Securites Income Fund, Inc., we consent to
incorporation by reference of our report on the Pilgrim Government Securities
Income Fund and to the reference to our Firm under the heading "Financial
Highlights"in Exhibit B to the Prospectus.
/s/ KPMG LLP
Los Angeles, California
December 20, 1999
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
the Pilgrim Government Securities 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: December 17, 1999
/s/ Michael A. Roland
---------------------------------
Michael A. Roland
<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
the Pilgrim Government Securities 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: December 17, 1999
/s/ Mary A. Baldwin, Ph.D
----------------------------------------
Mary A. Baldwin, Ph.D
/s/ Al Burton /s/ Paul S. Doherty
- ------------------------------------- ----------------------------------------
Al Burton Paul S. Doherty
/s/ Robert B. Goode, Jr. /s/ Alan L. Gosule
- ------------------------------------- ----------------------------------------
Robert B. Goode, Jr. Alan L. Gosule
/s/ Mark Lipson /s/ Walter H. May
- ------------------------------------- ----------------------------------------
Mark Lipson Walter H. May
/s/ Jock Patton /s/ David W.C. Putnam
- ------------------------------------- ----------------------------------------
Jock Patton David W.C. Putnam
/s/ John R. Smith /s/ Robert W. Stallings
- ------------------------------------- ----------------------------------------
John R. Smith Robert W. Stallings
/s/ John G. Turner /s/ David W. Wallace
- ------------------------------------- ----------------------------------------
John G. Turner David W. Wallace
