Pilgrim High Yield Fund III
(formerly Northstar High Yield Fund)
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
(800) 992-0180
February 8, 2000
Dear Shareholder:
Your Board of Trustees has called a Special Meeting of Shareholders of the
Pilgrim High Yield Fund III (formerly Northstar High Yield Fund) scheduled to be
held at 9:30 a.m., local time, on March 24, 2000, at 40 North Central Avenue,
Suite 1200, Phoenix, Arizona 85004.
The Board of Trustees has approved the reorganization (the
"Reorganization") of the Pilgrim High Yield Fund III into the Pilgrim High Yield
Fund II, which is managed by Pilgrim Investments, Inc. and is part of the
Pilgrim Funds. If approved by shareholders, you would become a shareholder of
the High Yield Fund II on the date that the Reorganization occurs. The Pilgrim
High Yield Fund II has investment objectives and policies that are substantially
similar to those of Pilgrim High Yield Fund III. 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 the funds for your evaluation.
After careful consideration, the Board of Trustees 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 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.
Pilgrim High Yield Fund III is using Shareholder Communications
Corporation, a professional proxy solicitation firm, to assist shareholders in
the voting process. As the date of the meeting approaches, if we have not
already heard from you, you may receive a telephone call from Shareholder
Communications Corporation reminding you to exercise your right to vote.
We appreciate your participation and prompt response in this matter and
thank you for your continued support.
Sincerely,
/s/ Robert W. Stallings
Robert W. Stallings, President
<PAGE>
Pilgrim High Yield Fund III
(formerly Northstar High Yield Fund)
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
(800) 992-0180
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF
PILGRIM HIGH YIELD FUND III
SCHEDULED FOR MARCH 24, 2000
To the Shareholders:
A Special Meeting of Shareholders of the Pilgrim High Yield Fund III
(formerly Northstar High Yield Fund) is scheduled for March 24, 2000 at 9:30
a.m., local time, at 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004
for the following purposes:
1. To approve an Agreement and Plan of Reorganization providing for the
acquisition of all of the assets and liabilities of Pilgrim High Yield
Fund III by Pilgrim High Yield Fund II; and
2. To transact such other business as may properly come before the
Special Meeting of Shareholders or any adjournments thereof.
Shareholders of record at the close of business on January 24, 2000, are
entitled to notice of, and to vote at, the meeting. Your attention is called to
the accompanying Proxy Statement/Prospectus. Regardless of whether you plan to
attend the meeting, PLEASE COMPLETE, SIGN AND RETURN PROMPTLY THE ENCLOSED PROXY
CARD so that a quorum will be present and a maximum number of shares may be
voted. If you are present at the meeting, you may change your vote, if desired,
at that time.
By Order of the Board of Trustees
/s/ James M. Hennessy
James M. Hennessy, Secretary
February 8, 2000
<PAGE>
TABLE OF CONTENTS
INTRODUCTION................................................................ 1
SUMMARY..................................................................... 2
INVESTMENT OBJECTIVES AND POLICIES.......................................... 5
Comparison of Objectives and Primary Investment Strategies............ 5
Comparison of Portfolio Characteristics................................ 6
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............................................. 12
Operating Expenses..................................................... 12
Annual Fund Operating Expenses......................................... 13
Expense Limitation Arrangements....................................... 15
Transaction Fees on New Investments.................................... 15
ADDITIONAL INFORMATION ABOUT HIGH YIELD FUND II............................. 17
INFORMATION ABOUT THE REORGANIZATION........................................ 19
ADDITIONAL INFORMATION ABOUT THE FUNDS...................................... 21
GENERAL INFORMATION ABOUT THE PROXY STATEMENT.............................. 23
APPENDIX A.................................................................. A-1
APPENDIX B.................................................................. B-1
APPENDIX C.................................................................. C-1
APPENDIX D.................................................................. D-1
APPENDIX E.................................................................. E-1
<PAGE>
PROXY STATEMENT/PROSPECTUS
SPECIAL MEETING OF SHAREHOLDERS SCHEDULED FOR
MARCH 24, 2000
PILGRIM HIGH YIELD FUND III
(formerly Northstar High Yield Fund)
Relating to the Reorganization into
PILGRIM HIGH YIELD FUND II,
a series of Pilgrim Mutual Funds
(COLLECTIVELY, THE "FUNDS")
INTRODUCTION
This Proxy Statement/Prospectus provides you with information about a
proposed transaction. This transaction involves the transfer of all the assets
and liabilities of Pilgrim High Yield Fund III (formerly Northstar High Yield
Fund) ("High Yield Fund III") to Pilgrim High Yield Fund II ("High Yield Fund
II") in exchange for shares of High Yield Fund II (the "Reorganization"). High
Yield Fund III would then distribute to you your portion of the shares of High
Yield Fund II it receives in the Reorganization. The result would be a
liquidation of High Yield Fund III. You would receive shares of High Yield Fund
II having an aggregate value equal to the aggregate value of the shares you held
of High Yield Fund III as of the close of business on the business day before
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 High Yield Fund III, are being asked to
approve a transaction that will result in your holding of shares of High Yield
Fund II, this Proxy Statement also serves as a Prospectus for High Yield Fund
II.
This Proxy Statement/Prospectus, which you should retain for future
reference, contains important information about the High Yield Fund II 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 included herewith (the "Pilgrim Prospectus") and the Statement of
Additional Information for Pilgrim Funds dated January 4, 2000, 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 High Yield Fund II dated June 30, 1999 is
included herewith and is incorporated herein by reference. You may receive a
copy of the most recent annual report for any 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
High Yield Fund II from the Securities and Exchange Commission's ("SEC") Public
Reference Room (1-800-SEC-0330) or from the SEC's internet website at
www.sec.gov.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES, OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<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
High Yield Fund III (formerly Northstar High Yield Fund) approved an Agreement
and Plan of Reorganization (the "Reorganization Agreement"). Subject to
shareholder approval, the Reorganization Agreement provides for:
* the transfer of all of the assets of High Yield Fund III to High Yield
Fund II, in exchange for shares of High Yield Fund II;
* the assumption by High Yield Fund II of all of the liabilities of High
Yield Fund III;
* the distribution of the High Yield Fund II shares to the shareholders
of High Yield Fund III, and;
* the complete liquidation of High Yield Fund III (the
"Reorganization").
The Reorganization is expected to be effective upon the opening of business
on April 3, 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 High Yield Fund III would become a shareholder of the same
Class of High Yield Fund II. Each shareholder would hold, immediately after the
Closing, shares of each Class of High Yield Fund II having an aggregate value
equal to the aggregate value of the shares of that same Class of High Yield Fund
III 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 similar mutual funds within the same
group of funds. Shareholders in High Yield Fund III 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 a
majority of the outstanding shares of High Yield Fund III.
AFTER CAREFUL CONSIDERATION, THE BOARD OF TRUSTEES OF HIGH YIELD FUND III
UNANIMOUSLY APPROVED THE PROPOSED REORGANIZATION. THE BOARD RECOMMENDS THAT YOU
VOTE "FOR" THE PROPOSED REORGANIZATION.
In considering whether to approve the Reorganization, you should note that:
* High Yield Fund II and High Yield Fund III have substantially similar
investment objectives and policies. One difference is that High Yield
Fund III's primary investment objective is to seek a high level of
current income while the investment objective of High Yield Fund II is
a high level of current income and capital growth. However, each Fund
normally seeks its objectives by investing primarily in high yield
debt securities.
* The proposed Reorganization offers actual or potential reductions in
total operating expenses for shareholders of High Yield Fund III. The
Funds each have the same management fee at an annual rate of 0.60% of
the Fund's average daily net assets. This chart compares the operating
expenses, management fees, and distribution and shareholder service
fees of the Funds.
2
<PAGE>
<TABLE>
<CAPTION>
Distribution and Total Net
Management Fees (2) Service (12b-1) Fees (2) Operating Expenses (3)
------------------- -------------------------- --------------------------
Class of Shares All Classes A B C T A B C T
- ------------------- ----------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield Fund II (1) 0.60% 0.35% 1.00% 1.00% N/A 1.10% 1.75% 1.75% N/A
High Yield Fund III 0.60% 0.30% 1.00% 1.00% 0.65% 1.29% 2.00% 2.00% 1.62%
</TABLE>
- ----------
(1) Pilgrim Investments, Inc. limits the expenses of High Yield Fund II
pursuant to the terms of an Expense Limitation Agreement. See "Comparison
of Fees and Expenses - Expense Limitation Arrangements" for more
information.
(2) Fees are expressed as an annual rate of average daily net assets.
(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 (as adjusted for contractual changes).
Combining the Funds should lower expenses further because of economies of
scale realized from a larger asset base. This chart shows an estimate of the
likely expenses after the Reorganization.
<TABLE>
<CAPTION>
Distribution and Total Net
Management Fees Service (12b-1) Fees Operating Expenses
--------------- -------------------------- --------------------------
Class of Shares All Classes A B C T A B C T
- ------------------- ----------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Combined Funds
(Pro Forma) 0.60% 0.35% 1.00% 1.00% 0.65% 1.10% 1.75% 1.75% 1.40%
</TABLE>
* An expense limitation arrangement is in place for High Yield Fund II,
under which Pilgrim Investments limits the ordinary operating expenses
borne by the Fund. Even without this expense limitation arrangement,
the expense ratio for each Class of High Yield Fund II (as adjusted
for contractual changes) would have been lower than the expense ratio
for the same Class of High Yield Fund III for the year ended June 30,
1999. For this period, the expense ratio for Class A shares was 1.27%
for High Yield Fund II and 1.29% for High Yield Fund III. 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 High Yield
Fund II provides that it will remain in effect through at least
October 31, 2001.
* 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 High Yield Fund II.
Pilgrim Advisors, Inc. ("Pilgrim Advisors"), (formally Northstar
Investment Management Corporation), 40 North Central Avenue, Suite
1200, Phoenix, Arizona 85004, is the investment manager for High Yield
Fund III. 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.
3
<PAGE>
PURCHASE, REDEMPTION, AND EXCHANGE INFORMATION. The purchase, redemption
and exchange provisions and privileges for High Yield Fund III and High Yield
Fund II 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 High Yield Fund III
shares held by you prior to November 1, 1999 will apply to the High Yield Fund
II shares issued to you in the Reorganization. In addition, you will receive
credit for the period that you held your High Yield Fund III shares for purposes
of calculating any contingent deferred sales charges and determining conversion
rights with regard to High Yield Fund II shares you receive in the
Reorganization. Similar to Class B shares of High Yield Fund III, Class B shares
of High Yield Fund II will convert to Class A eight years after their purchase
date.
Purchases of shares of High Yield Fund II after the Reorganization will be
subject to the sales load structure and conversion characteristics of High Yield
Fund II. For additional information on purchase, redemption and exchange
procedures see "Comparison of Fees and Expenses" and "Appendix B - Additional
Information Regarding High Yield Fund II."
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
INVESTMENT OBJECTIVE
High Yield Fund II and High Yield Fund III have substantially similar
investment objectives and policies.
* High Yield Fund II seeks a high level of current income and capital
growth.
* High Yield Fund III seeks high current income.
PRIMARY INVESTMENT STRATEGIES
DEBT SECURITIES:
* Generally, each Fund invests at least 65% of its total assets in high
yield debt securities, commonly referred to as "junk bonds," and, for
High Yield Fund II, convertible securities.
* High Yield Fund II has no limit on either the portfolio maturity or
the acceptable rating of securities by the Fund. In pursuing High
Yield Fund II's objectives, Pilgrim Investments seeks to identify
situations in which the rating agencies have not fully perceived the
value of the security.
* High Yield Fund III can invest up to 100% of its assets in debt
securities rated as low as Ca by Moody's Investors Service, Inc.
("Moody's") or CC by Standard & Poor's Ratings Services ("S&P") or in
securities that are not rated but that Pilgrim Advisors considers to
be of equivalent quality, and up to 1% of its assets in bonds in the
lowest rating categories. Debt securities rated Ca or CC are generally
considered to be of poor standing and predominantly speculative and
defaults in payment of interest and/or principal may be probable.
However, these debt securities pay a higher interest yield in an
attempt to attract investors.
* Both Funds may invest in short-term high-quality debt instruments for
liquidity and temporary defensive purposes.
EQUITY SECURITIES:
* High Yield Fund II may invest up to 35% of its total assets in equity
securities.
* High Yield Fund III may also invest up to 25% of its assets in equity
or equity-related instruments, such as preferred stocks, convertible
securities and rights and warrants associated with debt instruments.
FOREIGN SECURITIES:
* High Yield Fund III may invest up to 35% of its assets in foreign
issuers, but only 10% can be in securities that are not listed on a
U.S. securities exchange.
* High Yield Fund II may invest in securities, including high yield debt
and equity securities, of both U.S. and foreign issuers. The foreign
issuers may be in emerging market countries. High Yield Fund II is not
restricted to investments in companies of any particular size, but
currently intends to invest principally in companies with market
capitalizations above $100 million at the time of purchase.
Following the Reorganization and in the ordinary course of business as a
mutual fund, certain of the holdings of High Yield Fund III that were
transferred to High Yield Fund II in connection with the Reorganization may be
sold. Such sales may result in increased transaction costs for High Yield Fund
II, and the realization of taxable gains or losses for the Fund.
5
<PAGE>
COMPARISON OF PORTFOLIO CHARACTERISTICS
The following table compares certain characteristics of the portfolios of
the Funds as of June 30, 1999:
<TABLE>
<CAPTION>
High Yield Fund II High Yield Fund III
------------------ -------------------
<S> <C> <C>
Net Assets $ 80,524,199 $ 243,541,285
Number of Holdings 62 102
Average Credit Quality B B+
Average Remaining Maturity of
High Yield Securities 6.9 years 7.5 years
Portfolio Turnover Rate
(12 months ended 6/30/99) 44% 38%
As a percentage of net assets:
Equity Securities 0.2% 0.4%
Investment Grade Debt
Securities 1.8% 0.6%
High Yield Debt Securities 88.0% 79.5%
Convertible Securities 0.0% 0.0%
Foreign Securities 0.0% 13.2%
Zero Coupon Bonds 0.0% 0.0%
Borrowings 0.0% 0.0%
Short-term Investments 5.8% 0.7%
Issues Paid in Cash 0.0% 0.0%
Top 5 Industries Communications - CLEC 13.0% Gaming & Lottery 14.1%
(as a % of net assets) Communications - Telecommunications 8.0% Broadcasting 9.9%
Entertainment & Leisure 7.4% Food, Beverage & Tobacco 9.0%
Transportation 6.2% Cable Television 6.1%
Diversified Financial Services 5.8% Printing/Publishing 6.0%
Top 10 Holdings Winstar Communications 3.2% Intracel Corp. 2.2%
(as a % of net assets) ITC Deltacom 2.6% Allied Waste North America, Inc. 2.1%
Metromedia Fiber 2.6% Echostar Communications 2.1%
Resource America 2.5% Fage Dairy Industries SA 2.1%
Supreme Int'l Corp. 2.5% AES Corp. 2.0%
Majestic Star Casino 2.5% Americo Life, Inc. 1.9%
Hollywood Entertainment 2.4% Waterford Gaming LLC Finance Corp. 1.8%
Viatel, Inc. 2.4% Jupiters Ltd. 1.8%
Amkor Technology, Inc. 2.4% JCAC, Inc. 1.8%
ICG Services 2.3% Charter Communications Holdings LLC 1.8%
</TABLE>
6
<PAGE>
The following table compares the credit rating of the securities held by
the Funds. Generally, the lower the rating the greater the credit risk presented
by an instrument (CC is the lowest rating shown and A is the highest). Normally,
lower rated securities pay higher rates of interest. For the dates December 31,
1998, and June 30, 1999, the average weighted percentage of each Fund's assets
invested in securities with the following ratings (based on month-end holdings)
were as follows:
High Yield Fund II High Yield Fund III
---------------------- -----------------------
S&P RATING 12/31/98 06/30/99 12/31/98 06/30/99
- ---------- -------- -------- -------- --------
A
Rated 0.0% 0.0% 1.0% 1.2%
Unrated * 0.0% 0.0% 0.0% 0.0%
BBB
Rated 0.0% 1.8% 0.5% 0.4%
Unrated * 0.0% 0.0% 2.0% 0.0%
BB
Rated 10.3% 11.1% 36.3% 31.7%
Unrated * 0.0% 0.0% 0.0% 0.0%
B
Rated 62.8% 57.6% 41.5% 45.1%
Unrated * 0.0% 0.0% 1.7% 0.0%
CCC
Rated 13.0% 10.9% 7.8% 6.4%
Unrated * 13.9% 18.0% 9.2% 15.2%
CC
Rated 0.0% 0.6% 0.0% 0.0%
Unrated * 0.0% 0.0% 0.0% 0.0%
- ----------
* Deemed by the investment adviser to be equivalent to the same rating. For a
discussion of the S&P ratings, see Appendix C.
7
<PAGE>
RELATIVE PERFORMANCE
The following table shows, for each calendar year since 1997, the average
annual total return for (a) Class A shares of the High Yield Fund II, (b) Class
A shares of the High Yield Fund III, (c) the First Boston High Yield Index, and
(d) the Lehman High Yield Bond Index. Performance for the Funds does not reflect
the deduction of sales loads. The First Boston High Yield Index and Lehman High
Yield Bond Index have inherent performance advantages 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.
Calendar First Boston Lehman High
Year/Period High Yield High Yield High Yield Yield Bond
Ended Fund II (2) Fund III Index (3) Index (4)
----- ----------- -------- --------- ---------
12/31/97 21.05% 11.17% 12.63% 12.76%
12/31/98 4.69% 2.25% 0.58% 1.87%
09/30/99 (1) 2.62% (1.52%) 1.17% 0.75%
- ----------
(1) Not annualized.
(2) Performance for Class A shares of High Yield Fund II for periods prior to
March 27, 1998, the date on which that Fund first offered A shares, is
based upon the performance of the Institutional Class shares of the Fund,
which were first offered on July 31, 1996, as restated to reflect the
higher fees and expenses of Class A shares, excluding the deduction of
sales charges. Prior to May 24, 1999, a different investment adviser
managed Pilgrim High Yield Fund II.
(3) The First Boston High Yield Index is an unmanaged index of high yield
bonds.
(4) The Lehman High Yield Bond Index is an unmanaged index that measures the
performance of fixed income securities.
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 investment in either Fund is fluctuation in the net asset value of the
Fund's shares. Market conditions, financial conditions of issuers represented in
the portfolio, investment policies, portfolio management, and other factors
affect such fluctuations.
Each Fund is subject to credit risk. An issuer of a security held by a Fund
may default, become bankrupt or become unable to meet a financial obligation,
thereby decreasing the value of the Fund's holdings. Risk of default or
bankruptcy may be greater in periods of economic uncertainty or recession. High
yield securities are regarded as predominantly speculative with respect to the
issuing company's continuing ability to meet principal and interest payments,
and generally present a greater risk of default on payment of principal and
interest by the issuer than higher rated securities.
Each Fund is also subject to interest rate risk. For each Fund, the value
of the Fund's investments may fluctuate with changes in interest rates.
Generally, when interest rates rise the value of debt securities will fall, and
when interest rates fall the value of debt securities will increase.
Certain risks associated with an investment in High Yield Fund II are
summarized below in "Comparison of Securities and Investment Techniques."
8
<PAGE>
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.
HIGH YIELD SECURITIES. Each Fund normally invests at least 65% of its
assets in high yield securities, which are high yield/high risk debt securities
that are rated lower than Baa by Moody's or BBB by S&P, or if not rated by
Moody's or S&P, of equivalent quality ("high yield securities"). High yield
securities generally provide greater income and increased opportunity for
capital appreciation than higher quality debt securities, but they also
typically entail greater potential credit risk and price volatility. High Yield
Fund II is not restricted to investments in companies of any particular size,
but currently intends to invest principally in companies with market
capitalizations above $100 million at the time of purchase.
High yield securities are not considered to be investment grade, and are
regarded as predominantly speculative with respect to the issuing company's
continuing ability to meet principal and interest payments. The prices of high
yield securities tend to be more sensitive to adverse economic downturns or
individual corporate developments than higher-rated investments. The market
prices of high yield securities structured as zero-coupon or pay-in-kind
securities may be affected to a greater extent by interest rate changes.
High yield securities may be less liquid than higher grade bonds. Less
liquidity could adversely affect the price at which a Fund could sell a high
yield security, and could adversely affect the daily net asset value of the
Fund's shares. At times of less liquidity, it may be more difficult to value
high yield securities.
CORPORATE DEBT SECURITIES. Most high yield securities are corporate debt
securities. Corporate debt securities include corporate bonds, debentures, notes
and other similar corporate debt instruments, including convertible securities.
The market value of a corporate debt security will generally increase when
interest rates decline, and decrease when interest rates rise. There is also the
risk that the issuer of a debt security will be unable to pay interest or
principal at the time called for by the instrument.
EQUITY SECURITIES. Both Funds may invest in equity securities. Equity
securities face market, issuer and other risks, and their values may rise or
fall, sometimes rapidly and unpredictably. Market risk is the risk that the
securities may decline in value due to factors affecting securities markets
generally, or those of a particular industry. Issuer risk is the risk that the
value of a security may decline for reasons related to the issuer, such as
changes in the financial condition of the issuer. Although equity securities may
offer the potential for greater long-term growth than most debt securities, they
generally have higher volatility.
MORTGAGE-RELATED SECURITIES. Both Funds have no limit on the percentage of
their assets that may be invested in such securities. Investments in
mortgage-related securities involve certain risks. Like other fixed income
securities, when interest rates rise, the value of a 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 can be expected to increase the
9
<PAGE>
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.
FOREIGN SECURITIES. High Yield Fund II may invest up to 35% of its total
assets in equity securities of U.S. and foreign issuers. High Yield Fund II may
invest in high yield debt securities and equity securities of both U.S. and
foreign issuers. The foreign issuers may be emerging countries. High Yield Fund
II is not restricted to investments in companies of any particular size, but
currently intends to invest principally in companies with market capitalizations
above $100 million at the time of purchase. High Yield Fund III may invest up to
35% of its net assets in foreign issuers, but only 10% can be in securities that
are not listed on a U.S. securities exchange.
There are certain risks in owning foreign securities, including those
resulting from: (i) fluctuations in currency exchange rates; (ii) devaluation of
currencies; (iii) political or economic developments and the possible imposition
of currency exchange blockages or other foreign governmental laws or
restrictions; (iv) reduced availability of public information concerning
issuers; (v) accounting, auditing and financial reporting standards or other
regulatory practices and requirements that are not uniform when compared to
those applicable to domestic companies; and (vi) limitations on foreign
ownership of equity securities. Also, securities of many foreign companies may
be less liquid and the prices more volatile than those of domestic companies.
With certain foreign countries, there is the possibility of expropriation,
nationalization, confiscatory taxation and limitations on the use or removal of
funds or other assets of the Funds, including the withholding of dividends.
RESTRICTED AND ILLIQUID SECURITIES. High Yield Fund II may invest up to 15%
of its net assets in illiquid securities, but has no percentage limit on
restricted securities that are liquid. High Yield Fund III has a similar
restriction. 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. Generally, derivatives are financial instruments whose
performance is derived, at least in part, from the performance of an underlying
asset or assets. High Yield Fund II may use options, futures contracts and
interest rate and currency swaps as hedging techniques. High Yield Fund III may
invest in exchange-traded or over-the-counter derivatives, including options,
futures contracts, options on futures, and forward contracts. Mortgage-backed
securities in which the Funds may invest may be considered to be derivatives.
A risk of using financial futures contracts for hedging purposes is that
the adviser might imperfectly judge the market's direction, so that the hedge
might not correlate to the market's movements and may be ineffective.
Furthermore, if a Fund buys a futures contract to gain exposure to securities,
the Fund is exposed to the risk of change in the value of the underlying
securities and the futures contract.
10
<PAGE>
BORROWING. High Yield Fund II may borrow up to 20% of its total assets for
temporary, extraordinary or emergency purposes. High Yield Fund III may borrow
from banks solely for temporary or emergency purposes. Total borrowings by
either Fund may not exceed one-third of the Fund's total assets. Borrowing may
exaggerate the effect of any increase or decrease in the value of portfolio
securities or the net asset value (NAV) of a Fund, and money borrowed will be
subject to interest costs.
TEMPORARY DEFENSIVE AND OTHER SHORT-TERM POSITIONS. Each Fund may, on a
temporary basis, invest all of its assets in short-term instruments to maintain
liquidity or for temporary defensive purposes. The short-term instruments in
which both Funds may invest include: U.S. Government securities; other
high-quality corporate debt securities; commercial paper; certificates of
deposit; repurchase agreements; and other high-quality short-term debt
securities.
11
<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 High Yield Fund II, see "Appendix B - Additional
Information Regarding High Yield Fund II."
OPERATING EXPENSES
The operating expenses of High Yield Fund II, expressed as a ratio of
expenses to average daily net assets ("expense ratio") (as adjusted for
contractual changes) are lower than those of High Yield Fund III for the year
ending June 30, 1999.
* The net expenses for Class A, Class B and Class C shares of High Yield
Fund II are lower by 0.19%, 0.25% and 0.25%, respectively, than those
of the same classes of High Yield Fund III.
* The Funds each have the same management fee at an annual rate of 0.60%
of the Fund's average daily net assets.
* The fees for distribution and shareholder servicing for High Yield
Fund II are the same as High Yield Fund III, with the exception of
Class A, for which they are 0.05% lower for High Yield Fund III.
It is expected that combining the Funds will lower operating expenses to
a level less than the operating expenses of either Fund prior to the
Reorganization. For more information, see the estimated PRO FORMA expenses in
the table "Annual Fund Operating Expenses".
EXPENSE LIMITATION
An expense limitation arrangement is in place for High Yield Fund II,
under which Pilgrim Investments limits the ordinary operating expenses borne by
the Fund. Without this expense limitation arrangement, the expense ratio for
each Class of High Yield Fund II (as adjusted for contractual changes) would
have been lower than the expense ratio for the same Class of High Yield Fund III
for the year ended June 30, 1999. For this period, the expense ratio for Class A
shares was 1.27% for High Yield Fund II and 1.29% for High Yield Fund III. 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 High Yield Fund II provides that it
will remain in effect through at least October 31, 2001.
12
<PAGE>
EXPENSE TABLE
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 annualized based upon the operating expenses incurred for the year
ending June 30, 1999 (as adjusted for contractual changes). PRO FORMA fees show
estimated fees of High Yield Fund II after giving effect to the proposed
reorganization. PRO FORMA numbers are estimated in good faith and are
hypothetical.
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
Management Servicing Other Operating Fee Waiver Net Fund
Fees (12b-1) Fees (2) Expenses Expenses by Adviser (3) Expenses
---- ---------------- -------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
High Yield Fund II 0.60% 0.35% 0.32% 1.27% (0.17)% 1.10%
High Yield Fund III 0.60% 0.30% 0.39% 1.29% -- --
Pro Forma 0.60% 0.35% 0.17% 1.12% (0.02)% 1.10%
CLASS B
High Yield Fund II 0.60% 1.00% 0.32% 1.92% (0.17)% 1.75%
High Yield Fund III 0.60% 1.00% 0.40% 2.00% -- --
Pro Forma 0.60% 1.00% 0.17% 1.77% (0.02)% 1.75%
CLASS C
High Yield Fund II 0.60% 1.00% 0.32% 1.92% (0.17)% 1.75%
High Yield Fund III 0.60% 1.00% 0.40% 2.00% -- --
Pro Forma 0.60% 1.00% 0.17% 1.77% (0.02)% 1.75%
CLASS T
High Yield Fund II N/A N/A N/A N/A N/A N/A
High Yield Fund III 0.60% 0.65% (4) 0.37% 1.62% -- --
Pro Forma 0.60% 0.65% 0.17% 1.42% (0.02)% 1.40%
</TABLE>
- ----------
(1) High Yield Fund II's fiscal year ends on June 30, while High Yield Fund
III'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,
as adjusted for contractual changes.
(2) As a result of distribution (Rule 12b-1) fees, a long term investor may pay
more than the economic equivalent of the maximum sales charge allowed by
the Rules of the National Association of Securities Dealers, Inc. (NASD).
(3) Pilgrim Investments has entered into an expense limitation agreement that
limits expenses (excluding interest, taxes, brokerage and extraordinary
expenses) for High Yield Fund II to 1.10%, 1.75%, 1.75% and 1.40%, for
Class A, Class B, Class C and Class T shares, respectively, subject to
possible later recoupment. Pilgrim Investments has agreed that the expense
limitations shown in the table will apply to High Yield Fund II until at
least October 31, 2001.
(4) For Class T shares, distribution and service (Rule 12b-1) fees may be up to
0.95%.
13
<PAGE>
EXAMPLES
The examples are intended to help you compare the cost of investing in the
Funds and in the combined Funds on a PRO FORMA basis. The examples assume that
you invest $10,000 in each Fund and in the surviving fund after the
Reorganization for the time periods indicated. The examples also assume that
your investment has a 5% return each year and that each Fund's operating
expenses remain the same. The 5% return is an assumption and is not intended to
portray past or future investment results. Based on the above assumptions, you
would pay the following expenses if you redeem your shares at the end of each
period shown; your actual costs may be higher or lower.
<TABLE>
<CAPTION> Pro Forma:
High Yield Fund II High Yield Fund III 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 $582 $826 $1,107 $1,907 $600 $865 $1,149 $1,958 $582 $810 $1,059 $1,770
Class B 678 869 1,204 2,046 703 927 1,278 2,144* 678 853 1,155 2,080*
Class C 278 569 1,004 2,215 303 627 1,078 2,327 278 553 955 1,909
Class T N/A N/A N/A N/A 565 711 881 1,834* 543 645 772 1,617*
</TABLE>
- ----------
* The ten year calculations for Class B and Class T shares assume conversion
of the Class B and T shares to Class A shares at the end of the eighth year
following the date of purchase for High Yield Fund III and Pro Forma.
** Estimated.
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
Pro Forma:
High Yield Fund II High Yield Fund III 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 $582 $826 $1,107 $1,907 $600 $865 $1,149 $1,958 $582 $810 $1,059 $1,770
Class B 178 569 1,004 2,046 203 627 1,078 2,144* 178 553 955 2,080*
Class C 178 569 1,004 2,215 203 627 1,078 2,327 178 553 955 1,909
Class T N/A N/A N/A N/A 165 511 881 1,834* 143 445 772 1,617*
</TABLE>
- ----------
* The ten year calculations for Class B and Class T shares assume conversion
of the Class B and T shares to Class A shares at the end of the eighth year
following the date of purchase for High Yield Fund III and Pro Forma.
** Estimated.
14
<PAGE>
EXPENSE LIMITATION ARRANGEMENTS
Pilgrim Investments has entered into an expense limitation agreement with
respect to High Yield Fund II, pursuant to which Pilgrim Investments has agreed
to waive or limit its fees and to assume other expenses through at least October
31, 2001 so that the total annual ordinary operating expenses of the Fund
(excluding interest, taxes, brokerage commissions, extraordinary expenses such
as litigation, other expenses not incurred in the ordinary course of the Fund's
business, expenses of any counsel or other persons or services retained by the
Fund's trustees who are not "interested persons" of Pilgrim Investments) do not
exceed 1.10%, 1.75%, 1.75% and 1.40% for Class A, B, C and T shares,
respectively. High Yield Fund II may, in later years, reimburse Pilgrim
Investments for fees deferred or other expenses paid during the previous 36
months, but only if, after such reimbursement, the operating expenses for the
Fund are less than the percentage limitation set forth above for any such year.
GENERAL INFORMATION
Class A, Class B, Class C and Class T shares of High Yield Fund II 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 High Yield Fund III held by that shareholder immediately prior to the
Reorganization.
In addition, the period that the shareholder held the High Yield Fund III
shares will be included in the holding period of the High Yield Fund II shares
for purposes of calculating any contingent deferred sales charge. Class B and
Class T shares of High Yield Fund II 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 High Yield Fund III were purchased by the shareholder.
Purchases of shares of High Yield Fund II after the Reorganization will be
subject to the sales load structure described in the table below for High Yield
Fund II. This is the same sales load structure that is currently in effect for
High Yield Fund III.
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%(5)
</TABLE>
Neither High Yield Fund II nor High Yield Fund III 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 "Contingent Deferred
Sales Charge" in the Pilgrim Prospectus.
(4) Imposed upon redemptions within 1 year from purchase.
(5) Imposed upon redemptions within 4 years from purchase.
15
<PAGE>
SPECIAL RULES FOR SHARES OF THE HIGH YIELD FUND III PURCHASED PRIOR TO
NOVEMBER 1, 1999
Prior to November 1, 1999, the contingent deferred sales charge on
purchases of Class A shares of High Yield Fund III in excess of $1 million was
different than the contingent deferred sales charge on similar purchases of High
Yield Fund II. Shareholders of High Yield Fund III that 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
-------------------- ----------------------
11/01/99 Before 11/01/99 Before
and After 11/01/99 and After 11/01/99
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 High Yield Fund III was different than
the contingent deferred sales charge on similar purchases of High Yield Fund II.
Shareholders of High Yield Fund III 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:
CDSC ON SHARES BEING SOLD
-------------------------
11/01/99 Before
Years After Purchase and After 11/01/99
-------------------- --------- --------
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 -- --
16
<PAGE>
ADDITIONAL INFORMATION ABOUT HIGH YIELD FUND II
INVESTMENT PERSONNEL
Kevin G. Mathews, Senior Vice President and Senior Portfolio Manager of
Pilgrim Investments, has served as Portfolio Manager of High Yield Fund II since
May 1999. Additionally, he works with Pilgrim Advisors, formerly Northstar
Investment Management Corporation, and has been a member of the portfolio
management team for High Yield Fund III since November 1, 1999. Mr. Mathews has
served as Portfolio Manager to other funds within the Pilgrim Funds since 1995.
PERFORMANCE OF HIGH YIELD FUND II
The bar chart and table shown below provide an indication of the risks of
investing in High Yield Fund II by showing (on a calendar year basis) changes in
High Yield Fund II's annual total return from year to year and by showing (on a
calendar year basis) how High Yield Fund II's average annual returns since
inception compared to those of two broad-based securities market indices --First
Boston High Yield Index and Lehman High Yield Bond Index. Because Class A, B and
C shares of the Fund were not offered until March 27, 1998, the information in
the bar chart is based on the performance of the Institutional Class shares of
the Fund, which are no longer offered, for prior periods. The bar chart does not
reflect the deduction of the sales load and returns would be less than those
shown if it did. Prior to May 24, 1999, a firm other than Pilgrim Investments
managed the Fund. The Fund's past performance is not necessarily an indication
of how the Fund will perform in the future.
CALENDAR YEAR-BY-YEAR RETURNS*
1997 1998
---- ----
21.05% 4.69%
- ----------
* During the period shown in the chart, the Fund's best quarterly performance
was 8.30% for the quarter ended September 30, 1997, and the Fund's worst
quarterly performance was -7.14% for the quarter ended September 30, 1998.
For the period January 1, 1999 through September 30, 1999, the total return
of the Fund was 2.62%.
17
<PAGE>
The table below shows the average annual total returns of High Yield Fund
II if you average out actual performance over various lengths of time, compared
to the First Boston High Yield Index and the Lehman High Yield Bond Index, both
unmanaged indices. The indices have an inherent performance advantage over High
Yield Fund II 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. High Yield Fund II's performance reflected in the table assumes the
deduction of the maximum sales charge in all cases.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998 (1)
Since Inception
1 Year (7/31/96)
------ ---------
High Yield Fund II - Institutional Class (2) -0.32% 12.92%
First Boston High Yield Index (3) 0.58% 8.43%
Lehman High Yield Bond Index (4) 1.87% 8.97%
- ----------
(1) This table shows performance of the Institutional Class shares of the Fund,
which are no longer offered, because Class A, B and C shares of the Fund
were not offered until March 27, 1998.
(2) Reflects deduction of sales charge of 4.75%
(3) The First Boston High Yield Index is an unmanaged index of high yield
bonds.
(4) The Lehman High Yield Bond Index is an unmanaged index that measures the
performance of fixed income securities.
The table below shows the performance of High Yield Fund II if sales
charges are not reflected.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998 (1)
Since Inception
1 Year (7/31/96)
------ ---------
High Yield Fund II - Institutional Class 4.69% 15.21%
- ----------
(1) This table shows performance of the Institutional Class shares of the Fund,
which are no longer offered, because Class A, B and C of the Fund were not
offered until March 27, 1998.
Additional information about High Yield Fund II is included in Appendix B
to this Proxy Statement/Prospectus.
18
<PAGE>
INFORMATION ABOUT THE REORGANIZATION
THE REORGANIZATION AGREEMENT. The Reorganization Agreement provides for the
transfer of all of the assets and liabilities of High Yield Fund III to High
Yield Fund II in exchange for shares in High Yield Fund II. High Yield Fund III
will distribute the shares of High Yield Fund II received in the exchange to the
shareholders of High Yield Fund III in complete liquidation of the High Yield
Fund III.
After the Reorganization, each shareholder of High Yield Fund III will own
shares in High Yield Fund II having an aggregate value equal to the aggregate
value of each respective class of shares in High Yield Fund III 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 High Yield Fund III will
receive shares of the corresponding class of High Yield Fund II. In the interest
of economy and convenience, shares of High Yield Fund II generally will not be
represented by physical certificates.
Until the Closing, shareholders of High Yield Fund III will continue to be
able to redeem their shares. Redemption requests received after the Closing will
be treated as requests received by High Yield Fund II 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 High Yield Fund
III. The Reorganization Agreement also requires that each Fund take, or cause to
be taken, all action, and do or cause to be done, all things reasonably
necessary, proper or advisable to consummate and make effective the transactions
contemplated by the Reorganization Agreement. The Reorganization Agreement may
be terminated by mutual agreement of the parties or on certain other grounds.
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.
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 High Yield Fund II
may invest in substantially the same types of securities as High Yield Fund III,
the two Funds would be duplicative within the same group of funds. This could
impede the ability of one or both of the Funds to attract sufficient assets in
the future to enjoy reduced expenses per share from economies of scale. 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 High
Yield Fund III 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" of High Yield Fund III (as defined in the
Investment Company Act of 1940), determined that the interests of the
shareholders of High Yield Fund III will not be diluted as a result of the
proposed Reorganization, and that the proposed Reorganization is in the best
interests of High Yield Fund III and its shareholders.
19
<PAGE>
The Reorganization will allow High Yield Fund III's shareholders to
continue to participate in a professionally-managed portfolio consisting
primarily of high yield debt securities. As Class A, Class B, Class C and Class
T shareholders of High Yield Fund II, these shareholders will continue to be
able to exchange into other mutual funds in the larger Pilgrim Funds that offer
the same class of shares in which such shareholder is currently invested. A list
of the current Pilgrim Funds, and their available classes, is attached as
Appendix D.
BOARD CONSIDERATION. The Board of Trustees of High Yield Fund III, in
recommending the proposed transaction, considered a number of factors, including
the following:
(1) expense ratios and information regarding fees and expenses of High
Yield Fund III and High Yield Fund II, including the planned expense
limitation arrangement offered by Pilgrim Investments;
(2) the similarity of High Yield Fund II's investment objectives, policies
and restrictions with those of High Yield Fund III and the fact that
the two Funds are duplicative within the overall group of funds;
(3) elimination of duplication of costs, market confusion, and
inefficiencies of having two similar funds;
(4) shareholders who purchased shares of High Yield Fund III prior to
November 1, 1999 would retain the sales charge structure in place
prior to that date;
(5) estimates that show that combining the Funds would result in lower
expense ratios because of economies of scale;
(6) the Reorganization would not dilute the interests of High Yield Fund
III's current shareholders;
(7) the relative investment performance and risks of High Yield Fund II as
compared to High Yield Fund III; and
(8) the tax-free nature of the Reorganization to High Yield Fund III and
its shareholders.
The Board of Trustees also considered the future potential benefits to
Pilgrim Investments in that its costs to limit the expenses of High Yield Fund
II are likely to be reduced if the Reorganization is approved.
THE TRUSTEES OF HIGH YIELD TRUST III RECOMMEND THAT SHAREHOLDERS APPROVE THE
REORGANIZATION WITH HIGH YIELD FUND II.
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 High Yield Fund III nor its shareholders nor High Yield
Fund II 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.
20
<PAGE>
Immediately prior to the Reorganization, High Yield Fund III will pay a
dividend or dividends which, together with all previous dividends, will have the
effect of distributing to its shareholders all of High Yield Fund III'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 High
Yield Fund III's shareholders.
As of December 31, 1999, High Yield Fund III had accumulated capital loss
carryforwards in the amount of approximately $31,941,327. As of June 30, 1999,
High Yield Fund II had accumulated capital loss carryforwards of approximately
$2,988,771. After the Reorganization, the losses of High Yield Fund II will be
available to High Yield Fund II to offset its capital gains, although the amount
of these losses which may offset High Yield Fund II's future capital gains in
any given year may be limited. Also, after the Reorganization, the losses of
High Yield Fund III will be available to High Yield Fund II to offset its
capital gains, although a portion of the amount of these losses which may offset
High Yield Fund II's capital gains in any given year will be limited due to a
previous reorganization. As a result of this limitation, it is possible that
High Yield Fund II may not be able to use its losses as rapidly as it might have
had the Reorganization not occurred, and part of these losses may not be useable
at all. The ability of High Yield Fund II to absorb losses in the future depends
upon a variety of factors that cannot be known in advance, including the
existence of capital gains against which these losses may be offset. In
addition, the benefits of any of High Yield Fund II's capital loss carryforwards
currently are available only to pre-reorganization shareholders of that Fund .
After the Reorganization, however, these benefits will inure to the benefit of
all post-reorganization shareholders of High Yield Fund II.
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 immediate before Closing.
ADDITIONAL INFORMATION ABOUT THE FUNDS
FORM OF ORGANIZATION. High Yield Fund II is a series of Pilgrim Mutual
Funds, which is a Delaware business trust. Pilgrim Mutual Funds also offers
other series, which are not involved in the Reorganization. High Yield Fund III
is the only series of High Yield Fund III, which is organized as a Massachusetts
business trust. Pilgrim Mutual Funds and High Yield Fund III are each governed
by a Board of Trustees. High Yield Fund III has twelve trustees and High Yield
Fund II has thirteen trustees, including the twelve members of the Board of High
Yield Fund III.
DISTRIBUTOR. Pilgrim Securities, Inc. (the "Distributor"), whose address is
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004, is the principal
distributor for High Yield Fund II and High Yield Fund III. Formerly, Northstar
Distributors, Inc. served as distributor for High Yield Fund III. However, on
November 16, 1999 Northstar Distributors, Inc. merged with the Distributor.
DIVIDENDS AND OTHER DISTRIBUTIONS. Each Fund pays monthly dividends from
net investment income, and pays capital gains, if any, at least annually. For
each Fund, dividends and distributions are determined on a class basis.
Dividends and distributions of High Yield Fund II 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 High Yield Fund III's
shareholders, then as soon as practicable before the Closing, High Yield Fund
III will pay its shareholders a cash distribution of all undistributed 1999 net
investment income and undistributed realized net capital gains.
21
<PAGE>
CAPITALIZATION. The following table shows on an unaudited basis the
capitalization of High Yield Fund II and High Yield Fund III as of June 30, 1999
and on a PRO FORMA basis as of June 30, 1999 giving effect to the
Reorganization:
Net Asset Value
Net Assets Per Share Shares Outstanding
---------- --------- ------------------
HIGH YIELD FUND II
Class A $ 16,795,079 $11.57 1,451,200
Class B $ 41,882,346 $11.58 3,618,337
Class C $ 18,618,124 $11.58 1,608,363
Class T N/A N/A N/A
HIGH YIELD FUND III
Class A $ 26,747,858 $ 8.17 3,273,186
Class B $125,781,294 $ 8.17 15,399,860
Class C $ 21,331,511 $ 8.17 2,610,084
Class T $ 69,680,622 $ 8.17 8,533,000
PRO FORMA -- HIGH YIELD FUND II INCLUDING HIGH YIELD FUND III
Class A $ 43,542,937 $11.57 3,763,434
Class B $167,663,640 $11.58 14,478,725
Class C $ 39,949,635 $11.58 3,449,882
Class T $ 69,680,622 $11.58 6,017,325
22
<PAGE>
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 High Yield Fund III 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
and its affiliates, without additional compensation, may solicit proxies in
person or by telephone, telegraph, facsimile, or oral communication. High Yield
Fund III has retained Shareholder Communications Corporation a professional
proxy solicitation firm, to assist with any necessary solicitation of proxies.
Shareholders of High Yield Fund III 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 High Yield Fund III a written revocation or duly executed
proxy bearing a later date. In addition, any shareholder who attends the Meeting
in person may vote by ballot at the Meeting, thereby canceling any proxy
previously given. The persons named in the accompanying proxy will vote as
directed by the proxy, but in the absence of voting directions in any proxy that
is signed and returned, they intend to vote "FOR" the Reorganization proposal
and may vote in their discretion with respect to other matters not now known to
the Board of Trustees of High Yield Fund III that may be presented at the
Meeting.
VOTING RIGHTS
Shares of High Yield Fund III entitle its holders to one vote for each
share held, and a proportionate fraction of a vote for each fraction of a share
held. Shares have noncumulative voting rights and no preemptive or subscription
rights. High Yield Fund III is not required to hold shareholder meetings
annually, although shareholder meetings may be called for purposes such as
electing Trustees, changing fundamental policies or approving an investment
management agreement.
Shareholders of High Yield Fund III at the close of business on January 24,
2000 (the "Record Date") will be entitled to be present and give voting
instructions for High Yield Fund III at the Meeting with respect to their shares
owned as of that Record Date. As of the Record Date, 23,147,151 shares were
outstanding and entitled to vote.
Approval of the Reorganization requires the affirmative vote of a majority
of the outstanding shares of High Yield Fund III. The 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 entitled to vote
present in person or by proxy may adjourn the meeting from the time to time
until a quorum is present.
If a shareholder abstains from voting as to any matter, or if a broker
returns a "non-vote" proxy, indicating a lack of authority to vote on a matter,
the shares represented by the abstention or non-vote will be deemed present at
the Meeting for purposes of determining a quorum. However, abstentions and
broker non-votes will not be deemed represented at the Meeting for purposes of
calculating the vote on any matter. As a result, an abstention or broker
non-vote will have the same effect as a vote against the Reorganization. Prior
to the Meeting, High Yield Fund III expects that broker-dealer firms holding its
shares in "street name" for their customers will request voting instructions
from their customers and beneficial owners.
23
<PAGE>
To the knowledge of High Yield Fund III, as of December 1, 1999, no current
Trustee of High Yield Fund III owns 1% or more of the outstanding shares of the
Fund and the officers and Trustees of High Yield Fund III own, as a group, less
than 1% of the shares of High Yield Fund III.
Appendix E 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
High Yield Fund III or High Yield Fund II.
OTHER MATTERS TO COME BEFORE THE MEETING
High Yield Fund III does not know of any matters to be presented at the
Meeting other than those described in this Proxy Statement/Prospectus. If other
business should properly come before the Meeting, the proxyholders will vote
thereon in accordance with their best judgment.
SHAREHOLDER PROPOSALS
High Yield Fund III is not required to hold regular annual meetings and, in
order to minimize costs, does not intend to hold meetings of shareholders unless
so required by applicable law, regulation, regulatory policy or if otherwise
deemed advisable by its 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 High Yield Fund III 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 MEETING MAY BE ASSURED, PROMPT
EXECUTION AND RETURN OF THE ENCLOSED PROXY IS REQUESTED. A SELF-ADDRESSED,
POSTAGE-PAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
/s/ James M. Hennessy
James M. Hennessy, Secretary
February 8, 2000
40 North Central Avenue
Phoenix, Arizona 85004
24
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this 16th day of November, 1999, by and between Pilgrim Mutual Funds (the
"Acquiring Company"), a Delaware business trust with its principal place of
business at 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004, on
behalf of Pilgrim High Yield Fund II (the "Acquiring Fund"), a separate series
of the Acquiring Company, and Pilgrim High Yield Fund III (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 beneficial interest (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 Company 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 Trustees of the Acquiring Company have determined that the
exchange of all of the assets of the Acquired Fund for Acquiring Fund Shares and
the assumption of all liabilities of the Acquired Fund by the Acquiring Fund is
in the best interests of the Acquiring Fund and its shareholders and that the
interests of the existing shareholders of the Acquiring Fund would not be
diluted as a result of this transaction; and
WHEREAS, the 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 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 class, computed in the manner
A-1
<PAGE>
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 Company's Declaration of Trust and then-current
prospectus or statement of additional information with respect to the Acquiring
Fund, and valuation procedures established by the Acquiring Company's Board of
Trustees.
A-2
<PAGE>
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 Company's
Declaration of Trust and then-current prospectus or statement of additional
information with respect to the Acquiring Fund, and valuation procedures
established by the Acquiring Company's Board of Trustees.
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 Acquired Fund's
designated record keeping agent.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be April 1, 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 Company 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.
A-3
<PAGE>
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 Trustees
of the Acquiring Company 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;
A-4
<PAGE>
(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
A-5
<PAGE>
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 "Proxy Statement")
to be included in the Registration Statement referred to in paragraph 5.6,
insofar as it relates to the Acquired Fund, will, on the effective date of the
Registration Statement and on the Closing Date (i) not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not materially misleading
provided, however, that the representations and warranties in this subparagraph
(p) shall not apply to statements in or omissions from the Proxy Statement and
the Registration Statement made in reliance upon and in conformity with
information that was furnished by the Acquiring Fund for use therein, and (ii)
comply in all material respects with the provisions of the 1933 Act, the 1934
Act and the 1940 Act and the rules and regulations thereunder.
4.2 The Acquiring Company, on behalf of the Acquiring Fund, represents and
warrants to the Acquired Fund as follows:
(a) The Acquiring Fund is duly organized as a series of the Acquiring
Company, which is a business trust duly organized and validly existing under the
laws of the State of Delaware with power under the Acquiring Company'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 Acquiring Company is a registered investment company
classified as a management company of the open-end type, and its registration
with the Commission as an investment company under the 1940 Act and the
registration of its shares under the 1933 Act, including the shares of the
Acquiring Fund, 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
A-6
<PAGE>
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 Company's Declaration of Trust 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
A-7
<PAGE>
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 by the Acquiring Company and have been offered and sold in every
state and the District of Columbia in compliance in all material respects with
applicable registration requirements of the 1933 Act and state securities laws.
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 Trustees of the Acquiring Company on behalf of the
Acquiring Fund and this Agreement will constitute a valid and binding obligation
of the Acquiring Fund, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium and other
laws relating to or affecting creditors' rights and to general equity
principles;
(n) The Class A, Class B, Class C 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 by the Acquiring Company;
(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 Acquiring Company or the Acquiring
Fund, the Registration Statement relating to the Acquiring Fund Shares issuable
hereunder, and the proxy materials of the Acquired Fund to be included in the
Registration Statement, and any amendment or supplement to the foregoing, will,
from the effective date of the Registration Statement through the date of the
meeting of shareholders of the Acquired Fund contemplated therein (i) not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which such statements were made, not misleading
provided, however, that the representations and warranties in this subparagraph
(p) shall not apply to statements in or omissions from the Registrations
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 The Acquired Fund will call a meeting of the shareholders of the
Acquired Fund to consider and act upon this Agreement and to take all other
action necessary to obtain approval of the transactions contemplated herein.
A-8
<PAGE>
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 Proxy Statement referred to in paragraph 4.1(p), all to
be included in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the 1934 Act and the
1940 Act, in connection with the meeting of the shareholders of the Acquired
Fund to consider approval of this Agreement and the transactions contemplated
herein.
5.7 As soon as is reasonably practicable after the Closing, the Acquired
Fund will make a liquidating distribution to its shareholders consisting of the
Class A, Class B, Class C 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 and the
Acquiring Company contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date;
6.2 The Acquiring Company, on behalf of 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 Company
A-9
<PAGE>
and 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 Company and the Acquiring Fund shall have performed all
of the covenants and complied with all of the provisions required by this
Agreement to be performed or complied with by the Acquiring Company and 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;
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.
A-10
<PAGE>
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 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. 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 Company 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 entitled to vote on the
Reorganization. The costs of the Reorganization shall include, but not be
limited to, costs associated with obtaining any necessary order of exemption
from the 1940 Act, preparation of the Registration Statement, printing and
distributing the Acquiring Fund's prospectus and the Acquired Fund's proxy
materials, legal fees, accounting fees, securities registration fees, and
A-11
<PAGE>
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 Company 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, 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 Company; provided, however, that following the
meeting of the shareholders of the Acquired Fund called by the Acquired Fund
pursuant to paragraph 5.2 of this Agreement, no such amendment may have the
effect of changing the provisions for determining the number of the Class A,
Class B, Class C 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 Company 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
A-12
<PAGE>
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 either party hereto personally, but shall bind only the
trust property of such party, as provided in the Declaration of Trust of each
party. 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 each party as provided in
the Declaration of Trust of each party.
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 MUTUAL FUNDS on behalf of its
HIGH YIELD FUND II series
/s/ James M. Hennessy By: /s/ Michael J. Roland
- ----------------------------- ----------------------------------
SECRETARY Its: Principal Accounting Officer
Attest: PILGRIM HIGH YIELD FUND III
/s/ James M. Hennessy By: /s/ Michael J. Roland
- ----------------------------- ----------------------------------
SECRETARY Its: Principal Accounting Officer
A-13
<PAGE>
APPENDIX B
ADDITIONAL INFORMATION REGARDING PILGRIM HIGH YIELD FUND II
(THE "FUND")
SHAREHOLDER GUIDE
PILGRIM PURCHASE OPTIONS(TM)
This Proxy Statement/Prospectus relates to four separate classes of Pilgrim
High Yield Fund II: 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 High Yield Fund II shares issued to you in the
Reorganization will be the same as those that applied to High Yield Fund III
shares held by you immediately prior to the Reorganization, and the period that
you held the High Yield Fund III shares will be included in the holding period
of the High Yield Fund II shares for purposes of calculating contingent deferred
sales charges and determining conversion rights. Purchases of shares of High
Yield Fund II after the Reorganization will be subject to the sales load
structure and conversion rights discussed below.
The High Yield Fund II also offers Class 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 (1)
------- ------- ------- -----------
<S> <C> <C> <C> <C>
Maximum Initial Sales Charge on Purchases 4.75%(2) None None None
CDSC None (3) 5.00%(4) 1.00%(5) 4.00%(6)
Annual Service and Distribution Fees (7) 0.25% 1.00% 1.00% 0.65%
Maximum Purchase Unlimited $250,000 Unlimited Unlimited
Automatic Conversion to Class A N/A 8 Years (8) N/A 8 Years (8)
</TABLE>
- ----------
(1) Class T shares are no longer available for purchase, unless you are
investing income earned on Class T shares or exchanging Class T shares of
another fund.
(2) Imposed upon purchase. Reduced for purchases of $50,000 and over.
(3) 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."
(4) Imposed upon redemption within 6 years from purchase. Shares exchanged from
High Yield Fund III 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."
(5) Imposed upon redemption within 1 year from purchase.
(6) Imposed upon redemption within 4 years from purchase.
(7) Annual asset-based distribution charge.
(8) Class B and Class T shares of High Yield Fund II issued to shareholders of
High Yield Fund III 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 High Yield Fund III.
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 net asset value ("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."
Dealers'
Reallowance
As a % of Offering As a % as a % of
Your Investment Price Per Share of Nav Offering Price
- -------------------------------- ------------------ ------- --------------
Less than $50,000 4.75% 4.99% 4.25%
$50,000 but less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.00%
$250,000 but less than $500,00 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000 2.00% 2.04% 1.75%
There is no initial sales charge on purchases of $1,000,000 or more.
However, Pilgrim Securities, Inc. (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 Which
Your Investment CDSC CDSC Applies
- ----------------------------------- ----- -------------
$1,000,000 but less than $2,500,000 1.00% 2 Years
$2,500,000 but less than $5,000,000 0.50% 1 Year
$5,000,000 and over 0.25% 1 Year
However, Class A shares of High Yield Fund II issued in connection with the
Reorganization with respect to Class A shares of High Yield Fund III that were
purchased prior to November 1, 1999 and 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 High Yield Fund III.
REDUCED SALES CHARGES. An investor may immediately qualify for a reduced
sales charge on a purchase of Class A shares of the Fund or other open-end funds
in the Pilgrim Funds 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
Fund and class will be restricted within your account to cover additional sales
charges that may be due if your actual total investment fails to qualify for the
reduced sales charges. See the Statement of Additional Information for the Fund
for details on the Letter of Intent option or contact the Shareholder Servicing
Agent at (800) 992-0180 for more information.
A sales charge may also be reduced by taking into account the current value
of your existing holdings in the Fund or any other open-end funds in the Pilgrim
funds (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.
B-2
<PAGE>
For the purposes of Rights of Accumulation and the Letter of Intent
Privilege, shares held by investors in the Pilgrim Funds which impose a CDSC may
be combined with Class A 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
without a sales charge by certain individuals and institutions. For additional
information, contact the Shareholder Servicing Agent at (800) 992-0180, or see
the Statement of Additional Information for the Fund.
CLASS B SHARES: DEFERRED SALES CHARGE ALTERNATIVE. Class B shares 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:
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 High Yield Fund II issued in connection with the
Reorganization with respect to Class B shares of High Yield Fund III 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.
To determine the CDSC payable on redemptions of Class B shares, the Fund
will first redeem shares in accounts that are not subject to a CDSC; second,
shares acquired through reinvestment of net investment income dividends and
capital gain distributions; third, shares purchased more than 6 years prior to
redemption; and fourth, shares subject to a CDSC in the order in which such
shares were purchased. Using this method, your sales charge, if any, will be at
the lowest possible rate.
Class B shares will automatically convert into Class A shares approximately
eight years after purchase. Class B shares of High Yield Fund II issued in
connection with the Reorganization with respect to Class B shares of High Yield
Fund III that were held prior to November 1, 1999 will convert to Class A shares
eight years after the purchase of the original shares of High Yield Fund III.
For additional information on the CDSC and the conversion of Class B shares, see
the Fund's Statement of Additional Information.
B-3
<PAGE>
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 High Yield Fund III, and may only be
obtained by such shareholders by reinvesting dividends distributed to the Class
T shareholders or by exchanging Class T shares from another fund within the
Pilgrim funds.
Class T shares of the Fund are subject to a distribution fee at an annual
rate of 0.65% of the average daily net assets of the Class.
Class T shares will automatically convert into Class A shares approximately
eight years after purchase, except that Class T shares of High Yield Fund II
issued in connection with the Reorganization will convert to Class A shares
eight years after the purchase of the original shares of High Yield Fund III.
For additional information about Class T shares, see the Pilgrim Prospectus and
the Statement of Additional Information for the Pilgrim Funds.
WAIVERS OF CDSC. The CDSC 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 for more
information.
RULE 12b-1 PLAN. The Fund has a distribution plan pursuant to Rule 12b-1
under the Investment Company Act of 1940 applicable to each class of shares of
the Fund ("Rule 12b-1 Plan"). Under the Rule 12b-1 Plan, 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 and Class C shares.
B-4
<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 in connection with services rendered to shareholders of the
Fund, the Fund pays the Distributor servicing fees and distribution fees up to
the annual rates set forth below (calculated as a percentage of the Fund's
average daily net assets attributable to that class):
Servicing Fee Distribution Fee
------------- ----------------
Class A 0.25% 0.10%
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class T 0.25% 0.40%
Fees paid under the Rule 12b-1 Plan may be used to cover the expenses of
the Distributor from the sale of Class A, Class B or Class C 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% 0.40%
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 out-of-pocket fees, proxy solicitation costs, and the compensation
of Trustees who are not affiliated with Pilgrim Investments. Most Fund expenses
are allocated proportionately among all of the outstanding shares of that Fund.
However, the Rule 12b-1 Plan fees for each class of shares are charged
proportionately only to the outstanding shares of that class.
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 IRA's). The minimum initial
investment in the Fund is $1,000 ($250 for Retirement Accounts), 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-U.S. banks (even if payment may be effected through a U.S.
bank) will not be accepted. Pilgrim Investments reserves the right to waive
minimum investment amounts.
PRICE OF SHARES. When you buy shares, you pay the NAV plus any applicable
sales charge. When you sell shares, you receive the NAV minus any applicable
deferred sales charge. Exchange orders are effected at NAV.
B-5
<PAGE>
DETERMINATION OF NET ASSET VALUE. The NAV of each class of the Fund's
shares is determined daily as of the close of regular trading on the New York
Stock Exchange (usually at 4:00 p.m. New York City time) on each day that it is
open for business. The NAV of each class represents that classes pro rata share
of that Fund's net assets as adjusted for any class specific expenses (such as
fees under a Rule 12b-1 plan), and divided by that class' outstanding shares. In
general, the value of the Fund's assets is based on actual or estimated market
value, with special provisions for assets not having readily available market
quotations and short-term debt securities. The NAV per share of each class of
the Fund will fluctuate in response to changes in market conditions and other
factors. Portfolio securities for which market quotations are readily available
are stated at market value. Short-term debt securities having a maturity of 60
days or less are valued at amortized cost, unless the amortized cost does not
approximate market value. Securities prices may be obtained from automated
pricing services. In other cases, securities are valued at their fair value as
determined in good faith by the Board of Trustees, 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.
PRE-AUTHORIZED INVESTMENT PLAN. You may establish a pre-authorized
investment plan to purchase shares with automatic bank account debiting. For
further information on pre-authorized investment plans, contact the Shareholder
Servicing Agent at (800) 992-0180.
RETIREMENT PLANS. The Fund has available prototype qualified retirement
plans for both corporations and for self-employed individuals. Also available
are prototype IRA, Roth IRA and Simple IRA plans (for both individuals and
employers), Simplified Employee Pension Plans, Pension and Profit Sharing Plans
and Tax Sheltered Retirement Plans for employees of public educational
institutions and certain non-profit, tax-exempt organizations. 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.
EXECUTION OF REQUESTS
Purchase and sale requests are executed at the next NAV determined after
the order is received in proper form by the Transfer Agent or Distributor. A
purchase order will be deemed to be in proper form when all of the required
steps set forth above under "Purchase of Shares" have been completed. If you
purchase by wire, however, the order will be deemed to be in proper form after
the telephone notification and the federal funds wire have been received. If you
purchase by wire, you must submit an application form in a timely fashion. If an
order or payment by wire is received after the close of regular trading on the
New York Stock Exchange (normally 4:00 p.m. Eastern Time), the shares will not
be credited until the next business day.
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: (i) recording telephone instructions for
exchanges and expedited redemptions; (ii) requiring the caller to give certain
specific identifying information; and (iii) providing written confirmation to
shareholders of record not later than five days following any such telephone
transactions. If the Fund and its Transfer Agent do not employ these procedures,
they may be liable for any losses due to unauthorized or fraudulent telephone
instructions. Telephone redemptions may be executed on all accounts other than
retirement accounts.
B-6
<PAGE>
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 (more than four
per year). Pilgrim Investments reserves the right, upon 60 days' prior notice,
to restrict the frequency of, otherwise modify, or impose charges of up to $5.00
upon exchanges. The total value of shares being exchanged must at least equal
the minimum investment requirement of the fund into which they are being
exchanged.
Shares of one class of the Fund may be exchanged for shares of that same
class of any other open-end Pilgrim Fund at NAV 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.
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 the
Shareholder Servicing Agent at (800) 992-0180, or see the Fund's Statement of
Additional Information.
PAYMENTS. Payment to shareholders for shares redeemed or repurchased
ordinarily will be made within three days after receipt by the Transfer Agent of
a written request in good order. The Fund may delay the mailing of a redemption
check until the check used to purchase the shares being redeemed has cleared
which may take up to 15 days or more. To reduce such delay, all purchases should
be made by bank wire or federal funds. The Fund may suspend the right of
redemption under certain extraordinary circumstances in accordance with the
Rules of the Securities and Exchange Commission. 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
B-7
<PAGE>
Fund may make payment wholly or partly in securities at their then current
market value equal to the redemption price. In such case, the Fund could elect
to make payment in securities for redemptions in excess of $250,000 or 1% of its
net assets during any 90-day period for any one shareholder. An investor may
incur brokerage costs in converting such securities to cash.
MANAGEMENT OF THE FUND
INVESTMENT MANAGER. 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 Trustees 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 adviser to the High Yield Fund II in a transaction that closed on 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 are
indirect, wholly owned subsidiaries of ReliaStar Financial Corp. (NYSE: RLR).
Through its subsidiaries, ReliaStar Financial Corp. 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.
SHAREHOLDER SERVICING AGENT. Pilgrim Group, Inc. serves as Shareholder
Servicing Agent for the High Yield Fund II. 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
B-8
<PAGE>
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. High Yield Fund II 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.
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. The Fund expects that its
distributions will consist primarily of ordinary income.
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.
B-9
<PAGE>
FINANCIAL HIGHLIGHTS
PILGRIM
HIGH YIELD
FUND II
- --------------------------------------------------------------------------------
For the three months ended June 30, 1999, the information in the table below has
been audited by KPMG LLP, independent auditors. For all periods ending prior to
June 30, 1999, the financial information was audited by another independent
auditor.
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------
Three Months March 27, 1998
Ended Year Ended to
June 30, 1999 (b) March 31, 1999 March 31, 1998 (a)
----------------- -------------- ------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 11.66 12.72 12.70
-------- ----- -----
Income from investment operations:
Net investment income (loss) $ 0.28 1.12 0.01
Net realized and unrealized gains (loss) on
investments $ (0.09) (1.00) 0.01
-------- ----- -----
Total from investment operations $ 0.19 0.12 0.02
-------- ----- -----
Less distributions from:
Net investment income $ 0.28 1.18 --
Net asset value, end of period $ 11.57 11.66 12.72
-------- ----- -----
TOTAL RETURN (c): % 1.60 1.13 0.16
======== ===== =====
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ($000's) $ 16,795 17,327 4,690
Ratios to average net assets:
Net expenses after expense reimbursement (d) % 1.10 1.12 1.06
Gross expenses prior to expense reimbursement (d) % 1.37 1.53 1.06
Net investment income (loss) after expense
reimbursement (d) % 9.68 9.44 7.22
Portfolio turnover % 44 242 484
</TABLE>
- ----------
(a) The Fund commenced operations on March 27, 1998.
(b) Effective May 24, 1999, Pilgrim Investments, Inc. became the Investment
Manager of the Fund.
(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 for less than one year is not annualized.
(d) Annualized
B-10
<PAGE>
<TABLE>
<CAPTION>
Class B Class C
- ------------------------------------------------------------------ -----------------------------------------
Three Months March 27, 1998 Three Months March 27, 1998
Ended Year Ended to Ended Year Ended to
June 30, 1999 (b) March 31, 1999 March 31, 1998 (a) June 30, 1999 (b) March 31, 1999 March 31, 1998 (a)
- ----------------- -------------- ------------------ ----------------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
$ 11.66 12.71 12.69 11.66 12.71 12.69
---------- ----- ----- ----- ----- -----
$ 0.27 1.04 0.01 0.27 1.04 0.01
$ (0.09) (0.99) 0.01 (0.09) (0.99) 0.01
---------- ----- ----- ----- ----- -----
$ 0.18 0.05 0.02 0.18 0.05 0.02
---------- ----- ----- ----- ----- -----
$ 0.26 1.10 -- 0.26 1.10 --
$ 11.58 11.66 12.71 11.58 11.66 12.71
---------- ----- ----- ----- ----- -----
% 1.53 0.55 0.16 1.53 0.55 0.16
========== ===== ===== ===== ===== =====
$ 41,882 42,960 8,892 18,618 21,290 4,815
% 1.75 1.77 1.69 1.75 1.77 1.66
% 2.02 2.18 1.69 2.02 2.18 1.66
% 9.03 8.84 6.61 9.03 8.79 6.91
% 44 242 484 44 242 484
</TABLE>
B-11
<PAGE>
APPENDIX C
SUMMARY DESCRIPTION OF BOND RATINGS
The following are excerpts from S&P's description of its bond ratings: BB,
B, CCC, CC, C - predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with terms of the obligation; BB
indicates the lowest degree of speculation and C the highest. D - in payment
default. S&P applies indicators "+," no character, and "-" to its rating
categories. The indicators show relative standing within the major rating
categories.
The following are excerpts from Moody's description of its bond ratings: Ba
- - judged to have speculative elements; their future cannot be considered as well
assured. B - generally lack characteristics of a desirable investment. Caa - are
of poor standing; such issues may be in default or there may be present elements
of danger with respect to principal or interest. Ca -speculative in a high
degree; often in default. C - lowest rate class of bonds; regarded as having
extremely poor prospects. Moody's also applies numerical indicators 1, 2 and 3
to rating categories. The modifier 1 indicates that the security is in the
higher end of its rating category; 2 indicates a mid-range ranking; and 3
indicates a ranking towards the lower end of the category.
C-1
<PAGE>
APPENDIX D
The following is a list of the current funds in the Pilgrim Funds and the
classes of shares that are currently offered by each fund or are expected to be
offered at or shortly after the Reorganization:
Fund Classes Offered
- ---- ---------------
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) If approved by shareholders, this fund will be reorganized into the Pilgrim
Government Securities Income Fund.
(2) If approved by shareholders, this fund will be reorganized into the Pilgrim
High Yield Fund II. (3) If approved by shareholders, these funds will be
reorganized into the Pilgrim Balanced Fund.
D-1
<PAGE>
APPENDIX E
As of November 22, 1999, the following persons owned of record 5% or more
of the outstanding shares of the specified class of High Yield Fund II:
<TABLE>
<CAPTION>
% of Class % of Fund % of Fund
Before Before After
Name and Address Class Reorganization Reorganization Reorganization
- ----------------------------------------------- ----- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Wachovia Securities, Inc. FBO A 7.79% 1.11% 0.32%
M. B. Kahn Construction Co., Inc.
Attn: Ron McCall
PO Box 1179
Columbia, SC 29202
Merrill Lynch Pierce Fenner & A 6.86% 0.98% 0.30%
Smith, 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 & B 28.98% 14.91% 4.33%
Smith, For the Sole Benefit of its Customers,
Attn: Fund Admin
4800 Deer Lake Drive E 2nd Floor
Jacksonville, FL 32246-6484
New Life Corp of America FBO C 12.64% 2.91% 0.84%
Norvell L Olive President
PO Box 906
Hendersonville, TN 37077
Merrill Lynch Pierce Fenner & C 28.33% 6.53% 1.84%
Smith, For the Sole Benefit of its Customers,
Attn: Fund Admin
4800 Deer Lake Drive E 2nd Floor
Jacksonville, FL 32246-6484
</TABLE>
E-1
<PAGE>
As of November 22, 1999, the following persons owned of record 5% or more
of the outstanding shares of the specified class of High Yield Fund III:
<TABLE>
<CAPTION>
% of Class % of Fund % of Fund
Before Before After
Name and Address Class Reorganization Reorganization Reorganization
---------------- ----- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Merrill Lynch Pierce Fenner & A 10.00% 1.08% 0.71%
Smith, 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 & B 37.80% 20.22% 13.94%
Smith, 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 & C 60.17% 4.43% 2.91%
Smith, For the Sole Benefit of its Customers,
Attn: Fund Admin
4800 Deer Lake Drive E 2nd Floor
Jacksonville, FL 32246-6484
E-2
</TABLE>
