As filed with the Securities and Exchange Commission on December 21, 1999
Securities Act File No. 33-56094
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. __
Post-Effective Amendment No. __
PILGRIM MUTUAL FUNDS
(Exact Name of Registrant as Specified in Charter)
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004
(Address of Principal Executive Offices) (Zip Code)
(800) 992-0180
(Registrant's Area Code and Telephone Number)
James M. Hennessy
Pilgrim Investments, Inc.
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
(Name and Address of Agent for Service)
With copies to:
Jeffrey S. Puretz, Esq.
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, DC 20006
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Approximate Date of Proposed Public Offering:
As soon as practicable after this Registration Statement becomes effective.
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It is proposed that this filing will become effective on January 20, 2000
pursuant to Rule 488 under the Securities Act of 1933.
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No filing fee is required because an indefinite number of shares have previously
been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended.
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<PAGE>
Pilgrim 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) 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 group of funds. 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,
Robert W. Stallings
President
<PAGE>
Pilgrim High Yield Fund III
(formerly Northstar High Yield Bond 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
TO BE HELD ON MARCH 24, 2000
To the Shareholders:
A Special Meeting of Shareholders of the Pilgrim High Yield Fund III
(formerly Northstar High Yield Fund) will be held on 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
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 INVESTMENTS.............................5
COMPARISON OF PORTFOLIO CHARACTERISTICS......................................7
COMPARISON OF RISKS..........................................................9
COMPARISON OF SECURITIES AND INVESTMENT TECHNIQUES...........................9
COMPARISON OF FEES AND EXPENSES...............................................12
OPERATING EXPENSES..........................................................13
ANNUAL FUND OPERATING EXPENSES..............................................14
EXPENSE REIMBURSEMENT ARRANGEMENTS..........................................15
TRANSACTION FEES ON NEW INVESTMENTS.........................................16
ADDITIONAL INFORMATION ABOUT HIGH YIELD FUND II...............................17
INFORMATION ABOUT THE REORGANIZATION..........................................19
ADDITIONAL INFORMATION ABOUT THE FUNDS........................................22
GENERAL INFORMATION...........................................................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 TO BE HELD ON
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 received 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 (the "Pilgrim Prospectus") and the Statement of Additional
Information for Pilgrim group of funds dated January 4, 2000, each of which may
be obtained, without charge, by calling (800) 992-0180. Each of the Funds also
provides periodic reports to its shareholders which highlight certain important
information about the Funds, including investment results and financial
information. The annual report for 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 SEC's Public Reference Room (1-800-SEC-0330) or from
the SEC's internet website at www.sec.gov.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES, OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
SUMMARY
You should read this entire Proxy Statement/Prospectus carefully. For
additional information, you should consult the Pilgrim Prospectus, and the
Agreement and Plan of Reorganization, which is attached hereto as Appendix A.
THE PROPOSED REORGANIZATION. On November 16, 1999, the Board of Trustees of
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 March 27, 2000, or on a later date as the parties may agree (the "Closing").
As a result of the Reorganization, each shareholder of Class A, Class B, Class C
and Class T shares of 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 substantially 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
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<PAGE>
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.
<TABLE>
<CAPTION>
Distribution and
Operating Expenses(2) Management Fees(3) Shareholders Fees(3)
------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class of Shares A B C T A B C T A B C T
------------------------- ------------------------- -------------------------
High Yield Fund II(1) 1.10% 1.75% 1.75% N/A 0.60% 0.60% 0.60% N/A 0.35% 1.00% 1.00% N/A
High Yield Fund III 1.29% 2.00% 2.00% 1.62% 0.60% 0.60% 0.60% 0.60% 0.30% 1.00% 1.00% 0.65%
</TABLE>
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(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) 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).
(3) Fees are expressed as an annual rate of average daily net assets.
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
Operating Expenses Management Fees Shareholders Fees
------------------------- ------------------------- -------------------------
Class of Shares A B C T All Classes A B C T
------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Combined Funds
(pro forma) 1.10% 1.75% 1.75% 1.40% 0.60% 0.60% 0.60% 0.60% 0.35% 1.00% 1.00% 0.65%
</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.
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<PAGE>
For further information on fees and expenses, see "Comparison of Fees and
Expenses."
* The Funds have affiliated management. Pilgrim Investments, Inc., 40
North Central Avenue, Suite 1200, Phoenix, Arizona 85004, is the
investment manager to High Yield Fund II. Pilgrim Advisors, Inc.,
(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.
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 acquire 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."
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<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.
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<PAGE>
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.
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<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,
Metromedia Fiber 2.6% Inc. 2.1%
Resource America 2.5% Echostar Communications 2.1
Supreme Int'l Corp. 2.5% Fage Dairy Industries SA 2.1%
Majestic Star Casino 2.5% AES Corp. 2.0%
Hollywood Entertainment 2.4% Americo Life, Inc. 1.9%
Viatel, Inc. 2.4% Waterford Gaming LLC Finance
Amkor Technology, Inc. 2.4% Corp. 1.8%
ICG Services 2.3% Jupiters Ltd. 1.8%
JCAC, Inc. 1.8%
Charter Communications
Holdings LLC 1.8%
</TABLE>
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<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 (D is the lowest rating shown and BBB 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:
S&P RATING HIGH YIELD FUND II HIGH YIELD FUND III
-------------------------- -------------------------
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%
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* Deemed by the investment adviser to be equivalent to the same rating. For a
discussion of the S&P ratings, see Appendix C.
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.
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<PAGE>
CALENDAR
YEAR/PERIOD HIGH YIELD HIGH YIELD FIRST BOSTON(3) LEHMAN HIGH(4)
ENDED FUND II(2) FUND III HIGH YIELD INDEX YIELD BOND INDEX
- ----------- ---------- -------- ---------------- ----------------
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%
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(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."
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.
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<PAGE>
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
-10-
<PAGE>
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
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
-11-
<PAGE>
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.
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.
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.
-12-
<PAGE>
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".
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.
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 Fee Waiver
Management Servicing Other Operating by Net Fund
Fees (12b-1) Fees(2) Expenses Expenses 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% None 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% None 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% None 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% None 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>
EXAMPLE
This example is intended to help you compare the cost of investing in the
Funds and in the combined Funds on a PRO FORMA basis. The example assumes that
you invest $10,000 in each Fund and in the surviving fund after the
Reorganization for the time periods indicated. The Example also assumes 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 1,909*
Class C 278 569 1,004 2,215 303 627 1,078 2,327 278 553 955 2,080
Class T N/A N/A N/A N/A 565 711 881 1,834** 543 645 772 1,611*
</TABLE>
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* 178 552 955 1,909*
Class C 178 569 1,004 2,215 203 627 1,078 2,327 178 553 955 2,080
Class T N/A N/A N/A N/A 165 511 881 1,834** 143 445 772 1,611*
</TABLE>
- ----------
* The ten year calculations for Class B and Class T shares assume conversions
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.
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 will, 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.
-14-
<PAGE>
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 issued 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%
</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.
-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:
Years After CDSC On Shares
Purchase Being Sold
----------- ----------------------------------
11/01/99 Before
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, Inc., 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 group of 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. Performance for
periods prior to March 27, 1998, the date on which the Fund first offered Class
A shares, is based upon the performance of the Institutional Class shares of the
Fund, which were first offered on July 31, 1996. The information in the bar
chart is based on the performance of the Class A shares of High Yield Fund II,
although the bar chart does not reflect the deduction of the sales load on Class
A shares. If the bar chart included the sales load, returns would be less than
those shown. 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.
-17-
<PAGE>
CALENDAR YEAR-BY-YEAR RETURNS*
1997 21.05%
1998 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%.
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 Class A (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 of the Fund,
because Classes 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.
-18-
<PAGE>
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*
SINCE INCEPTION
1 YEAR (7/31/96)
------ ---------------
High Yield Fund II Class A 4.69% 15.21%
- ----------
* This table shows performance of the Institutional Class of the
Fund, because Classes 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.
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 Class A, Class B, Class C, and Class T 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
-19-
<PAGE>
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. Therefore, it
was determined that the Funds should be reorganized to realize economic
efficiencies that would benefit the shareholders of both funds by spreading
costs across a larger, combined asset base.
The proposed Reorganization was presented to the Board of Trustees of 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.
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 group of funds
that offer the same class of shares in which such shareholder is currently
invested. A list of the current Pilgrim group of funds, and their available
classes, is attached as Appendix 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;
-20-
<PAGE>
(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.
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 ________ ___, 1999, High Yield Fund III had accumulated capital loss
carryforwards in the amount of approximately $ ____________. After the
Reorganization, these losses 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 capital gains in any given year may be limited. As a result of
this limitation, it is possible that High Yield Fund II may not be able to use
these losses as rapidly as High Yield Fund III might have, 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 capital loss carryforwards currently
are available only to shareholders of High Yield Fund III. After the
Reorganization, however, these benefits will inure to the benefit of all
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.
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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.
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
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GENERAL INFORMATION ABOUT THE PROXY STATEMENT
SOLICITATION OF PROXIES
Solicitation of proxies is being made primarily by the mailing of this
Notice and Proxy Statement with its enclosures on or about 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, ____________ 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.
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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.
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.
James M. Hennessy, Secretary
February 8, 2000
40 North Central Avenue
Phoenix, Arizona 85004
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APPENDIX A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this _____ day of _____________, 1999, by and between Pilgrim 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 and
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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
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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.
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 March ___, 2000, or such other date as the
parties may agree to in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of immediately after the close of
business on the Closing Date unless otherwise agreed to by the parties. The
close of business on the Closing Date shall be as of 4:00 p.m., Eastern Time.
The Closing shall be held at the offices of the Acquiring 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.
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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.
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
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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;
(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;
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(l) For each taxable year of its operation (including the taxable year
ending on the Closing Date), the Acquired Fund has met the requirements of
Subchapter M of the Code for qualification as a regulated investment company and
has elected to be treated as such, has been eligible to and has computed its
federal income tax under Section 852 of the Code, and will have distributed all
of its investment company taxable income and net capital gain (as defined in the
Code) that has accrued through the Closing Date, and before the Closing Date
will have declared dividends sufficient to distribute all of its investment
company taxable income and net capital gain for the period ending on the Closing
Date;
(m) All issued and outstanding shares of the Acquired Fund are, and on the
Closing Date will be, duly and validly issued and outstanding, fully paid and
non-assessable by the Acquired Fund (recognizing that, under Massachusetts law,
it is theoretically possible that shareholders of the Acquired Fund could, under
certain circumstances, be held personally liable for obligations of the Acquired
Fund) and have been offered and sold in every state and the District of Columbia
in compliance in all material respects with applicable registration requirements
of the 1933 Act and state securities laws. All of the issued and outstanding
shares of the Acquired Fund will, at the time of Closing, be held by the persons
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:
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(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
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;
A-7
<PAGE>
(i) Since June 30, 1999, there has not been any material adverse change in
the Acquiring Fund's financial condition, assets, liabilities or business, other
than changes occurring in the ordinary course of business, or any incurrence by
the Acquiring Fund of indebtedness maturing more than one year from the date
such indebtedness was incurred, except as otherwise disclosed to and accepted by
the Acquired Fund. For purposes of this subparagraph (i), a decline in net asset
value per share of the Acquiring Fund due to declines in market values of
securities in the Acquiring Fund's portfolio, the discharge of Acquiring Fund
liabilities, or the redemption of Acquiring Fund Shares by shareholders of the
Acquiring Fund, shall not constitute a material adverse change;
(j) On the Closing Date, all Federal and other tax returns and reports of
the Acquiring Fund required by law to have been filed by such date (including
any extensions) shall have been filed and are or will be correct in all material
respects, and all Federal and other taxes shown as due or required to be shown
as due on said returns and reports shall have been paid or provision shall have
been made for the payment thereof, and to the best of the Acquiring Fund's
knowledge no such return is currently under audit and no assessment has been
asserted with respect to such returns;
(k) For each taxable year of its operation, the Acquiring Fund has met the
requirements of Subchapter M of the Code for qualification as a regulated
investment company and has elected to be treated as such, has been eligible to
and has computed its federal income tax under Section 852 of the Code, has
distributed all of its investment company taxable income and net capital gain
(as defined in the Code) for periods ending prior to the Closing Date, and will
do so for the taxable year including the Closing Date;
(l) All issued and outstanding Acquiring Fund Shares are, and on the
Closing Date will be, duly and validly issued and outstanding, fully paid and
non-assessable 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
A-8
<PAGE>
(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.
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.
A-9
<PAGE>
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
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:
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<PAGE>
7.1 All representations and warranties of the Acquired Fund contained in
this Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date, with the same force and effect as if
made on and as of the Closing Date;
7.2 The Acquired Fund shall have delivered to the Acquiring Fund a
statement of the Acquired Fund's assets and liabilities, as of the Closing Date,
certified by the Treasurer of the Acquired Fund;
7.3 The Acquired Fund shall have delivered to the Acquiring Fund on the
Closing Date a certificate executed in its name by its President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
satisfactory to the Acquiring Fund and dated as of the Closing Date, to the
effect that the representations and warranties of the Acquired Fund made in this
Agreement are true and correct at and as of the Closing Date, except as they may
be affected by the transactions contemplated by this Agreement, and as to such
other matters as the Acquiring Fund shall reasonably request;
7.4 The Acquired Fund shall have performed all of the covenants and
complied with all of the provisions required by this Agreement to be performed
or complied with by the Acquired Fund on or before the Closing Date;
7.5 The Acquired Fund and the Acquiring Fund shall have agreed on the
number of full and fractional Acquiring Fund Shares of each Class to be issued
in connection with the Reorganization after such number has been calculated in
accordance with paragraph 1.1;
7.6 The Acquired Fund shall have declared and paid a distribution or
distributions prior to the Closing that, together with all previous
distributions, shall have the effect of distributing to its shareholders (i) all
of its investment company taxable income and all of its net realized capital
gains, if any, for the period from the close of its last fiscal year to 4:00
p.m. Eastern time on the Closing; and (ii) any undistributed investment company
taxable income and net realized capital gains from any period to the extent not
otherwise already distributed.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND AND THE
ACQUIRED FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Acquired Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 The Agreement and the transactions contemplated herein shall have been
approved by 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;
A-11
<PAGE>
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
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.
A-12
<PAGE>
11. TERMINATION
This Agreement and the transactions contemplated hereby may be terminated
and abandoned by mutual agreement of the parties hereto or by either party by
resolution of the party's Board of Trustees, 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 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.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its President or Vice President and its seal to be affixed
thereto and attested by its Secretary or Assistant Secretary.
Attest: PILGRIM MUTUAL FUNDS on behalf of its
HIGH YIELD FUND II series
By:
-------------------------------- -------------------------------
SECRETARY
Its:
-------------------------------
Attest: PILGRIM HIGH YIELD FUND III
By:
-------------------------------- -------------------------------
SECRETARY
Its:
-------------------------------
A-14
<PAGE>
APPENDIX B
ADDITIONAL INFORMATION REGARDING PILGRIM HIGH YIELD FUND II
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
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maximum Initial Sales Charge on Purchases 4.75% (1) None None N/A
CDSC None (2) 5.00% (3) 1.00% (4) N/A
Annual Distribution Fees(5) 0.25% 1.00% 1.00% 0.65%
Maximum Purchase Unlimited $250,000 Unlimited Unlimited
Automatic Conversion to Class A N/A 8 Years (6) N/A 8 Years (6)
</TABLE>
- ----------
(1) Imposed upon purchase. Reduced for purchases of $50,000 and over.
(2) For investments of $1 million or more, a CDSC of no more than 1% may be
assessed on redemptions of shares that were purchased without an initial
sales charge. See "Class A Shares: Initial Sales Charge Alternative."
(3) Imposed upon redemption within 6 years from purchase . Shares exchanged
from the High Yield Fund III are subject to CDSC until after the 5th year
from purchase. Fee has scheduled reductions after the first year. See
"Class B Shares: Deferred Sales Charge Alternative."
(4) Imposed upon redemption within 1 year from purchase.
(5) Annual asset-based distribution charge.
(6) Class B and Class T shares of 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 date of purchase of the original Class B 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.
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<PAGE>
CLASS A SHARES: INITIAL SALES CHARGE ALTERNATIVE. Class A shares of the Fund are
sold at the NAV per share in effect plus a sales charge as described in the
following table. For waivers or reductions of the Class A shares sales charges,
see "Special Purchases without a Sales Charge" and "Reduced Sales Charges."
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,
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
applicable Fund and class will be restricted within your account to cover
additional sales charges that may be due if your actual total investment fails
to qualify for the reduced sales charges. See the Statement of Additional
Information for the Fund for details on the Letter of Intent option or contact
the Shareholder Servicing Agent at (800) 992-0180 for more information.
A sales charge may also be reduced by taking into account the current value of
your existing holdings in the Fund or any other open-end funds in the Pilgrim
group of funds (excluding Pilgrim Money Market Fund) ("Rights of Accumulation").
The reduced sales charges apply to quantity purchases made at one time or on a
B-2
<PAGE>
cumulative basis over any period of time. See the Statement of Additional
Information for the Fund for details or contact the Shareholder Servicing Agent
at (800) 992-0180 for more information.
For the purposes of Rights of Accumulation and the Letter of Intent Privilege,
shares held by investors in the Pilgrim Funds which impose a CDSC may be
combined with Class 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
B-3
<PAGE>
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.
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 group of funds.
Class T shares of the Fund are subject to a distribution fee at an annual rate
of 0.65% of the average daily net assets of the Class.
Class T shares will automatically convert into Class A shares approximately
eight years after purchase, except that Class T shares of 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 group of 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.
B-4
<PAGE>
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.
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.
B-5
<PAGE>
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.
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.
B-6
<PAGE>
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.
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
B-7
<PAGE>
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 Fund may
make payment wholly or partly in securities at their then current market value
equal to the redemption price. In such case, the Fund could elect to make
payment in securities for redemptions in excess of $250,000 or 1% of its net
assets during any 90-day period for any one shareholder. An investor may incur
brokerage costs in converting such securities to cash.
B-8
<PAGE>
ADDITIONAL INVESTMENT STRATEGIES
LENDING PORTFOLIO SECURITIES. High Yield Fund II may lend up to 30% of its total
assets. High Yield Fund III may lend portfolio securities in an amount up to 33
1/3 % of total Fund assets. As with other extensions of credit, there are risks
of delay in recovery or even loss of rights in the collateral should the
borrower fail financially.
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. Each
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, the
Fund's principal underwriter, 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.
B-9
<PAGE>
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
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.
B-10
<PAGE>
All dividends and capital gains are taxable whether they are reinvested or
received in cash, unless you are exempt from taxation or entitled to tax
deferral. Dividends declared in October, November, or December with a record
date in such month and paid during the following January will be treated as
having been paid by the Fund and received by shareholders on December 31 of the
calendar year in which declared, rather than the calendar year in which the
dividends are actually received.
Upon the sale or other disposition of shares of the Fund, a shareholder may
realize a gain or loss which will be a capital gain or loss if the shares are
held as a capital asset and, if so, may be eligible for reduced federal tax
rates, depending on the shareholder's holding period for the shares.
This is a brief summary of some of the tax laws that affect your investment in
the Fund. Please see the Fund's Statement of Additional Information and your tax
adviser for further information.
YEAR 2000 COMPLIANCE
[Like other financial organizations, the Fund could be adversely affected if the
computer systems used by the Fund's service providers do not properly process
and calculate date-related information after January 1, 2000. This is commonly
known as the "Year 2000 Problem." The Year 2000 Problem could have a negative
impact on handling securities trades, payment of interest and dividends,
pricing, and account services. Pilgrim Investments has taken steps that it
believes are reasonably designed to address the Year 2000 Problem with respect
to computer systems that it uses and to obtain reasonable assurances that
comparable steps have been taken by the Fund's other major service providers. It
is not anticipated that the Funds will directly bear any material costs
associated with Pilgrim Investments and the Fund's other service providers
efforts to become Year 2000 compliant. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact to the
Fund nor can there be any assurance that the Year 2000 Problem will not have an
adverse effect on the companies whose securities are held by the Fund or on
global markets or economies, generally.]
B-11
<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.
Class A
-----------------------------------
Three Months Year March 27,
Ended Ended 1998 to
June 30, March 31, March 31,
1999(b) 1999 1998(a)
------- ---- -------
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%
- --------------------------------------------------------------------------------
(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-12
<PAGE>
Class B Class C
- ------------------------------------- --------------------------------------
Three Months Year March 27, Three Months Year March 27,
Ended Ended 1998 to Ended Ended 1998 to
June 30, March 31, March 31, June 30, March 31, March 31,
1999(b) 1999 1998(a) 1999(b) 1999 1998(a)
------- ---- ------- ------- ---- -------
$ 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%
-------- -------- --------- -------- -------- ---------
B-13
<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.
<PAGE>
APPENDIX D
The following is a list of the current funds in the Pilgrim group of funds and
the classes of shares that are currently offered by each fund or are expected to
be offered at or shortly after the Reorganization:
Fund Classes Offered
- ---- ---------------
Pilgrim MagnaCap Fund A, B, C, M and Q
Pilgrim LargeCap Leaders Fund A, B, C, M and Q
Pilgrim Research Enhanced Index Fund A, B, C, I and Q
Pilgrim Growth Opportunities Fund A, B, C, I, Q and T
Pilgrim LargeCap Growth Fund A, B, C and Q
Pilgrim MidCap Value Fund A, B, C, M, and Q
Pilgrim MidCap Opportunities Fund A, B, C, I and Q
Pilgrim MidCap Growth Fund A, B, C and Q
Pilgrim Growth + Value Fund A, B, C and Q
Pilgrim SmallCap Opportunities Fund A, B, C, I, Q and T
Pilgrim SmallCap Growth Fund A, B, C and Q
Pilgrim Bank and Thrift Fund A and B
Pilgrim Worldwide Growth Fund A, B, C and Q
Pilgrim International Value Fund A, B, C and Q
Pilgrim International Core Growth Fund A, B, C and Q
Pilgrim International SmallCap Growth Fund A, B, C and Q
Pilgrim Emerging Markets Value Fund A, B and C
Pilgrim Emerging Countries Fund A, B, C and Q
Pilgrim Asia-Pacific Equity Fund A, B and M
Pilgrim Government Securities Income Fund A, B, C, M, Q and T
Pilgrim Government Securities Fund(1) A, B, C and T
Pilgrim Strategic Income Fund A, B, C and Q
Pilgrim High Yield Fund A, B, C, M and Q
Pilgrim High Yield Fund II A, B, C, Q and T
Pilgrim High Yield Fund III(2) A, B, C and T
Pilgrim High Total Return Fund A, B and C
Pilgrim High Total Return Fund II A, B and C
Pilgrim Money Market Fund A, B and C
Pilgrim Balanced Fund A, B, C, Q and T
Pilgrim Income & Growth Fund(3) A, B and C
Pilgrim Balance Sheet Opportunities Fund(3) A, B, C and T
Pilgrim Convertible Fund A, B, C and Q
- ----------
(1) Subject to shareholder approval, this fund will be reorganized into the
Pilgrim Government Securities Income Fund.
(2) Subject to shareholder approval, this fund will be reorganized into the
Pilgrim High Yield Fund II.
(3) Subject to shareholder approval, these funds will be reorganized into the
Pilgrim Balanced Fund.
<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%
M. B. Kahn Construction Co., Inc.
Attn: Ron McCall
PO Box 1179
Columbia, SC 29202
Merrill Lynch Pierce Fenner & A 6.86% 0.98%
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%
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%
Norvell L Olive President
PO Box 906
Hendersonville, TN 37077
Merrill Lynch Pierce Fenner & C 28.33% 6.53%
Smith, For the Sole Benefit of Its
Customers, Attn: Fund Admin
4800 Deer Lake Drive E 2nd Floor
Jacksonville, FL 32246-6484
</TABLE>
<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 &
Smith, For the Sole Benefit of Its
Customers, Attn: Fund Admin
4800 Deer Lake Drive E 2nd Floor
Jacksonville, FL 32246-6484 A 10.00% 1.08%
Merrill Lynch Pierce Fenner &
Smith, For the Sole Benefit of Its
Customers, Attn: Fund Admin
4800 Deer Lake Drive E 2nd Floor
Jacksonville, FL 32246-6484 B 37.80% 20.22%
Merrill Lynch Pierce Fenner &
Smith, For the Sole Benefit of Its
Customers, Attn: Fund Admin
4800 Deer Lake Drive E 2nd Floor
Jacksonville, FL 32246-6484 C 60.17% 4.43%
</TABLE>
<PAGE>
PILGRIM HIGH YIELD FUND III
PROXY FOR A SPECIAL MEETING OF SHAREHOLDERS SCHEDULED FOR MARCH 24, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
The undersigned hereby appoint(s) Robert W. Stallings and James M. Hennessy or
any one or more of them, proxies, with full power of substitution, to vote all
shares of the Pilgrim High Yield Fund III (the "Fund") which the undersigned is
entitled to vote at the Special Meeting of Shareholders of the Fund to be held
at the offices of the Fund at 40 North Central Avenue, Suite 1200, Phoenix,
Arizona 85004, and which is scheduled for March 24, 2000 at 9:30 a.m., local
time, and at any adjournment thereof.
This proxy will be voted as instructed. If no specification is made, the proxy
will be voted "FOR" the proposals.
Please vote, date and sign this proxy and return it promptly in the enclosed
envelope.
Please indicate your vote by an "x" in the appropriate box below.
THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSAL:
1. To approve an Agreement and Plan of Reorganization providing for the
acquisition of all of the assets of Pilgrim High Yield Fund III by Pilgrim High
Yield Fund II in exchange for shares of common stock of Pilgrim High Yield Fund
II and the assumption by Pilgrim High Yield Fund II of all of the liabilities of
Pilgrim High Yield Fund III.
For [ ] Against [ ] Abstain [ ]
This proxy must be signed exactly as your name(s) appears hereon. If as an
attorney, executor, guardian or in some representative capacity or as an officer
of a corporation, please add titles as such. Joint owners must each sign.
- ------------------------------- ------------------
Signature Date
- ------------------------------- ------------------
Signature (if held jointly) Date
<PAGE>
PART B
PILGRIM MUTUAL FUNDS
Statement of Additional Information
January 20, 2000
Acquisition of the Assets By and in Exchange for Shares of
and Liabilities of Pilgrim High Yield Fund II
Pilgrim High Yield Fund III (a series of Pilgrim Mutual Funds)
40 North Central Avenue, Suite 1200 40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004 Phoenix, Arizona 85004
This Statement of Additional Information is available to the Shareholders of
Pilgrim High Yield Fund III (formerly, NorthStar High Yield Fund) in connection
with a proposed transaction whereby all of the assets and liabilities of Pilgrim
High Yield Fund III will be transferred to the Pilgrim High Yield Fund II, a
series of Pilgrim Mutual Funds, in exchange for shares of Pilgrim High Yield
Fund II.
This Statement of Additional Information of the Pilgrim Mutual Funds consists of
this cover page and the following documents, each of which was filed
electronically with the Securities and Exchange Commission and is incorporated
by reference herein:
1. The Statement of Additional Information for Pilgrim High Yield Fund II and
Pilgrim High Yield III dated January 4, 2000, as filed on December __,
1999.
2. The Financial Statements of Pilgrim High Yield Fund II included in the
Annual Report of Pilgrim Mutual Funds dated June 30, 1999, as filed on
September 9, 1999.
3. The Financial Statements of Pilgrim High Yield Field III included in the
Annual Report to Shareholders of the Northstar Funds dated December 31,
1998, as filed on March 1, 1999.
4. The Financial Statements of Pilgrim High Yield Fund III included in the
Semi-Annual Report to Shareholders of the Northstar Funds dated June 30,
1999, as filed on August 31, 1999.
This Statement of Additional Information is not a prospectus. A Prospectus/Proxy
Statement dated January 20, 2000 relating to the reorganization of Pilgrim High
Yield Fund III may be obtained, without charge, by writing to Pilgrim at 40
North Central Avenue, Suite 1200, Phoenix, Arizona 85004 or calling (800)
992-0180. This Statement of Additional Information should be read in conjunction
with the Prospectus/Proxy Statement.
B-1
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES AS OF JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
HIGH YIELD HIGH YIELD ADJUSTMENTS PRO FORMA
FUND II FUND III COMBINED
--------------------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities at market value* $74,984,519 $237,004,363 $311,988,882
Short-term investments at amortized cost 4,639,000 1,749,000 6,388,000
Cash 0 535 535
Receivables:
Fund shares sold 179,845 114,805 294,650
Dividends and interest 1,168,007 5,981,963 7,149,970
Due from affiliate 134,231 0 134,231
Investment securities sold 3,568,801 0 3,568,801
Prepaid expenses 3,647 25,321 28,968
--------------------------- ------------
Total Assets 84,678,050 244,875,987 329,554,037
--------------------------- ------------
LIABILITIES:
Payable for investment securities purchased 3,195,425 0 3,195,425
Payable for fund shares redeemed 304,419 855,594 1,160,013
Payable to affiliate 0 349,704 349,704
Payable to custodian 1,700 0 1,700
Other accrued expenses and liabilities 652,307 127,876 780,183
Income distribution payable 0 1,528 1,528
--------------------------- ------------
Total Liabilities 4,153,851 1,334,702 5,488,553
--------------------------- ------------
NET ASSETS $80,524,199 $243,541,285 $324,065,484
=========================== ============
NET ASSETS CONSIST OF:
Paid-in capital $86,817,360 $276,374,139 $363,191,499
Accumulated net investment income of
overdistributed net investment income (193,920) (1,256,136) (1,450,056)
Accumulated net realized loss on investments (4,358,980) (21,438,939) (25,797,919)
Net unrealized depreciation of investments
and other assets, liabilities (1,740,261) (10,137,779) (11,878,040)
--------------------------- ------------
Net Assets $80,524,199 $243,541,285 $324,065,484
=========================== ============
* Cost of securities $76,724,780 $247,142,142 $323,866,922
CLASS A:
Net Assets $16,795,079 $26,747,858 $43,542,937
Shares authorized unlimited unlimited unlimited
Shares outstanding 1,451,200 3,273,186 (960,952) (3) 3,763,434
Net asset value and redemption price per share $11.57 $8.17 $11.57
Maximum offering price per share(1) $12.15 $8.58 $12.15
CLASS B:
Net Assets $41,882,346 $125,781,294 $167,663,640
Shares authorized unlimited unlimited unlimited
Shares outstanding 3,618,337 15,399,860 (4,539,472) (3) 14,478,725
Net asset value and redemption price per share(2) $11.58 $8.17 $11.58
Maximum offering price per share $11.58 $8.17 $11.58
CLASS C:
Net Assets $18,618,124 $21,331,511 $39,949,635
Shares authorized unlimited unlimited unlimited
Shares outstanding 1,608,363 2,610,084 (768,565) (3) 3,449,882
Net asset value and redemption price per share(2) $11.58 $8.17 $11.58
Maximum offering price per share $11.58 $8.17 $11.58
CLASS Q:
Net Assets $3,228,650 -- $3,228,650
Shares authorized unlimited unlimited unlimited
Shares outstanding 278,622 -- 278,622
Net asset value and redemption price per share $11.59 -- $11.59
Maximum offering price per share $11.59 -- $11.59
CLASS T:
Net Assets -- $69,680,622 $69,680,622
Shares authorized -- unlimited unlimited
Shares outstanding -- 8,533,000 (2,515,675) (3) 6,017,325
Net asset value and redemption price per share -- $8.17 $11.58
Maximum offering price per share -- $8.17 $11.58
</TABLE>
(1) Maximum offering price is computed at 100/95.25 of net asset value.
(2) Redemption price per share is equal to the net asset value per share less
any applicable contingent deferred sales charge.
(3) Reflects new shares issued, net of retired shares of the Fund
See accompanying notes to financial statements.
B-2
<PAGE>
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
HIGH YIELD HIGH YIELD PRO FORMA
FUND II FUND III ADJUSTMENTS COMBINED
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30,
1999 1999 1999
---------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends, net of foreign taxes $208,950 $539,422 $748,372
Interest 9,234,493 24,260,919 33,495,412
---------------------------------------------------
Total investment income 9,443,443 24,800,341 34,243,784
---------------------------------------------------
EXPENSES:
Investment management fees 482,441 1,571,262 356,313 (A) 2,410,016
Distribution expenses 596,343 2,137,878 2,734,221
Transfer agent and registrar fees 72,349 377,332 449,681
Custodian fees 19,784 85,270 105,054
Registration and filing fees 46,132 44,042 (44,042)(B) 46,132
Professional fees 40,240 31,812 (31,812)(B) 40,240
Directors' fees 1,276 9,956 (1,276)(B) 9,956
Administrative expense 0 323,932 (323,932)(B) 0
Other 243,061 133,613 376,674
---------------------------------------------------
Total expenses 1,501,624 4,715,097 6,171,972
---------------------------------------------------
Less:
Waived and reimbursed fees (293,105) 0 (407,838)(C) (700,943)
---------------------------------------------------
Net expenses 1,208,519 4,715,097 (452,587) 5,471,029
---------------------------------------------------
Net investment income 8,234,925 20,085,244 452,587 28,772,755
---------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized loss from:
Investments (3,869,559) (11,364,997) (15,234,556)
Net change in unrealized depreciation of:
Investments (958,834) (16,035,649) (16,994,483)
---------------------------------------------------
Net loss from investments (4,828,393) (27,400,646) (32,229,039)
---------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $3,406,531 $(7,315,402) $452,587 $(3,456,284)
===================================================
</TABLE>
(A) Reflects adjustment in expenses due to effects of proposed contract rate.
(B) Reflects adjustment in expenses due to elimination of duplicative services.
(C) Reflects change in the amounts to be waived or reimbursed by Pilgrim
Investments, Inc. to keep the Fund at its proposed expense limit.
See accompanying notes to financial statements.
B-3
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Basis of Combination:
On November 16, 1999, the Boards of Pilgrim High Yield Fund II ("High Yield
Fund II") and Pilgrim High Yield Fund III (formerly Northstar High Yield Fund)
("High Yield Fund III"), approved an Agreement and Plan of Reorganization (the
"Plan") whereby, subject to approval by the shareholders of High Yield Fund III,
High Yield Fund II will acquire all the assets of the High Yield Fund III
subject to the liabilities of such Fund, in exchange for a number of shares
equal to the pro rata net assets of shares of the High Yield Fund II (the
"Merger").
The Merger will be accounted for as a tax free merger of investment
companies. The pro forma combined financial statements are presented for the
information of the reader and may not necessarily be representative of what the
actual combined financial statements would have been had the reorganization
occurred at June 30, 1999. The unaudited pro forma portfolio of investments, and
statement of assets and liabilities reflect the financial position of High Yield
Fund II and High Yield Fund III at June 30, 1999. The unaudited pro forma
statement of operations reflects the results of operations of the High Yield
Fund II and High Yield Fund III for the year ended June 30, 1999. These
statements have been derived from the Funds' respective books and records
utilized in calculating daily net asset value at the dates indicated above for
High Yield Fund II and High Yield Fund III under generally accepted accounting
principles. The historical cost of investment securities will be carried forward
to the surviving entity and results of operations of High Yield Fund II for
pre-combination periods will not be restated.
The pro forma portfolio of investments, and statements of assets and
liabilities and operations should be read in conjunction with the historical
financial statements of the Funds incorporated by reference in the Statements of
Additional Information.
Note 2 - Security Valuation:
Investments in equity securities traded on a national securities exchange
or included on the NASDAQ National Market System are valued at the last reported
sale price. Securities traded on an exchange of NASDAQ for which there has been
no sale and securities traded in the over-the-counter-market are valued at the
mean between the last reported bid and ask prices. All investments quoted in
foreign currencies will be valued daily in U.S. Dollars on the basis of the
foreign currency exchange rates prevailing at the time such valuation is
determined by each Fund's Custodian. Debt securities in High Yield Fund II are
valued at bid prices obtained from independent services or from one or more
dealers making markets in the securities. U.S. Government obligations are valued
by using market quotations or independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield data
relating to instruments or securities with similar characteristics. Securities
for which market quotations are not readily available are valued at their
respective fair values as determined in good faith and in accordance with
policies set by the Board of Directors. Investments in securities maturing in
less than 60 days are valued at cost, which, when combined with accrued
interest, approximates market value.
Note 3 - Foreign Currency Transactions:
The books and records of the funds are maintained in U.S. dollars. Any
foreign currency amounts are translated into U.S. dollars on the following
basis:
(1) Market value of investment securities, other assets and
liabilities--at the exchange rates prevailing at the end of the day.
(2) Purchases and sales of investment securities, income and expenses - at
the rates of exchange prevailing on the respective dates of such
transactions.
B-4
<PAGE>
Although the net assets and the market values are presented at the foreign
exchange rates at the end of the day, the Funds do not isolate the portion of
the results of operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from the changes in market prices of
securities held. Such fluctuations are included with the net realized and
unrealized gains or losses from the investments. Reported net realized foreign
exchange gains or losses arise from sales and maturities of short-term
securities, sales of foreign currencies, currency gains or losses realized
between the trade and settlement on securities transactions, the difference
between the amounts of dividends, interest, and foreign withholding taxes
recorded on the Fund's books, and the U.S. dollar equivalent of the amounts
actually received or paid. Net unrealized foreign exchange gains and losses
arise from changes in the value of assets and liabilities other than investments
in securities at fiscal year end, resulting from changes in the exchange rate.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with investing U.S. companies and the U.S.
Government. These risks include but are not limited to re-evaluation of
currencies and future adverse political and economic developments which could
cause securities and their markets to be less liquid and prices more volatile
than those of the comparable U.S. Government.
Note 4 - Capital Shares:
The pro forma net asset value per share assumes additional shares of common
stock issued in connection with the proposed acquisition of High Yield Fund III
by High Yield Fund II as of June 30, 1999. The number of additional shares
issued was calculated by dividing the net asset value of each Class of High
Yield Fund III by the respective Class net asset value per share of High Yield
Fund II.
Note 5 - Pro Forma Operation Expenses:
The accompanying pro forma financial statements reflect changes in fund
shares as if the merger had taken place on June 30, 1999. High Yield Fund III
expenses were adjusted assuming High Yield Fund II's fee structure was in effect
for the year ended June 30, 1999.
Note 6 - Merger Costs:
Merger costs are estimated at approximately $148,025 and are not included
in the pro forma statement of operations since these costs are not reoccurring.
These costs represent the estimated expense of both Funds carrying out their
obligations under the Plan and consist of management's estimate of legal fees,
accounting fees, printing costs and mailing charges related to the proposed
merger.
Note 7 - Federal Income Taxes:
It is the policy of the Funds, to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute substantially all of their net investment income and any net
realized gains to their shareholders. Therefore, a federal income tax or excise
tax provision is not required. In addition, by distributing during each calendar
year substantially all of its net investment income and net realized capital
gains, each Fund intends not to be subject to any federal excise tax.
The Board of Directors intends to offset any net capital gains with any
available capital loss carryforward until each carryforward has been fully
utilized or expires. In addition, no capital gain distribution shall be made
until the capital loss carryforward has been fully utilized or expires.
B-5
<PAGE>
Pro Forma - High Yield Fund II & High Yield Fund III
PORTFOLIO OF INVESTMENTS
As of June 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT MARKET VALUE
- ------------------------------ --------------------------------
HIGH HIGH PRO FORMA HIGH HIGH PRO FORMA
YIELD II YIELD III COMBINED SECURITY RATE MATURITY YIELD II YIELD III COMBINED
- -------- --------- -------- -------- ---- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CORPORATE BONDS: 93.14%
AEROSPACE & DEFENSE: 2.71%
2,000,000 2,000,000 Aviation Sales Co. 8.125% 02/15/08 $1,880,000 $1,880,000
2,000,000 2,000,000 BE Aerospace, Inc. 8.000 03/01/08 1,880,000 1,880,000
3,000,000 3,000,000 Deerlan Manufacturing 10.000 01/15/07 2,895,000 2,895,000
2,000,000 2,000,000 L-3 Communications Corp. 10.375 05/01/07 2,125,000 2,125,000
------------
8,780,000
------------
APPAREL: 0.62%
2,000,000 2,000,000(b) Supreme International Corp. 12.250 04/01/06 2,030,000 2,030,000
------------
AUTOMOTIVE MANUFACTURING: 1.00%
3,400,000 3,400,000 Titan Wheel International, Inc. 8.750 04/01/07 3,247,000 3,247,000
------------
BROADCASTING: 8.91%
1,500,000 1,500,000 American Radio Systems Corp. 9.000 02/01/06 1,594,980 1,594,980
3,000,000 3,000,000 Antenna TV SA 9.000 08/01/07 2,835,000 2,835,000
2,900,000 2,900,000 Capstar Broadcasting Partners, Inc. 9.250 07/01/07 3,045,000 3,045,000
1,780,000 1,780,000(c) CD Radio, Inc. 0.000 12/01/07 905,574 905,574
1,000,000 1,000,000 Chancellor Media Corp. 8.125 12/15/07 970,000 970,000
4,500,000 4,500,000(b) Echostar DBS Corp. 9.250 02/01/06 4,612,500 4,612,500
450,000 450,000(b) Echostar DBS Corp. 9.375 02/01/09 459,000 459,000
4,000,000 4,000,000 JCAC, Inc. 10.125 06/15/06 4,350,000 4,350,000
1,110,000 1,110,000 Pegasus Communications Corp. 9.625 10/15/05 1,087,800 1,087,800
2,631,000 2,631,000 SFX Broadcasting, Inc. 10.750 05/15/06 2,802,015 2,802,015
2,800,000 2,800,000 Sinclair Broadcast Group, Inc. 8.750 12/15/07 2,737,000 2,737,000
1,250,000 1,250,000 Sinclair Broadcast Group, Inc. 10.000 09/30/05 1,281,250 1,281,250
1,225,000 1,225,000 Source Media, Inc. 12.000 11/01/04 973,875 973,875
1,340,000 1,340,000(c) Telewest PLC 0.000 10/01/07 1,194,274 1,194,274
------------
28,848,268
------------
CABLE TELEVISION: 4.59%
3,500,000 3,500,000 Adelphia Communications Corp. 7.875 05/01/09 3,263,750 3,263,750
4,000,000 4,000,000 Century Communications Corp. 0.000 01/15/08 1,800,000 1,800,000
4,500,000 4,500,000(b) Charter Communications Holdings LLC 8.625 04/01/09 4,325,625 4,325,625
2,500,000 2,500,000 Mediacom LLC & Capital Corp. 8.500 04/15/08 2,337,500 2,337,500
3,000,000 3,000,000 Rogers Cablesystems Ltd. 9.625 08/01/02 3,135,000 3,135,000
------------
14,861,875
------------
CAPITAL GOODS MANUFACTURING: 2.28%
3,500,000 3,500,000 American Standard, Inc. 7.375 02/01/08 3,294,375 3,294,375
3,000,000 3,000,000 Westinghouse Air Brake Co. 9.375 06/15/05 3,060,000 3,060,000
1,000,000 1,000,000(b) Westinghouse Air Brake Co. 9.375 06/15/05 1,020,000 1,020,000
------------
7,374,375
------------
</TABLE>
See accompanying notes to financial statements.
B-6
<PAGE>
Pro Forma - High Yield Fund II & High Yield Fund III
PORTFOLIO OF INVESTMENTS
As of June 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT MARKET VALUE
- ------------------------------ --------------------------------
HIGH HIGH PRO FORMA HIGH HIGH PRO FORMA
YIELD II YIELD III COMBINED SECURITY RATE MATURITY YIELD II YIELD III COMBINED
- -------- --------- -------- -------- ---- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CHEMICAL: 0.48%
1,500,000 1,500,000 American Pacific Corp. 9.250 03/01/05 $1,539,375 $1,539,375
------------
CONSUMER PRODUCTS: 2.01%
2,200,000 2,200,000 Packaged Ice, Inc. 9.750 02/01/05 2,167,000 2,167,000
3,000,000 3,000,000(b) Scotts Co. 8.625 01/15/09 2,955,000 2,955,000
1,250,000 1,250,000 Shop Vac Corp. 10.625 09/01/03 1,381,250 1,381,250
------------
6,503,250
------------
COMMUNICATIONS - COMPETITIVE LOCAL
EXCHANGE CARRIER: 386%
1,870,000 1,870,000(c) Colt Telecom Group PLC 0.000 12/15/06 1,573,137 1,573,137
1,780,000 1,780,000(c) Completel Europe N.V. 0.000 02/15/09 970,260 970,260
3,000,000 3,000,000(c) ICG Services 0.000 02/15/08 1,890,000 1,890,000
2,000,000 2,000,000 4,000,000 Metromedia Fiber 10.000 11/15/08 2,055,000 2,065,000 4,120,000
1,500,000 1,500,000 MGC Communications, Inc. 13.000 10/01/04 1,376,250 1,376,250
2,230,000 2,230,000(c) Winstar Communication, Inc. 0.000 03/01/07 2,564,500 2,564,500
------------
12,494,147
------------
COMMUNICATIONS - GENERAL: 0.66%
2,320,000 2,320,000(c) Covad Communications Group 0.000 03/15/08 1,261,500 1,261,500
1,340,000 1,340,000(c) United International Holdings 0.000 02/15/08 887,750 887,750
------------
2,149,250
------------
COMMUNICATIONS - INTERNET SERVICE PROVIDER: 0.77%
1,535,000 1,535,000 Global Telesystems Group 9.875 02/15/05 1,531,163 1,531,163
1,020,000 1,020,000 Globix Corp. 13.000 05/01/05 969,000 969,000
------------
2,500,163
------------
COMMUNICATIONS - LONG DISTANCE: 1.24%
2,000,000 2,000,000 ITC Deltacom 9.750 11/15/08 2,060,000 2,060,000
1,960,000 1,960,000 Viatel, Inc. 11.250 04/15/08 1,969,800 1,969,800
------------
4,029,800
------------
COMMUNICATIONS - TELECOMMUNICATIONS: 6.37%
500,000 500,000(c) Colt Telecom Group 0.000 12/15/06 417,500 417,500
1,250,000 1,250,000(c) International Cabletel, Inc. 0.000 04/15/05 1,200,000 1,200,000
3,000,000 3,000,000 IXC Communications, Inc. 9.000 04/15/08 2,883,750 2,883,750
3,500,000 3,500,000 Level 3 Communications, Inc. 9.125 05/01/08 3,469,375 3,469,375
980,000 980,000 Northeast Optic Network 12.500 08/15/08 1,011,850 1,011,850
3,000,000 3,000,000(c) Pinnacle Holdings 0.000 03/15/08 1,770,000 1,770,000
1,110,000 1,110,000(c) Powertel, Inc. 0.000 02/01/06 931,012 931,012
3,500,000 3,500,000(c) Qwest Communications International, Inc. 0.000 02/01/08 2,607,500 2,607,500
2,000,000 2,000,000(c) RCN Corp. 0.000 02/15/08 1,270,000 1,270,000
3,500,000 3,500,000 RCN Corp. 10.000 10/15/07 3,517,500 3,517,500
3,000,000 3,000,000(c) Rhythms Netconnections 0.000 05/15/08 1,556,250 1,556,250
------------
20,634,737
------------
</TABLE>
See accompanying notes to financial statements.
B-7
<PAGE>
Pro Forma - High Yield Fund II & High Yield Fund III
PORTFOLIO OF INVESTMENTS
As of June 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT MARKET VALUE
- ------------------------------ --------------------------------
HIGH HIGH PRO FORMA HIGH HIGH PRO FORMA
YIELD II YIELD III COMBINED SECURITY RATE MATURITY YIELD II YIELD III COMBINED
- -------- --------- -------- -------- ---- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMUNICATIONS - WIRELESS: 3.72%
1,340,000 4,000,000 5,340,000(c) Nextel Communications, Inc. 0.000 09/15/07 $979,875 $2,940,000 $3,919,875
3,500,000 3,500,000(c) NEXTLINK Communications, Inc. 0.000 04/15/08 2,117,500 2,117,500
1,500,000 1,500,000 NEXTLINK Communications, Inc. 9.000 03/15/08 1,421,250 1,421,250
2,100,000 2,100,000(c) Occidente Y Caribe Celular SA 0.000 03/15/04 1,291,500 1,291,500
2,800,000 2,800,000 Rogers Cantel, Inc. 8.800 10/01/07 2,807,000 2,807,000
915,000 915,000(c) Telesystem International Wireless 0.000 06/30/07 483,806 483,806
------------
12,040,931
------------
COMPUTERS: 1.31%
1,780,000 1,780,000 Apple Computer, Inc. 6.500 02/15/04 1,650,950 1,650,950
940,000 940,000 Unisys Corp. 12.000 04/15/03 1,024,600 1,024,600
1,405,000 1,405,000 Unisys Corp. 11.750 10/15/04 1,566,575 1,566,575
------------
4,242,125
------------
DIVERSIFIED FINANCIAL SERVICES: 1.81%
890,000 890,000 Amresco, Inc. 8.750 07/01/99 887,774 887,774
1,780,000 1,780,000(c) Coinstar, Inc. 0.000 10/01/06 1,755,525 1,755,525
1,000,000 1,000,000(b) Natwest Asset Trust Securities 9.585 01/31/03 854,375 854,375
2,270,000 2,270,000 Resource America, Inc. 12.000 08/01/04 2,043,000 2,043,000
500,000 500,000(b) Westways Funding II Ltd. 21.364 01/31/03 321,875 321,875
------------
5,862,549
------------
ELECTRONICS: 0.60%
2,000,000 2,000,000 Amkor Technology, Inc. 9.250 05/01/06 1,942,500 1,942,500
------------
ENERGY: 2.50%
750,000 750,000 AES Corp. 8.500 11/01/07 708,750 708,750
4,000,000 4,000,000 AES Corp. 10.250 07/15/06 4,120,000 4,120,000
1,000,000 1,000,000 CalEnergy Co., Inc. 9.500 09/15/06 1,120,000 1,120,000
2,000,000 2,000,000 Calpine Corp. 10.500 05/15/06 2,150,000 2,150,000
------------
8,098,750
------------
ENTERTAINMENT AND LEISURE: 1.84%
1,878,000 1,878,000(c) Ascent Entertainment Group 0.000 12/15/04 1,331,032 1,331,032
1,290,000 1,290,000 Bally Total Fitness Holdings 9.875 10/15/07 1,248,075 1,248,075
2,000,000 2,000,000(b) Hollywood Entertainment 10.625 08/15/04 1,970,000 1,970,000
1,470,000 1,470,000 SFX Entertainment 9.125 02/01/08 1,436,924 1,436,924
------------
5,986,031
------------
</TABLE>
See accompanying notes to financial statements.
B-8
<PAGE>
Pro Forma - High Yield Fund II & High Yield Fund III
PORTFOLIO OF INVESTMENTS
As of June 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT MARKET VALUE
- ------------------------------ --------------------------------
HIGH HIGH PRO FORMA HIGH HIGH PRO FORMA
YIELD II YIELD III COMBINED SECURITY RATE MATURITY YIELD II YIELD III COMBINED
- -------- --------- -------- -------- ---- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOOD, BEVERGE & TOBACCO: 7.26%
2,750,000 2,750,000 Amerisave Food Distribution, Inc. 8.875 10/15/06 $2,543,750 $2,543,750
3,000,000 3,000,000 Canandaigua Brands, Inc. 8.500 03/01/09 2,902,500 2,902,500
1,250,000 1,250,000 Eagle Family Foods, Inc. 8.750 01/15/08 1,118,750 1,118,750
5,550,000 5,550,000 Fage Dairy Industries SA 9.000 02/01/07 5,022,750 5,022,750
3,000,000 3,000,000 North Atalntic Trading, Inc. 11.000 06/15/04 3,075,000 3,075,000
4,250,000 4,250,000(b) Richmont Marketing Specialists, Inc. 10.125 12/15/07 3,591,250 3,591,250
4,500,000 4,500,000 Standard Commercial Tobacco Co., Inc. 8.875 08/01/05 3,780,000 3,780,000
1,560,000 1,560,000(b) Triarc Consumer Products Group, Inc. 10.250 02/15/09 1,505,400 1,505,400
------------
23,539,400
------------
GAMING AND LOTTERY: 11.21%
2,000,000 2,000,000 Courtyard By Marriott II Ltd. 10.750 02/01/08 2,050,000 2,050,000
4,000,000 4,000,000 Hard Rock Hotel, Inc. 9.250 04/01/05 3,820,000 3,820,000
3,250,000 3,250,000 Harrahs Operating Co., Inc. 7.875 12/15/05 3,160,625 3,160,625
4,000,000 4,000,000 HMH Properties, Inc. 7.875 08/01/08 3,710,000 3,710,000
2,000,000 2,000,000(b) Horseshoe Gaming Holding Corp. 8.625 05/15/09 1,945,000 1,945,000
3,500,000 3,500,000(b) International Game Technology 8.375 05/15/09 3,456,250 3,456,250
2,500,000 2,500,000(b) Isle Capri Casinos, Inc. 8.750 04/15/09 2,362,500 2,362,500
4,500,000 4,500,000(b) Jupiters Ltd. 8.500 03/01/06 4,432,500 4,432,500
2,000,000 2,000,000(b) Majestic Star Casino LLC 10.875 07/01/06 1,985,000 1,985,000
3,000,000 3,000,000 Mohegan Tribal Gaming Authority 8.750 01/01/09 2,996,250 2,996,250
1,940,000 1,940,000 Venetian Casino Resort LLC 12.250 11/15/04 1,910,900 1,910,900
4,500,000 4,500,000(b) Waterford Gaming LLC Finance Corp. 9.500 03/15/10 4,488,750 4,488,750
------------
36,317,775
------------
HEALTHCARE: 4.18%
1,780,000 1,780,000 Abbey Healthcare Group, Inc. 9.500 11/01/02 1,780,000 1,780,000
2,400,000 2,400,000 Fisher Scientific International, Inc. 9.000 02/01/08 2,292,000 2,292,000
1,000,000 1,000,000 Global Health Sciences, Inc. 11.000 05/01/08 770,000 770,000
3,000,000 3,000,000 Health Insurance Plan
of Greater New York 11.250 07/01/10 2,947,500 2,947,500
878,049 878,049(b) Intracel Corp. 12.000 08/25/03 792,439 792,439
5,121,951 5,121,951(b) Intracel Corp. 12.000 08/25/03 4,622,561 4,622,561
317,000 317,000 Twin Laboratories 10.250 05/15/06 336,812 336,812
------------
13,541,312
------------
HOME BUILDING: 1.04%
1,500,000 1,500,000 Engle Homes, Inc. 9.250 02/01/08 1,432,500 1,432,500
750,000 750,000 Kevco, Inc. 10.375 12/01/07 525,000 525,000
1,340,000 1,340,000 McDermott, Inc. 9.375 03/15/02 1,398,960 1,398,960
------------
3,356,460
------------
INSURANCE: 1.42%
455,000 455,000 Americo Life, Inc. 9.250 06/01/05 4,618,250 4,618,250
------------
OIL & GAS: 2.20%
2,900,000 2,900,000 Benton Oil & Gas Co. 11.625 05/01/03 1,986,500 1,986,500
3,000,000 3,000,000 Northern Offshore ASA 10.000 05/15/05 1,665,000 1,665,000
4,500,000 4,500,000(b) Windsor Petroleum Transport Corp. 7.840 01/15/21 3,487,500 3,487,500
------------
7,139,000
------------
</TABLE>
See accompanying notes to financial statements.
B-9
<PAGE>
Pro Forma - High Yield Fund II & High Yield Fund III
PORTFOLIO OF INVESTMENTS
As of June 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT MARKET VALUE
- ------------------------------ --------------------------------
HIGH HIGH PRO FORMA HIGH HIGH PRO FORMA
YIELD II YIELD III COMBINED SECURITY RATE MATURITY YIELD II YIELD III COMBINED
- -------- --------- -------- -------- ---- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PAPER: 1.66%
2,725,000 2,725,000 Buckeye Technologies, Inc. 8.500 12/15/05 $2,697,750 $2,697,750
2,500,000 2,500,000 SD Warren Co. 12.000 12/15/04 2,693,750 2,693,750
------------
5,391,500
------------
PRINTING/PUBLISHING: 5.02%
1,780,000 1,780,000 Big Flower Press Holdings 8.625 12/01/08 1,650,950 1,650,950
3,000,000 3,000,000 Garden State Newspapers, Inc. 8.625 07/01/11 2,820,000 2,820,000
3,000,000 3,000,000 Hollinger International
Publishing, Inc. 9.250 03/15/07 3,090,000 3,090,000
2,400,000 2,400,000 Newsquest Capital PLC 11.000 05/01/06 2,688,000 2,688,000
3,000,000 3,000,000 Liberty Group Operating, Inc. 9.375 02/01/08 2,835,000 2,835,000
3,250,000 3,250,000 Mail-Well I Corp. 8.750 12/15/08 3,185,000 3,185,000
------------
16,268,950
------------
RENTAL EQUIPMENT: 0.34%
1,110,000 1,110,000 United Rentals, Inc. 9.500 06/01/08 1,123,875 1,123,875
------------
RESTAURANTS: 1.36%
1,050,000 1,050,000 Foodmaker, Inc. 8.375 04/15/08 1,029,000 1,029,000
3,500,000 3,500,000 Romacorp, Inc. 12.000 07/01/06 3,377,500 3,377,500
------------
4,406,500
------------
RETAIL: 0.92%
1,109,000 1,109,000 Michaels Stores, Inc. 10.875 06/15/06 1,189,402 1,189,402
890,000 890,000 Musicland Stores Corp. 9.875 03/15/08 895,562 895,562
862,000 862,000 Tuesday Morning Corp. 11.000 12/15/07 912,642 912,642
------------
2,997,606
------------
SERVICES: 3.98%
5,500,000 5,500,000 Allied Waste North America, Inc. 7.875 01/01/09 5,115,000 5,115,000
2,000,000 2,000,000(b) Iron Mountain, Inc. 8.250 07/01/11 1,910,000 1,910,000
2,000,000 2,000,000 Nebraska Book Co., Inc. 8.750 02/15/08 1,690,000 1,690,000
4,500,000 4,500,000 Protection One, Inc. 8.125 01/15/09 4,185,000 4,185,000
------------
12,900,000
------------
SHIPPING: 2.56%
3,750,000 3,750,000 Equimar Shipholdings Ltd. 9.875 07/01/07 2,456,250 2,456,250
1,495,000 2,000,000 3,495,000 Sea Containers 12.500 12/01/04 1,608,993 2,180,000 3,788,993
2,100,000 2,100,000 Sea Containers 7.875 02/15/08 2,047,500 2,047,500
------------
8,292,743
------------
STEEL: 0.13%
2,000,000 2,000,000 Geneva Steel Co. 9.500 01/15/04 430,000 430,000
------------
</TABLE>
See accompanying notes to financial statements.
B-10
<PAGE>
Pro Forma - High Yield Fund II & High Yield Fund III
PORTFOLIO OF INVESTMENTS
As of June 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT MARKET VALUE
- ------------------------------ --------------------------------
HIGH HIGH PRO FORMA HIGH HIGH PRO FORMA
YIELD II YIELD III COMBINED SECURITY RATE MATURITY YIELD II YIELD III COMBINED
- -------- --------- -------- -------- ---- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TRANSPORTATION: 2.58%
1,340,000 1,340,000 Atlas Air, Inc. 9.250 04/15/08 $1,286,400 $1,286,400
1,340,000 1,340,000 Atlas Air, Inc. 9.375 11/15/06 1,309,850 1,309,850
278,363 278,363(b) Atlantic Coast Airlines, Inc. 7.970 01/01/00 278,391 278,391
3,205,104 3,205,104(b) Atlantic Coast Airlines, Inc. 8.750 01/01/00 3,054,913 3,054,913
890,000 890,000 Trans World Airlines 11.375 03/01/06 456,125 456,125
890,000 890,000 Trans World Airlines 11.500 12/15/04 745,375 745,375
1,340,000 1,340,000 Trans World Airlines 12.000 04/01/02 1,232,800 1,232,800
------------
8,363,854
------------
Total Corporate Bonds
(Cost $314,201,675) 301,852,351
------------
(a) COMMON STOCK: 0.36%
SHARES
------ COMMUNICATIONS - LONG DISTANCE: 0.36%
3,288 17,371 20,659 Viatel, Inc. 184,533 974,947 1,159,480
------------
(Cost $21,360)
PREFERRED STOCK: 2.21%
SHARES
------ BROADCASTING: 0.46%
12,545 12,545 Capstar 1,477,173 1,477,173
------------
INSURANCE: 0.82%
27,500 27,500 Superior National Insurance
Group, Inc., 10.75% 2,653,750 2,653,750
------------
INTERNET: 0.27%
9,250 9,250 Concentric Network 13.5% 888,036 888,036
------------
PUBLISHING/PRINTING: 0.31%
10,000 10,000 Primedia, Inc., 9.20% 995,000 995,000
------------
SUPERMARKETS: 0.35%
29,116 29,116 Nebco Evans Holding Co., 11.25% 1,150,082 1,150,082
------------
Total Preferred Stock (Cost $8,834,566) 7,164,041
------------
</TABLE>
See accompanying notes to financial statements.
B-11
<PAGE>
Pro Forma - High Yield Fund II & High Yield Fund III
PORTFOLIO OF INVESTMENTS
As of June 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT MARKET VALUE
- ------------------------------ --------------------------------
HIGH HIGH PRO FORMA HIGH HIGH PRO FORMA
YIELD II YIELD III COMBINED SECURITY RATE MATURITY YIELD II YIELD III COMBINED
- -------- --------- -------- -------- ---- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NUMBER OF RIGHTS (a) RIGHTS: 0.04%
---------------- CAPITAL GOODS MANUFACTURING: 0.04%
8,000 8,000 Terex Corp. $116,000 $116,000
------------
FOREIGN GOVERNMENT SECURITIES: 0.00%
1,500,000 1,500,000 United Mexican States 0
------------
Total Rights (Cost $0) 116,000
------------
NUMBER OF WARRANTS (a) WARRANTS: 0.52%
------------------
COMPUTERS: 0.04%
1,600 1,600 Bell Technology Group 144,000 144,000
------------
CONSUMER PRODUCTS: 0.02%
500 500 Chattem, Inc. 69,685 69,685
------------
HEALTHCARE: 0.36%
31,815 31,815 Intracel Corp. 182,936 182,936
158,536 158,536 Intracel Corp. 812,497 812,497
32,711 32,711 Intracel Corp. 171,733 171,733
------------
1,167,166
------------
SUPERMARKETS: 0.00%
4,999 4,999 Dairy Mart Convenience Stores, Inc. 2,999 2,999
------------
COMMUNICATIONS - TELECOMMUNICATIONS: 0.10%
500 500(b) Colt Telecom Group PLC 313,150 313,150
9,400 9,400(b) Occidente Y Caribe Celular SA 0 0
1,000 1,000(b) UNIFI Communications, Inc. 10 10
------------
313,160
------------
Total Warrants (Cost $809,321) 1,697,010
------------
Total Long-Term Investments (Cost $323,866,922) 311,988,882
------------
</TABLE>
See accompanying notes to financial statements.
B-12
<PAGE>
Pro Forma - High Yield Fund II & High Yield Fund III
PORTFOLIO OF INVESTMENTS
As of June 30, 1999
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT MARKET VALUE
- ------------------------------ --------------------------------
HIGH HIGH PRO FORMA HIGH HIGH PRO FORMA
YIELD II YIELD III COMBINED SECURITY RATE MATURITY YIELD II YIELD III COMBINED
- -------- --------- -------- -------- ---- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS: 1.97%
VALUE
REPURCHASE AGREEMENT: 1.97% -----
4,639,000 1,749,000 6,388,000 State Stree Repurchase Agreement,
4.70% due 07/01/99 $4,639,000 $1,749,000 $6,388,000
------------
(Collateralized by $4,605,000 U.S. Treasury
Notes, 6.375% and $1,430,000 U.S. Treasury
Bonds, 10.375%)
Treasury Notes Market Value $4,735,552, Due 09/30/2001)
Treasury Bonds Market Value $1,787,500, Due 11/15/2012)
Total Short-Term Investments (Cost $6,388,000) 4,639,000 1,749,000 6,388,000
------------
TOTAL INVESTMENTS IN SECURITIES (COST $330,254,922) 98.24% $318,376,882
OTHER ASSETS AND LIABLITIES, NET 1.76% 5,688,602
------------------------
TOTAL NET ASSETS 100.00% $324,065,484
========================
</TABLE>
(a) Non-income producing security
(b) Securities with purchases pursuant to Rule 144A, under the Securities Act
of 1933 and may not be resold subject to that rule except to qualified
institutional buyers.
(c) Step - Up Security
See accompanying notes to financial statements.
B-13
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Reference is made to Article V, Sections 5.2 and 5.3 of the Registrant's
Amended and Restated Declaration of Trust.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against policy as expressed in the Act and is, therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a Director, officer or controlling person of the Registrant in the
successful defense of any action, a suit or proceeding) is asserted by such
Director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 16. EXHIBITS
(1) (A) Form of Certificate of Trust of Registrant (b)
(B) Form of Certificate of Amendment of Certificate of Trust (b)
(C) Form of Amended and Restated Declaration of Trust (b)
(D) Form of Establishment of Additional Series (b)
(E) Form of Establishment of Additional Series (b)
(F) Form of Amendment No. 2 to Amended and Restated Declaration of
Trust (b)
(G) Form of Amendment No. 3 to Amended and Restated Declaration of
Trust (b)
(H) Form of Amendment No. 4 to Amended and Restated Declaration of
Trust (b)
(I) Form of Amendment No. 5 to Amended and Restated Declaration of
Trust (b)
(J) Form of Amendment No. 6 to Amended and Restated Declaration of
Trust (b)
(K) Form of Amendment No. 7 to Amended and Restated Declaration of
Trust (b)
(L) Form of Amendment No. 8 to Amended and Restated Declaration of
Trust (b)
(M) Form of Amendment No. 9 to Amended and Restated Declaration of
Trust (b)
(N) Form of Amendment No. 10 to Amended and Restated Declaration of
Trust (a)
(O) Form of Amendment No. 11 to Amended and Restated Declaration of
Trust (c)
C-1
<PAGE>
(P) Form of Amendment No. 12 to Amended and Restated Declaration of
Trust (c)
(Q) Form of Amendment No. 13 to Amended and Restated Declaration of
Trust (b)
(R) Form of Amendment No. 14 to Amended and Restated Declaration of
Trust (d)
(S) Form of Amendment No. 15 to Amended and Restated Declaration of
Trust (e)
(T) Form of Amendment No. 16 to Amended and Restated Declaration of
Trust (h)
(U) Form of Amendment No. 17 to Amended and Restated Declaration of
Trust (h)
(V) Form of Amendment No. 18 to Amended and Restated Declaration of
Trust (h)
(W) Form of Amendment No. 19 to Amended and Restated Declaration of
Trust (j)
(X) Form of Amendment No. 20 to Amended and Restated Declaration of
Trust (j)
(Y) Form of Amendment No. 21 to Amended and Restated Declaration of
Trust (k)
(Z) Form of Certificate of Amendment to Certificate of Trust (m)
(AA) Form of Amendment No. 22 to Amended and Restated Declaration of
Trust (m)
(BB) Form of Amendment No. 23 to Amended and Restated Declaration of
Trust (n)
(2) (A) Form of Amended Bylaws of Registrant (b)
(B) Form of Amendment to Section 2.5 of Bylaws of Registrant (b)
(3) Not Applicable
(4) Form of Agreement and Plan of Reorganization between Pilgrim Mutual Funds,
on behalf of Pilgrim High Yield Fund and Pilgrim High Yield Fund III
(5) See Exhibits 1 and 2
(6) Form of Investment Management Agreement between the Trust and Pilgrim
Investments, Inc. (p)
(7) Form of Underwriting Agreement between the Trust and Pilgrim Securities,
Inc. (p)
(8) Not Applicable
(9) (A) Form of Custodian Agreement between Registrant and Brown Brothers
Harriman & Co. dated as of June 1, 1998. (k)
(B) Form of Amendment to Custodian Agreement between Registrant and Brown
Brothers Harriman & Co. (k)
(C) Form of Foreign Custody Manager Delegation Agreement between
Registrant and Brown Brothers Harriman & Co. dated as of June 1, 1998
(k)
(D) Form of Novation Agreement to Custody Agreement with Brown Brothers
Harriman & Co. (n)
(E) Form of Appendix C to Custody Agreement with Brown Brothers Harriman
& Co. (n)
(F) Form of Novation Agreement to Foreign Custody Manager Delegation
Agreement with Brown Brothers Harriman & Co. (n)
C-2
<PAGE>
(G) Form of Appendix C to Foreign Custody Manager Delegation Agreement
with Brown Brothers Harriman & Co. (n)
(H) Form of Custodian Agreement with Investors Fiduciary Trust Company (n)
(I) Form of Recordkeeping Agreement (n)
(10) (A) Form of Amended and Restated Service and Distribution Plan for
Class A (m)
(B) Form of Amended and Restated Service and Distribution Plan for
Class B (m)
(C) Form of Amended and Restated Service and Distribution Plan for
Class C (m)
(D) Form of Amended and Restated Service Plan for Class Q (m)
(E) Form of Amendment to Amended and Restated Service and Distribution
Plan for Class B (n)
(F) Form of Amendment to Amended and Restated Service and Distribution
Plan for Class C (n)
(G) Form of Service and Distribution Plan for Class T (r)
(H) Form of Multiple Class Plan Pursuant to Rule 18f-3 (n)
(I) Form of Amended and Restated Multiple Class Plan Pursuant to
Rule 18f-3 (r)
(11) Form of Opinion and Consent of Counsel
(12) Form of Opinion and Consent of Counsel supporting tax matters and
consequences
(13) Form of Shareholder Service Agreement (n)
(14) Consents of Independent Auditors
(15) Not Applicable
(16) Powers of Attorney
(17) Not Applicable
- ----------
(a) Filed as an exhibit to Post-Effective Amendment No. 29 to Registrant's Form
N-1A Registration Statement on May 3, 1996 and incorporated herein by
reference.
(b) Filed as an exhibit to Post-Effective Amendment No. 30 to the Registrant's
Form N-1A Registration Statement on June 4, 1996 and incorporated herein by
reference.
(c) Filed as an exhibit to Post-Effective Amendment No. 38 to Registrants Form
N-1A Registration Statement of January 3, 1997 and incorporated herein by
reference.
(d) Filed as an exhibit to Post-Effective Amendment No. 40 to Registrants form
N-1A Registration Statement on May 2, 1997 and incorporated herein by
reference.
(e) Filed as an exhibit to Post-Effective Amendment No. 43 to Registrant's Form
N-1A Registration Statement on July 14, 1997 and incorporated herein by
reference.
(f) Filed as an exhibit to Post-Effective Amendment No. 45 to Registrant's Form
N-1A Registration Statement on July 28, 1997 and incorporated herein by
reference.
(g) Filed as an exhibit to Post-Effective Amendment No. 47 to Registrant's Form
N-1A Registration Statement on September 2, 1997 and incorporated herein by
reference.
C-3
<PAGE>
(h) Filed as an exhibit to Post-Effective Amendment No. 48 to Registrant's Form
N-1A Registration Statement on December 15, 1997 and incorporated herein by
reference.
(i) Filed as an exhibit to Post-Effective Amendment No. 60 to Registrant's Form
N-1A Registration Statement on June 15, 1998 and incorporated herein by
reference.
(j) Filed as an exhibit to Post-Effective Amendment No. 63 to Registrant's Form
N-1A Registration Statement on July 21, 1998 and incorporated herein by
reference.
(k) Filed as an exhibit to Post-Effective Amendment No. 66 to Registrant's Form
N-1A Registration Statement on August 14, 1998 and incorporated herein by
reference.
(l) Filed as an exhibit to Registrant's Form N-14 Registration Statement on
December 15, 1997 and incorporated herein by reference.
(m) Filed as an exhibit to Post-Effective Amendment No. 67 to the Registrant's
Form N-1A Registration Statement on March 25, 1999 and incorporated herein
by reference.
(n) Filed as an exhibit to Post-Effective Amendment No. 68 to the Registrant's
Form N-1A Registration Statement on May 24, 1999 and incorporated herein by
reference.
(o) Filed as an exhibit to Post-Effective Amendment No. 71 to the Registrant's
Form N-1A Registration Statement on July 1, 1999 and incorporated herein by
reference.
(p) Filed as an exhibit to Post-Effective Amendment No. 72 to the Registrant's
Form N-1A Registration Statement on September 2, 1999 and incorporated
herein by reference.
(q) Filed as an exhibit to Post-Effective Amendment No. 73 to the Registrant's
Form N-1A Registration Statement on October 29, 1999 and incorporated
herein by reference.
(r) Filed as an exhibit to Post-Effective Amendment No. 74 to the Registrant's
Form N-1A Registration Statement on November 5, 1999 and incorporated
herein by reference.
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act 17 CFR
230.145(c), the reoffering prospectus will contain the information called for by
the applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned registrant agrees that every prospectus that is filed under
paragraph (1) above will be filed as a part of an amendment to the registration
statement and will not be used until the amendment is effective, and that, in
determining any liability under the 1933 Act, each post-effective amendment
shall be deemed to be a new registration statement for the securities offered
therein, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering of them.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form N-14 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Phoenix and State of Arizona on the 21st day of December, 1999.
PILGRIM MUTUAL FUNDS
By:
------------------------------------
John G. Turner*
Chairman
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
Trustee and President December 21, 1999
- --------------------------- (Chief Executive Officer)
Robert W. Stallings*
Trustee December 21, 1999
- ---------------------------
Mary A. Baldwin *
Trustee December 21, 1999
- ---------------------------
Al Burton *
Trustee December 21, 1999
- ---------------------------
Paul S. Doherty *
Trustee December 21, 1999
- ---------------------------
Robert B. Goode, Jr. *
Trustee December 21, 1999
- ---------------------------
Alan L. Gosule *
Trustee December 21, 1999
- ---------------------------
Mark L. Lipson *
C-7
<PAGE>
Trustee December 21, 1999
- ---------------------------
Walter H. May *
Trustee December 21, 1999
- ---------------------------
Jock Patton *
Trustee December 21, 1999
- ---------------------------
David W.C. Putnam *
Trustee December 21, 1999
- ---------------------------
John R. Smith *
Trustee December 21, 1999
- ---------------------------
John G. Turner *
Trustee December 21, 1999
- ---------------------------
David W. Wallace *
Principal Financial December 21, 1999
- --------------------------- Officer
Michael J. Roland *
* By: /s/ James M. Hennessy
----------------------------
James M. Hennessy
Attorney-in-Fact**
** Executed pursuant to powers of attorney filed herewith.
C-8
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EXHIBIT INDEX
(4) Form of Agreement and Plan of Reorganization
(11) Form of Opinion and Consent of Counsel
(12) Form of Opinion and Consent of Counsel supporting tax matters and
consequences
(14) Consents of Independent Auditors
(16) Powers of Attorney
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this _____ day of _____________, 1999, by and between Pilgrim 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 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").
<PAGE>
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
2
<PAGE>
prospectus or statement of additional information with respect to the Acquiring
Fund, and valuation procedures established by the Acquiring Company's Board of
Trustees.
2.2 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 March ___, 2000, or such other date as the
parties may agree to in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of immediately after the close of
business on the Closing Date unless otherwise agreed to by the parties. The
close of business on the Closing Date shall be as of 4:00 p.m., Eastern Time.
The Closing shall be held at the offices of the Acquiring 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.
3
<PAGE>
At the Closing each party shall deliver to the other such bills of sale, checks,
assignments, share certificates, if any, receipts or other documents as such
other party or its counsel may reasonably request.
3.4 In the event that on the Valuation Date (a) the New York Stock Exchange
or another primary trading market for portfolio securities of the Acquiring Fund
or the Acquired Fund shall be closed to trading or trading thereupon shall be
restricted, or (b) trading or the reporting of trading on such Exchange or
elsewhere shall be disrupted so that, in the judgment of the Board of 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;
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 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
5
<PAGE>
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
of its use include any untrue statement of a material fact or omit to state any
6
<PAGE>
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
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;
7
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(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.
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
and the Acquiring Fund made in this Agreement are true and correct at and as of
9
<PAGE>
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.
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
expenses of holding shareholders' meetings. Notwithstanding any of the
foregoing, expenses will in any event be paid by the party directly incurring
11
<PAGE>
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.
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<PAGE>
14.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
14.5 It is expressly agreed that the obligations of the parties hereunder
shall not be binding upon any of the Trustees, shareholders, nominees, officers,
agents, or employees of 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
By:
-------------------------------- -------------------------------
SECRETARY
Its:
-------------------------------- -------------------------------
Attest: PILGRIM HIGH YIELD FUND III
By:
-------------------------------- -------------------------------
SECRETARY
Its:
-------------------------------- -------------------------------
13
[FORM OF OPINION]
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, DC 20006
___________, 2000
Pilgrim Mutual Funds
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
Re: Pilgrim Mutual Funds, on behalf of Pilgrim High Yield Fund II
Dear Sirs:
We have acted as counsel to Pilgrim Mutual Funds, a Delaware business trust
(the "Company"), and we have a general familiarity with the Company's business
operations, practices and procedures. You have asked for our opinion regarding
the issuance of shares of common stock by the Company in connection with the
acquisition by Pilgrim High Yield Fund II, a series of the Company, of the
assets of Pilgrim High Yield Fund III, which will be registered on a Form N-14
Registration Statement (the "Registration Statement") to be filed by the Company
with the Securities and Exchange Commission.
We have examined originals or certified copies, or copies otherwise
identified to our satisfaction as being true copies, of various corporate
records of the Company and such other instruments, documents and records as we
have deemed necessary to render this opinion. We have assumed the genuineness of
all signatures, the authenticity of all documents examined by us and the
correctness of all statements of fact contained in those documents.
On the basis of the foregoing, it is our opinion that the shares of common
stock of the Company being registered under the Securities Act of 1933 in the
Registration Statement have been duly authorized and will be legally and validly
issued, fully paid and non-assessable by the Company upon transfer of the assets
of Pilgrim High Yield Fund III pursuant to the terms of the Agreement and Plan
of Reorganization included in the Registration Statement.
We hereby consent to use of this opinion as an exhibit to the Registration
Statement and to all references to our firm therein.
Very truly yours,
[FORM OF OPINION]
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, DC 20006
___________, 2000
Pilgrim Mutual Funds
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
Dear Sirs:
You have requested our opinion regarding certain Federal income tax
consequences to Pilgrim High Yield Fund III (the "Target Fund"), a Massachusetts
business trust, to the holders of the shares of the Target Fund (the "Target
Shareholders"), and to Pilgrim High Yield Fund II (the "Acquiring Fund"), a
separate series of Pilgrim Mutual Funds (the "Acquiring Company"), a Delaware
business trust, in connection with the proposed transfer of substantially all of
the properties of the Target Fund to the Acquiring Fund, in exchange solely for
voting shares of common stock of the Acquiring Fund ("Acquiring Fund Shares")
followed by the distribution of such Acquiring Fund Shares received by the
Target Fund in complete liquidation and termination of the Target Fund (the
"Reorganization"), all pursuant to the Agreement and Plan of Reorganization (the
"Agreement") dated as of ________ ___, 1999 between the Target Fund and the
Acquiring Company on behalf of the Acquiring Fund.
For purposes of this opinion, we have examined and rely upon the Agreement
and the Acquiring Company's registration statement on Form N-14 (Securities Act
File No. 33-56094) (the "Form N-14") and such other documents and instruments as
we deem necessary or appropriate for purposes of rendering this opinion.
This opinion is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), United States Treasury regulations, judicial decisions, and
administrative rulings and pronouncements of the Internal Revenue Service, all
as in effect on the date hereof. This opinion is conditioned upon the
Reorganization taking place in the manner described in the Agreement and the
Form N-14 referred to above, and upon our receipt of satisfactory representation
letters from the Target Fund and from the Acquiring Company on behalf of the
Acquiring Fund.
Based upon the foregoing, it is our opinion that:
1. The acquisition by the Acquiring Fund of substantially all of the
properties of the Target Fund in exchange solely for Acquiring Fund
Shares followed by the distribution of Acquiring Fund Shares to the
shareholders of the Target Fund in exchange for their Target Fund
shares in complete liquidation and termination of the Target Fund will
constitute a reorganization within the meaning of section 368 of the
Code. The Target Fund and the Acquiring Fund will each be "a party to
a reorganization" within the meaning of section 368(b) of the Code.
<PAGE>
2. The Target Fund will not recognize gain or loss upon the transfer of
substantially all of its assets to the Acquiring Fund in exchange
solely for Acquiring Fund Shares or upon distributing to its
shareholders the Acquiring Fund Shares received by the Target Fund in
the transaction pursuant to the Agreement. We do not express any
opinion as to whether any accrued market discount will be required to
be recognized as ordinary income.
3. The Acquiring Fund will recognize no gain or loss upon receiving the
properties of the Target Fund in exchange solely for Acquiring Fund
Shares.
4. The aggregated adjusted basis to the Acquiring Fund of the properties
of the Target Fund received by the Acquiring Fund in the
reorganization will be the same as the aggregate adjusted basis of
those properties in the hands of the Target Fund immediately before
the exchange.
5. The Acquiring Fund's holding periods with respect to the properties of
the Target Fund that the Acquiring Fund acquires in the transaction
will include the respective periods for which those properties were
held by the Target Fund (except where investment activities of the
Acquiring Fund have the effect of reducing or eliminating a holding
period with respect to an asset).
6. The shareholders of the Target Fund will recognize no gain or loss
upon receiving Acquiring Fund Shares solely in exchange for the Target
Fund shares.
7. The aggregate basis of the Acquiring Fund Shares received by a
shareholder of the Target Fund in the transaction will be the same as
the aggregate basis of the Target Fund shares surrendered by the
shareholder in exchange therefor.
8. A Target Fund shareholder's holding period for the Acquiring Fund
Shares received by the shareholder in the transaction will include the
holding period during which the shareholder held the Target Fund
shares surrendered in exchange therefor, provided that the shareholder
held such shares as a capital asset on the date of Reorganization.
We express no opinion as to the federal income tax consequences of the
Reorganization except as expressly set forth above, or as to any transaction
except those consummated in accordance with the Plan.
2
<PAGE>
Our opinion as expressed herein, is solely for the benefit of the Target
Fund, the Target Fund shareholders, and the Acquiring Fund, and unless we give
our prior written consent, neither our opinion nor this opinion letter may be
quoted in whole or in part or relied upon by any other person.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the references to this firm in the Tax Section. In
giving this consent, we do not admit that we come within the category of persons
whose consent is required under Section 7 of the Securities Act or the rules and
regulations of the Commission thereunder.
Very truly yours,
3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement of
Pilgrim Mutual Funds on Form N-14 of our report dated February 5, 1999, on our
audit of the financial statements and financial highlights of The Northstar
Funds, which report is included in the Annual Report to Shareholders for the
year ended December 31, 1998, which is also incorporated by reference into this
Registration Statement.
PricewaterhouseCoopers LLP
New York, New York
December 20, 1999
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Pilgrim Mutual Funds:
In connection with the combined registration statement/proxy statement on Form
N-14 for Pilgrim Mutual Funds., we consent to incorporation by reference of our
report on the Pilgrim High Yield Fund II and to the reference to our Firm under
the heading "Financial Highlights" in Exhibit B to the Prospectus.
/s/ KPMG LLP
Los Angeles, California
December 20, 1999
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Robert W. Stallings, James M. Hennessy, Jeffrey S. Puretz and Karen L.
Anderberg, and each of them his true and lawful attorney-in-fact as agent with
full power of substitution and resubstitution of him in his name, place, and
stead, to sign any and all registration statements on Form N-14 applicable to
the Pilgrim Mutual Funds, on behalf of the Pilgrim Balanced Fund and the Pilgrim
High Yield Fund II, and any amendment or supplement thereto, and to file the
same with all exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitutes, may lawfully do or cause to be
done by virtue hereof.
Dated: December 17, 1999
/s/ Mary A. Baldwin, Ph.D
----------------------------------------
Mary A. Baldwin, Ph.D
/s/ Al Burton /s/ Paul S. Doherty
- ------------------------------------- ----------------------------------------
Al Burton Paul S. Doherty
/s/ Robert B. Goode, Jr. /s/ Alan L. Gosule
- ------------------------------------- ----------------------------------------
Robert B. Goode, Jr. Alan L. Gosule
/s/ Mark Lipson /s/ Walter H. May
- ------------------------------------- ----------------------------------------
Mark Lipson Walter H. May
/s/ Jock Patton /s/ David W.C. Putnam
- ------------------------------------- ----------------------------------------
Jock Patton David W.C. Putnam
/s/ John R. Smith /s/ Robert W. Stallings
- ------------------------------------- ----------------------------------------
John R. Smith Robert W. Stallings
/s/ John G. Turner /s/ David W. Wallace
- ------------------------------------- ----------------------------------------
John G. Turner David W. Wallace
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Robert W. Stallings, James M. Hennessy, Jeffrey S. Puretz and Karen L.
Anderberg, and each of them his true and lawful attorney-in-fact as agent with
full power of substitution and resubstitution of him in his name, place, and
stead, to sign any and all registration statements on Form N-14 applicable to
the Pilgrim Mutual Funds, on behalf of the Pilgrim Balanced Fund and the Pilgrim
High Yield Fund II, and any amendment or supplement thereto, and to file the
same with all exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitutes, may lawfully do or cause to be
done by virtue hereof.
Dated: December 17, 1999
/s/ Michael A. Roland
----------------------------------------
Michael A. Roland
