Pilgrim Income & Growth Fund and
Pilgrim Balance Sheet Opportunities 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 Income & Growth Fund (formerly Northstar Income and Growth Fund) and the
Pilgrim Balance Sheet Opportunities Fund (formerly Northstar Balance Sheet
Opportunities Fund), as applicable, each scheduled to be held at 9:00 a.m.,
local time, on March 24, 2000 at 40 North Central Avenue, Suite 1200, Phoenix,
Arizona 85004.
The Board of Trustees has approved a reorganization of each of these Funds
into the Pilgrim Balanced Fund, which is managed by Pilgrim Investments, Inc.
and is part of the Pilgrim Funds (the "Reorganization"). If approved by
shareholders, you would become a shareholder of the Balanced Fund on the date
that the Reorganization occurs. The Balanced Fund has investment objectives and
policies that are similar in many respects to those of Pilgrim Income & Growth
Fund and Pilgrim Balance Sheet Opportunities Fund, and the Reorganization is
expected to result in operating expenses that are lower for shareholders.
You are being asked to vote to approve an Agreement and Plan of
Reorganization. The accompanying document describes the proposed transaction and
compares the policies and expenses of each of the funds for your evaluation.
After careful consideration, the Board of Trustees of the Pilgrim Income &
Growth Fund (a series of Pilgrim Mayflower Trust) and the Pilgrim Balance Sheet
Opportunities Fund each unanimously approved this proposal and recommended
shareholders vote "FOR" the proposal.
A Proxy Statement/Prospectus that describes the reorganizations is
enclosed. We hope that you can attend the applicable Meeting in person; however,
we urge you in any event to vote your shares by completing and returning the
enclosed proxy in the envelope provided at your earliest convenience.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. IN ORDER
TO AVOID THE ADDED COST OF FOLLOW-UP SOLICITATIONS AND POSSIBLE ADJOURNMENTS,
PLEASE TAKE A FEW MINUTES TO READ THE PROXY STATEMENT/PROSPECTUS AND CAST YOUR
VOTE. IT IS IMPORTANT THAT YOUR VOTE BE RECEIVED NO LATER THAN MARCH 23, 2000.
The Funds are using Shareholder Communications Corporation, a professional
proxy solicitation firm, to assist shareholders in the voting process. As the
date of the meeting approaches, if we have not already heard from you, you may
receive a telephone call from Shareholder Communications Corporation reminding
you to exercise your right to vote.
We appreciate your participation and prompt response in this matter and
thank you for your continued support.
Sincerely,
/s/ Robert W. Stallings
Robert W. Stallings,
President
<PAGE>
Pilgrim Income & Growth Fund and
Pilgrim Balance Sheet Opportunities Fund
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004
(800) 992-0180
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF
PILGRIM INCOME & GROWTH FUND AND
PILGRIM BALANCE SHEET OPPORTUNITIES FUND
SCHEDULED FOR MARCH 24, 2000
To the Shareholders:
Special Meetings of Shareholders of the Pilgrim Income & Growth Fund and
the Pilgrim Balance Sheet Opportunities Fund (formerly, Northstar Income &
Growth Fund and Northstar Balance Sheet Opportunities Fund, respectively) are
scheduled for March 24, 2000 at 9:00 a.m., local time, at 40 North Central
Avenue, Suite 1200, Phoenix, Arizona 85004.
The purposes of the Special Meeting of Pilgrim Income & Growth Fund are as
follows:
1. To approve an Agreement and Plan of Reorganization providing for the
acquisition of all of the assets and liabilities of Pilgrim Income &
Growth Fund by Pilgrim Balanced Fund; and
2. To transact such other business as may properly come before the
Special Meeting of Shareholders or any adjournments thereof.
The purposes of the Special Meeting of the Pilgrim Balance Sheet
Opportunities Fund are as follows:
1. To approve an Agreement and Plan of Reorganization providing for the
acquisition of all of the assets and liabilities of Pilgrim Balance
Sheet Opportunities Fund by Pilgrim Balanced Fund; 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 Boards of Trustees
/s/ James M. Hennessy
James M. Hennessy,
Secretary
February 8, 2000
<PAGE>
TABLE OF CONTENTS
INTRODUCTION.............................................................. 1
SUMMARY................................................................... 2
INVESTMENT OBJECTIVES AND POLICIES........................................ 5
Comparison of Objectives and Primary Investment Strategies............ 5
Comparison of Portfolio Characteristics............................... 8
Relative Performance.................................................. 9
Comparison of the Risks of Investing in the Funds..................... 9
Comparison of Securities and Investment Techniques.................... 11
COMPARISON OF FEES AND EXPENSES........................................... 14
Operating Expenses.................................................... 14
Annual Fund Operating Expenses........................................ 15
Expense Limitation Arrangements....................................... 17
Transaction Fees on New Investments.................................. 17
ADDITIONAL INFORMATION ABOUT BALANCED FUND................................ 19
INFORMATION ABOUT THE REORGANIZATION...................................... 22
ADDITIONAL INFORMATION ABOUT THE FUNDS.................................... 24
GENERAL INFORMATION ABOUT THE PROXY STATEMENT............................. 26
APPENDIX A................................................................ A-1
APPENDIX B................................................................ B-1
APPENDIX C................................................................ C-1
APPENDIX D................................................................ D-1
APPENDIX E................................................................ E-1
<PAGE>
PROXY STATEMENT/PROSPECTUS
SPECIAL MEETING OF SHAREHOLDERS SCHEDULED FOR
MARCH 24, 2000
PILGRIM INCOME & GROWTH FUND
(formerly Northstar Income & Growth Fund; a series of Pilgrim Mayflower Trust)
and the
PILGRIM BALANCE SHEET OPPORTUNITIES FUND
(formerly Northstar Balance Sheet Opportunities Fund)
Relating to the Reorganization into
PILGRIM BALANCED FUND
(a series of Pilgrim Mutual Funds)
(COLLECTIVELY, THE "FUNDS")
INTRODUCTION
This Proxy Statement/Prospectus provides you with information about two
proposed transactions. These transactions involve the transfer of all the assets
and liabilities of Pilgrim Income & Growth Fund (formerly Northstar Income &
Growth Fund) ("Income & Growth Fund") and Pilgrim Balance Sheet Opportunities
Fund (formerly Northstar Balance Sheet Opportunities Fund) ("Balance Sheet
Opportunities Fund") (collectively, the "Target Funds") to Pilgrim Balanced Fund
("Balanced Fund") in exchange for shares of Balanced Fund (the
"Reorganization"). Each Target Fund would then distribute to its shareholders
their portion of the shares of Balanced Fund it receives in the Reorganization.
The result would be a liquidation of each of the Target Funds. You would receive
shares of Balanced Fund having an aggregate value equal to the aggregate value
of the shares you held of Income & Growth Fund and/or Balance Sheet
Opportunities Fund, as applicable, 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 Reorganizations through which these transactions would be
accomplished.
Because you, as a shareholder of one or both of the Target Funds, are being
asked to approve a transaction that will result in your holding of shares of
Balanced Fund, this Proxy Statement also serves as a Prospectus for Balanced
Fund.
This Proxy Statement/Prospectus, which you should retain for future
reference, contains important information about the Balanced Fund that you
should know before investing. For a more detailed discussion of the investment
objectives, policies, restrictions and risks of each of the Funds, see the
Prospectus included herewith (the "Pilgrim Prospectus") and the Statement of
Additional Information for Pilgrim Funds dated January 4, 2000, which may be
obtained, without charge, by calling (800) 992-0180. Each of the Funds also
provides periodic reports to its shareholders which highlight certain important
information about the Funds, including investment results and financial
information. The annual report for Balanced Fund 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
Pilgrim Balanced Fund from the Securities and Exchange Commission's ("SEC")
Public Reference Room (1-800-SEC-0330) or from the SEC's internet website at
www.sec.gov.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES, OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<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
Pilgrim Mayflower Trust ("Pilgrim Mayflower Trust"), on behalf of the Income &
Growth Fund, and Balance Sheet Opportunities Fund each approved an Agreement and
Plan of Reorganization (each a "Reorganization Agreement," collectively, the
"Reorganization Agreements"). Subject to shareholder approval, each
Reorganization Agreement provides for:
* the transfer of all of the assets of the Target Fund to Balanced Fund,
in exchange for shares of Balanced Fund;
* the assumption by Balanced Fund of all of the liabilities of the
Target Fund;
* the distribution of the Balanced Fund shares to the shareholders of
the Target Fund; and
* the complete liquidation of the Target Fund (the "Reorganization").
The Reorganization is expected to be effective upon the opening of business
on April 3, 2000, or on a later date as the parties may agree (the "Closing").
As a result of the Reorganization, each shareholder of Class A, Class B and
Class C Shares of the Target Funds, as well as Class T shares of Balance Sheet
Opportunities Fund, would become a shareholder of the same Class of Balanced
Fund. Each shareholder would hold, immediately after the Closing, shares of each
Class of Balanced Fund having an aggregate value equal to the aggregate value of
the shares of that same Class of Income & Growth Fund and/or Balance Sheet
Opportunities Fund, as applicable, 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 three similar mutual funds within the same
group of funds. Shareholders in the Target Funds (as well as those in Balanced
Fund) 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 by each of the Target Funds
requires the affirmative vote of a majority of the outstanding shares of the
pertinent fund.
AFTER CAREFUL CONSIDERATION, THE BOARD OF TRUSTEES OF THE PILGRIM MAYFLOWER
TRUST, ON BEHALF OF THE INCOME & GROWTH FUND, AND THE BALANCE SHEET
OPPORTUNITIES FUND EACH 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:
* The Funds have substantially similar investment objectives. Balanced
Fund and Income & Growth Fund seek current income balanced with
capital appreciation. Balance Sheet Opportunities Fund seeks income,
with a secondary objective of capital appreciation. Each of the Funds
combines the use of debt and equity investing to seek its objectives.
However, the strategies by which each Fund seeks to achieve its
objectives differ in some respects. A more complete discussion of the
differences in the investment strategies of each Fund is contained in
the section of the Proxy Statement/Prospectus entitled "Investment
Objectives and Policies."
* The proposed Reorganization offers actual or potential reductions in
total operating expenses for shareholders of the Target Funds. This
chart compares the current operating expenses, management fees, and
distribution and shareholder service fees of the Funds.
2
<PAGE>
<TABLE>
<CAPTION>
Distribution and Service Total Net
(12b-1) Fees(2) Operating Expenses(3)
Management Fees(2) ---------------------------- ----------------------------
Class of Shares All Classes A B C T A B C T
--------------- ----------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced Fund (1) 0.75% 0.35% 1.00% 1.00% N/A 1.35% 2.00% 2.00% N/A
Income & Growth Fund 0.75%(4) 0.30% 1.00% 1.00% N/A 1.40% 2.12% 2.08% N/A
Balance Sheet
Opportunities Fund 0.65% 0.30% 1.00% 1.00% 0.75% 1.52% 2.24% 2.22% 1.94%
</TABLE>
- ----------
(1) Pilgrim Investments, Inc. limits the expenses of the Balanced Fund pursuant
to the terms of an Expense Limitation Agreement. See "Comparison of Fees
and Expenses - Expense Limitation Arrangements" for more information.
(2) Fees are expressed as an annual rate of average daily net assets.
(3) Operating Expenses are expressed as a ratio of expenses to average daily
net assets ("expense ratio"), and reflect ordinary operating expenses for
the year ended June 30, 1999 (as adjusted for contractual changes).
(4) Income & Growth Fund's management fee is subject to a breakpoint fee
structure, which is described below under the caption "Comparison of Fees
and Expenses."
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 Service Total Net
(12b-1) Fees Operating Expenses
Management Fees ---------------------------- ----------------------------
Class of Shares All Classes A B C T A B C T
- --------------- ----------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Combined Funds
(Pro Forma) 0.75% 0.35% 1.00% 1.00% 0.75% 1.35% 2.00% 2.00% 1.75%
</TABLE>
* An expense limitation arrangement is in place for Balanced Fund, 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 Balanced Fund (as adjusted for contractual changes) would
have been higher than the expense ratio for the same Class of the Target
Funds. For the fiscal year ended June 30, 1999, for example, the expense
ratio for Class A shares would have been 1.61% for Balanced Fund compared
to 1.40% for Income & Growth Fund and 1.52% for Balance Sheet Opportunities
Fund. This information and similar information for the other Classes is
shown in the table under the caption "Annual Fund Operating Expenses."
Pilgrim Investments has committed to maintain the current expense
limitation arrangement for Balanced Fund through at least October 31, 2001.
3
<PAGE>
* The current sales load structure for the Funds is identical.
* For further information on fees and expenses, see "Comparison of Fees and
Expenses."
* The Funds have affiliated management. Pilgrim Investments, Inc. ("Pilgrim
Investments"), 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004,
is the Investment Manager to Balanced Fund. Pilgrim Advisors, Inc.
("Pilgrim Advisors") (formally Northstar Investment Management
Corporation), 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004,
is the investment manager for Income & Growth Fund and Balance Sheet
Opportunities Fund. Both are affiliated subsidiaries of the same holding
company, ReliaStar Financial Corp. Because these firms share investment
resources, the investment personnel who manage the Balanced and Balance
Sheet Opportunities Funds are the same. Different investment personnel,
however, manage the Income & Growth Fund.
PURCHASE, REDEMPTION, AND EXCHANGE INFORMATION. The purchase, redemption
and exchange provisions and privileges for the Target Funds and Balanced Fund
are currently the same. Prior to November 1, 1999, there were some differences
in these provisions, including differences in sales loads. As a result, the
contingent deferred sales load structure of the Target Funds shares held by you
prior to November 1, 1999 will apply to the Balanced Fund shares issued to you
in the Reorganization. In addition, you will receive credit for the period that
you held your Target Funds shares for purposes of calculating any contingent
deferred sales charges and determining conversion rights with regard to Balanced
Fund shares you receive in the Reorganization. Similar to Class B shares of the
Target Funds, Class B shares of Balanced Fund will convert to Class A eight
years after their purchase date.
Purchases of shares of Balanced Fund after the Reorganization will be
subject to the sales load structure and conversion characteristics of Balanced
Fund. For additional information on purchase, redemption and exchange
procedures, see "Comparison of Fees and Expenses" and "Appendix B - Additional
Information Regarding Balanced Fund."
FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION. The Funds expect
that the Reorganization will be considered a tax-free reorganization within the
meaning of section 368(a)(1) of the Internal Revenue Code of 1986, as amended
(the "Code"). As such, you will not recognize gain or loss as a result of the
Reorganization. See "Information About The Reorganization - Tax Considerations."
4
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
COMPARISON OF OBJECTIVES AND PRIMARY INVESTMENT STRATEGIES
The following chart compares the investment objectives of the Funds.
Income & Balance Sheet
Balanced Fund Growth Fund Opportunities Fund
------------- -------------------- -----------------------
Long-term capital Current income and Income with a secondary
appreciation and capital appreciation. objective of capital
current income. appreciation.
The following chart and text compares and describes the types of primary
investment strategies that may be that may be used by the Funds.
Income & Balance Sheet
Balanced Fund Growth Fund Opportunities Fund
------------- ----------- ------------------
Debt Securities X X X
Equity Securities X X X
High Yield Debt Securities X X
Foreign Securities X X X
GENERAL
BALANCED FUND:
* Primarily invests in a blend of equity and debt securities with an
emphasis on overall total return.
INCOME & GROWTH FUND:
* Primarily invests in dividend paying equity securities, convertible
securities, and investment grade debt securities.
BALANCE SHEET OPPORTUNITIES FUND:
* Primarily invests in domestic debt and equity securities.
* Adviser reviews various factors relating to an issuer, especially its
financial statements, to determine whether debt or equity securities
offer the best potential to meet the Fund's investment objectives.
DEBT SECURITIES
BALANCED FUND:
* Invests 40% to 60% (target is 50%) of its assets in debt securities of
any maturity issued by corporations, other business entities, the U.S.
Government and its agencies and instrumentalities, and government
sponsored enterprises.
* May invest up to 35% of its net assets in zero coupon securities. May
invest up to 10% of its assets in other investment companies that
invest in secured floating rate loans, including up to 5% of its
assets in Pilgrim Prime Rate Trust, a closed-end investment company
advised by Pilgrim Investments.
5
<PAGE>
INCOME & GROWTH FUND:
* Invests at least 65% of its total assets in income-producing
securities, which may include debt securities, convertible securities,
preferred securities, and equity securities that normally pay
dividends.
BALANCE SHEET OPPORTUNITIES FUND:
* Invests at least 51% of its total assets in income-producing
securities, which may include debt securities, convertible securities,
preferred securities, and equity securities that normally pay
dividends.
* May invest in pay-in-kind securities and discount obligations,
including zero coupon securities.
EQUITY SECURITIES
BALANCED FUND:
* Assets not invested in debt are primarily invested in equity
securities of large companies (over $5 billion) that the adviser
believes are leaders in their industries. Adviser emphasizes a value
approach, and seeks securities whose prices in relation to projected
earnings are believed to be reasonable in comparison to the market.
May invest to a limited degree in companies that have a market
capitalization between $1 billion and $5 billion.
INCOME & GROWTH FUND:
* May invest no more than 30% of its assets in convertible securities.
* Historically, has invested primarily in equity securities.
BALANCE SHEET OPPORTUNITIES FUND:
* May invest in common stocks, preferred stocks, convertible securities
and warrants, and other stock purchase rights.
HIGH YIELD DEBT SECURITIES
BALANCED FUND:
* May invest up to 35% of its net assets in high yield debt securities
(junk bonds) rated below investment grade by a nationally recognized
statistical rating agency, or of comparable quality if unrated. There
is no minimum credit quality for the high yield debt securities in
which it may invest.
BALANCE SHEET OPPORTUNITIES FUND:
* May invest up to 50% of its assets in debt securities rated as low as
"B" by Moody's or S&P (junk bonds).
FOREIGN SECURITIES
BALANCED FUND:
* May invest up to 20% of its total assets in foreign securities.
6
<PAGE>
INCOME & GROWTH FUND:
* May invest up to 20% of its net assets in foreign issuers, but only
10% of its net assets can be in securities that are not listed on a
U.S. securities exchange.
BALANCE SHEET OPPORTUNITIES FUND:
* May invest up to 20% of its net assets in foreign issuers, but only
10% of its net assets can be in securities that are not listed on a
U.S. securities exchange.
Following the Reorganization and in the ordinary course of business as a
mutual fund, certain holdings of Income & Growth Fund and/or Balance Sheet
Opportunities Fund that were transferred to Balanced Fund in connection with the
Reorganization may be sold. Such sales may result in increased transaction costs
for Balanced Fund, and the realization of taxable gains or losses for the Fund.
7
<PAGE>
COMPARISON OF PORTFOLIO CHARACTERISTICS
The following table compares certain characteristics of the portfolios of
the Funds as of June 30, 1999:
<TABLE>
<CAPTION>
Income & Balance Sheet
Balanced Fund Growth Fund Opportunities Fund
------------- ----------- ------------------
<S> <C> <C> <C>
Net Assets $38,296,244 $115,276,196 $43,634,265
Number of Holdings 147 88 67
Average Credit Quality of Debt
Securities A2 A2 Baa3
Ratio of net income to average net
assets (for 12 months ending
06/30/99) 1.75% 1.40% 3.11%
Portfolio Turnover Rate 63% 73% 4%
As a percentage of Net Assets:
Equity Securities 48% 69% 62%
Foreign Securities 0% 2% 0%
Convertible Securities 0% 0% 3%
Preferred Securities 0% 0% 5%
Mortgage-Related Securities 6% 2% 0%
U.S. Government Securities 12% 0% 0%
Domestic Corporate Bonds 14% 23% 10%
Foreign Corporate Bonds 3% 0% 8%
Convertible Corporate Bonds 0% 0% 6%
Warrants 0% 0% 1%
Investment Trusts 7% 0% 0%
Short-term Investments 10% 4% 5%
Top 5 Industries Investment Trust 7.7% Financial 15.7% Consumer Products 17.1%
(as a % of Net Assets) Financial 7.1% Consumer Products 12.4% Broadcasting 13.9%
Communications 6.8% Energy 12.0% Communications 8.8%
Treasury Notes 6.7% Communications 10.6% Entertainment 5.8%
Mortgage Backed 5.9% Capital Goods 6.6% Energy 8.5%
Top 10 Holdings Pilgrim Prime Rate Halliburton Co. 4.7% EchoStar
(as a % of Net Assets) Trust 4.7% Avon Products, Inc. 3.0% Communications 10.5%
UST 5.75 8/03 3.0% MCI Intracel Corp. 3.9%
FHLMC E74572 2.9% Communications, Comcast Corp. 3.7%
UST 5.50 8/28 2.4% Inc. 2.5% Clear Channel
Blackrock Strategic First Union Corp. 2.3% Communications 3.7%
Term Trust 1.6% IES Utilities Inc. 2.3% CBS Radio, Inc. 3.7%
FHLMC E00659 1.4% International Business Communications
Blackrock 2001 Term Machines 2.2% Corp. 3.6%
Trust 1.4% Fleet Financial Star Choice
ICG Services 0.8% Group, Inc. 2.2% Communications 3.6%
Warner Lambert Co 0.8% General Motors Time Warner, Inc. 3.4%
Hewlett Packard 0.8% Acceptance Corp. 2.1% Chancellor Media
Delphi Automotive Corp. 3.3%
Systems Corp. 1.7% Unisite, Inc. 3.2%
Baker Hughes, Inc. 1.6%
</TABLE>
8
<PAGE>
RELATIVE PERFORMANCE
The following table shows, for each calendar year since 1994, the average
annual total return for (a) Class A Shares of Balanced Fund, (b) Class A shares
of each of the Target Funds, (c) the Standard & Poor's Barra Value Index, (d)
the Lehman Aggregate Bond Index, (e) the Lipper Balanced Fund Average and (f) a
composite of securities indices (the "Composite Index"). Performance of the
Funds in the table does not reflect the deduction of sales loads. The indices
have an inherent performance advantage over the Balanced Fund since they have no
cash in their portfolios, impose no sales charges and incur no operating
expenses. An investor cannot invest directly in an index. Total return is
calculated assuming reinvestment of all dividends and capital gain distributions
at net asset value and excluding the deduction of sales charges.
<TABLE>
<CAPTION>
Lehman Lipper
Calendar Income & Balance Sheet S&p Barra Aggregate Balanced
Year Balanced Growth Opportunities Value Bond Fund Composite
Period/ended Fund(1) Fund(2) Fund(3) Index(4) Index(5) Average(6) Index(7)
- ------------ ------- ------- ------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/94 (6.29)% (3.56)% -- (1.13)% (2.92)% (2.05)% (0.59)%
12/31/95 23.44% 21.33% -- 36.90% 18.47% 24.89% 30.16%
12/31/96 16.39% 15.23% 10.54% 21.20% 3.63% 13.05% 14.90%
12/31/97 20.50% 15.56% 24.31% 29.94% 9.65% 20.30% 23.90%
12/31/98 23.34% 5.76% 5.19% 14.66% 8.69% 15.09% 20.90%
9/30/99(8) 2.58% 1.15% 7.34% 3.40% (0.70)% 1.77% 1.48%
</TABLE>
- ----------
(1) Prior to May 24, 1999, a different adviser managed Balanced Fund and the
Fund's policies targeted an allocation of 60% of net assets to equities
rather than the current 50%.
(2) Income & Growth Fund commenced operations on November 8, 1993.
(3) Balance Sheet Opportunities Fund commenced operations on June 5, 1995.
(4) The Standard & Poor's Barra Value Index is a capitalization-weighted index
of all stocks in the Standard & Poor's 500 Composite Stock Price Index
("S&P 500 Index") that have low price-to-book ratios. It is designed so
that approximately 50% of the market capitalization of the S&P 500 Index is
in the Standard & Poor's Barra Value Index.
(5) The Lehman Aggregate Bond Index is an unmanaged index that measures the
performance of the U.S. investment grade fixed rate bond market, including
government and corporate securities, mortgage pass-through securities, and
asset-backed securities.
(6) The Lipper Balanced Fund Average measures the performance of balanced funds
(funds that seek income balanced with capital appreciation).
(7) The Composite Index consists of 60% of the S&P 500 Index and 40% of the
Lehman Brothers Government/Corporate Bond Index.
(8) Not annualized.
9
<PAGE>
COMPARISON OF THE RISKS OF INVESTING IN THE FUNDS
Because the Funds share similar investment objectives and policies, many of
the risks of investing in Balanced Fund are substantially similar to the risks
of investing in the Target Funds. The principal risk of an investment in each of
the Funds 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.
The Target Funds and Balanced Fund are subject to risks associated with
investing in debt and equity securities, including market risks, changes in
interest rates, credit risks, prepayment risks, liquidity risks, price
volatility risks, market trends risks, risk of investing in foreign securities,
and risks of using derivatives, as described below.
* The value of each Fund's investments may fall as the prices of its
investments go up or down. The equity portion of each Fund's portfolio
is subject to market, issuer and other risks, and their values may go
up or down, sometimes rapidly and unpredictably. Market risk is the
risk that securities may decline in value due to factors affecting
securities markets generally or particular industries. Issuer risk is
the risk that the value of a security may decline for reasons relating
to the issuer, such as changes in the financial condition of the
issuer. While equities may offer the potential for greater long-term
growth than most debt securities, they generally have higher
volatility. Since the Balanced Fund normally has a somewhat smaller
commitment to equities than the Income & Growth Fund and the Balance
Sheet Opportunities Fund, it will have somewhat less exposure to the
risks of the equities markets, and somewhat less potential for growth
from equities.
* From time to time, the stock market may not favor the large company
value securities in which each of the Funds may invest. Rather, the
market could favor growth-oriented stocks or small company stocks, or
may not favor equities at all. Each Fund is subject to this risk.
* With respect to the fixed income (debt) portion of each Fund's
portfolio, the value of those investments may fall when interest rates
rise. Each of the Funds may be particularly sensitive to changes in
interest rates because they invest in debt securities with
intermediate and long terms to maturity. Debt securities with longer
durations tend to be more sensitive to changes in interest rates,
usually making them more volatile than debt securities with shorter
durations. Each of the Funds may invest in zero coupon securities,
which are particularly sensitive to changes in interest rates. Since
the Balanced Fund = normally has a somewhat greater commitment to debt
securities than the Income & Growth Fund and the Balance Sheet
Opportunities Fund, it will have somewhat greater exposure to the
risks of investing in debt securities, including changes in interest
rates and credit risks, as described below.
* Each Fund could lose money if the issuer of a debt security is unable
to meet its financial obligations or goes bankrupt. Generally,
Balanced Fund and Balance Sheet Opportunities Fund normally are
subject to more credit risk than the Income & Growth Fund, because
they may invest in high yield debt securities, which are considered
predominantly speculative with respect to the issuer's continuing
ability to meet interest and principal payments. This is especially
true during periods of economic uncertainty or economic downturns. The
debt portion of the Income & Growth Fund, on the other hand, normally
is subject to less credit risk than other income funds that emphasize
corporate bonds because its debt investments are principally in
securities issued or guaranteed by the U.S. government, its agencies
and governments sponsored enterprises, or other high quality money
market instruments. Obligations of some U.S. government agencies, such
as the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation, are not backed by the full faith and credit of
the U.S. Government. Consequently, there are greater credit risks
involved with investing in securities issued by those entities than in
securities backed by the full faith and credit of the U.S. Government.
10
<PAGE>
* Each of the Funds may invest in foreign securities (although this is
not a principal strategy of the Income & Growth Fund), which may be
riskier than U.S. investments for many reasons, including changes in
currency exchange rates, unstable political and economic conditions, a
lack of adequate company information, differences in the way
securities markets operate, less secure foreign banks or securities
depositories than those in the U.S., and foreign controls on
investment.
* The high yield securities in which Balanced Fund and Balance Sheet
Opportunities Fund may invest may be less liquid than higher quality
investments. These Funds could lose money if they cannot sell a
security at the time and price that would be most beneficial to these
Funds. Similarly, each of these Fund's investments in foreign
securities could be less liquid than investments in U.S. securities.
* Each of the Funds may employ the use of derivative instruments.
Derivatives are subject to the risk of changes in the market price of
the security, credit risk with respect to the counterparty to the
derivatives instrument, and the risk of loss due to changes in
interest rates. The use of derivatives may reduce returns for the
Funds.
COMPARISON OF SECURITIES AND INVESTMENT TECHNIQUES
The following is a summary of the types of securities in which the Funds
may invest and strategies the Funds may employ in pursuit of their investment
objectives. As with any security, an investment in a Fund's shares involves
certain risks, including loss of principal. The Funds are subject to varying
degrees of financial, market and credit risk. An investment in any of the Funds
is not a deposit of a bank and is not insured by the Federal Deposit Insurance
Corporation or any other government agency.
EQUITY SECURITIES. Each of the Funds invests a portion of its assets in
equity securities and securities with equity characteristics, such as common
stocks, preferred stocks, convertible securities and warrants and other stock
purchase rights. Balanced Fund's equity investments are normally in large
companies that Pilgrim Investments believes are leaders in their industries.
Pilgrim Investments considers a company to be a large company if it has market
capitalization of over $5 billion. Balanced Fund may also invest to a limited
degree in companies that have a market capitalization between $1 billion and $5
billion. For Balanced Fund, Pilgrim Investments emphasizes a value approach, and
seeks securities whose prices in relation to projected earnings are believed to
be reasonable in comparison to the market. Income & Growth Fund normally invests
in equity securities of larger companies that have historically paid dividends.
HIGH YIELD SECURITIES. Balanced Fund and Balance Sheet Opportunities Fund
may invest in junk bonds, which are high yield/high risk debt securities that
are rated below investment grade by a nationally recognized statistical rating
organization or of comparable quality if not rated. Balanced Fund may invest up
to 35% of its assets in junk bonds. There is no minimum credit quality for the
junk bonds in which Balanced Fund may invest. Balance Sheet Opportunities Fund
may hold up to 50% of its assets in junk bonds rated as low as B by Moody's or
S&P. Income & Growth Fund does not invest in junk bonds as a principal
investment strategy.
Junk bonds 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. Junk bonds
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 junk bonds tend to be more
sensitive to adverse economic downturns or individual corporate developments
than higher-rated investments. The market prices of junk bonds structured as
zero-coupon or pay-in-kind securities may be affected to a greater extent by
interest rate changes. Junk bonds are generally less liquid than higher grade
bonds. Less liquidity could adversely affect the price at which a Fund could
sell a junk bond, 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
junk bonds.
11
<PAGE>
MORTGAGE-RELATED SECURITIES AND ASSET-BACKED SECURITIES. Each of the Funds
may invest in mortgage-related securities. Investments in mortgage-related
securities involve certain risks. Like other fixed income securities, when
interest rates rise, the value of a mortgage-backed security generally will
decline, and may decline more rapidly as the underlying mortgages are less
likely to be prepaid; however, when interest rates are declining, the value of
mortgage-backed securities with prepayment features may not increase as much as
other fixed income securities. The mortgage loans underlying a mortgage-backed
security will be subject to normal principal amortization, and may be prepaid
prior to maturity due to the sale of the underlying property, the refinancing of
the loan, or foreclosure. The rate of prepayments on underlying mortgages will
affect the price and volatility of a mortgage-related security, and may have the
effect of shortening or extending the effective maturity of the security beyond
what was anticipated at the time of the purchase. Unanticipated rates of
prepayment on underlying mortgages may increase the volatility of such
securities. In addition, the value of these securities may fluctuate in response
to the market's perception of the creditworthiness of the issuers of
mortgage-related securities owned by a Fund. Further, during periods that
interest rates are low, prepaid amounts would be reinvested in low yielding
instruments.
Balanced Fund also may invest in non-mortgage-related asset-backed
securities which include, but are not limited to, interests in pools of
receivables, such as credit card and accounts receivables and motor vehicle and
other installment purchase obligations and leases. Interests in these pools are
not backed by the U.S. Government and may or may not be secured. The credit
characteristics of asset-backed securities differs in a number of respects from
those of traditional debt securities. Asset-backed securities generally do not
have the benefit of a security interest in collateral that is comparable to
other debt obligations, and there is a possibility that recoveries on
repossessed collateral may not be available to support payment on these
securities.
FOREIGN SECURITIES. Balanced Fund may invest up to 20% of its total assets
in foreign securities. Income & Growth Fund and Balance Sheet Opportunities Fund
may invest up to 20% of their net assets in foreign issuers, but only 10% of
their net assets may be invested in foreign securities that are not listed on a
U.S. securities exchange.
There are risks in owning foreign securities, including: (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 U.S. 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.
ZERO COUPON SECURITIES. Each of the Funds may invest in zero coupon
securities issued or guaranteed by the U.S. Government and its agencies and
instrumentalities, including zero coupon Treasury securities which consist of
Treasury bills or stripped interest or principal components of U.S. Treasury
bonds or notes. Balanced Fund's investments in these securities is limited to
35% of its net assets. Zero coupon securities are sold at (a usually
substantial) discount from face value and redeemed at face value at their
maturity date without interim cash payments of interest and principal. Because
of these features, the market prices of zero coupon securities are generally
more volatile than the market prices of securities that have a similar maturity
but that pay interest periodically. Zero coupon securities are likely to respond
to a greater degree to interest rate changes than are non-zero coupon securities
with similar maturity and credit qualities.
12
<PAGE>
ILLIQUID SECURITIES. Each of the Funds may invest up to 15% of their net
assets in illiquid securities, but has no percentage limit on restricted
securities that are liquid. 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.
USE OF DERIVATIVES. Derivatives are financial instruments whose performance
is derived, at least in part, from the performance of an underlying asset or
assets. Derivatives usually take the form of a contract to buy or sell an asset
or commodity either now or in the future, but mortgage and other asset-backed
securities (described above) may also be considered derivatives. Balanced Fund
may use options, futures contracts and interest rate and currency swaps as
hedging techniques. Income & Growth Fund and Balance Sheet Opportunities Fund
may invest in exchange-traded or over-the-counter derivatives, including
options, futures contracts, options on futures, and forward contracts for a
variety of purposes.
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.
CORPORATE DEBT SECURITIES. Each of the Funds may invest in corporate debt
securities. Corporate debt securities are subject to the risk of the issuer's
inability to meet principal and interest payments on the obligation (credit
risk) and may also be subject to price volatility due to such factors as
interest rate sensitivity, market perception of the credit-worthiness of the
issuer and general market liquidity (market risk). When interest rates decline,
the value of the debt securities can be expected to rise, and when interest
rates rise, the value of those securities can be expected to decline. Debt
securities with longer maturities tend to be more sensitive to interest rate
movements than those with shorter maturities.
FLOATING OR VARIABLE RATE INSTRUMENTS. Each of the Funds may purchase
floating or variable rate bonds, which normally provide that the holder can
demand payment of the obligation on short notice at par with accrued interest.
Floating or variable rate instruments provide for adjustments in the interest
rate at specified intervals (weekly, monthly, semiannually, etc.).
13
<PAGE>
COMPARISON OF FEES AND EXPENSES
The following describes and compares the fees and expenses that you may pay
if you buy and hold shares of the Funds. It is expected that combining the Funds
will allow the shareholders of the Funds to realize economies of scale. For
further information on the fees and expenses of the Balanced Fund, see "Appendix
B Additional Information Regarding Pilgrim Balanced Fund."
OPERATING EXPENSES
The operating expenses of Balanced Fund, expressed as a ratio of expenses
to average daily net assets ("expense ratio") (as adjusted for contractual
changes), are lower than those of the Target Funds giving effect to the expense
limitation agreement described below.
* For the year ending June 30, 1999, the net expenses for Class A, Class
B and Class C shares of Balanced Fund are 0.05%, 0.12% and 0.09% lower
than those of the same classes of the Income & Growth Fund.
* For the year ending June 30, 1999, the net expenses for Class A, Class
B and Class C shares of Balanced Fund are 0.17%, 0.24% and 0.22% lower
than those of the same classes of the Balance Sheet Opportunities
Fund.
MANAGEMENT FEE
The Income & Growth Fund and the Balanced Fund each have a management fee
of 0.75%. Unlike the Balanced Fund, however, the Income & Growth Fund's
management fee is subject to a breakpoint fee structure. The Income & Growth
Fund's management fee of 0.75% is reduced on assets in excess of $250 million
based on the following schedule:
* 0.75% on the first $250 million 0.70% on the next $250 million 0.65%
on the next $250 million 0.60% on the next $250 million 0.55% on
assets over $1 billion
* The Balance Sheet Opportunities Fund's management fee is 0.65%.
DISTRIBUTION AND SERVICE FEES
The distribution and service (12b-1) fees of the Target Funds are the same
as those of the Balanced Fund, except that the 12b-1 fees for the Class A Shares
of the Balanced Fund are 0.05% higher than those of the Target Funds.
EXPENSE LIMITATION
As mentioned above, an expense limitation arrangement is in place for
Balanced Fund, under which Pilgrim Investments limits the ordinary operating
expenses borne by that Fund. Without this expense limitation arrangement, the
expense ratio for each Class of Balanced Fund (as adjusted for contractual
changes) would have been higher than the expense ratio for the same Class of the
Target Funds. For the year ended June 30, 1999, for example, the expense ratio
for Class A shares would have been 1.61% for Balanced Fund compared to 1.40% for
Income & Growth Fund and 1.52% for Balance Sheet Opportunities Fund. This
information and similar information for the other Classes is shown in the table
below entitled, "Annual Fund Operating Expenses." The current expense limitation
agreement for the Balanced Fund provides that it will remain in effect through
at least October 31, 2001.
14
<PAGE>
EXPENSE TABLE
The current expenses of each Fund, and estimated PRO FORMA expenses giving
effect to the proposed Reorganization are shown in the table below. Expenses for
the Funds are annualized based upon the operating expenses incurred by the Class
A, Class B, Class C and Class T Shares for the period ended June 30, 1999 (as
adjusted for contractual changes). PRO FORMA fees show estimated fees of the
Balanced Fund after giving effect to the proposed reorganization.
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets, shown as a ratio of
expenses to average daily net assets) (1)
<TABLE>
<CAPTION>
Distribution
and
Shareholder Total Fund
Management Servicing Other Operating Fee Waiver Net Fund
Fees (12b-1)fees(2) Expenses Expenses by Adviser(3) Expenses
---- -------------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Balanced Fund 0.75% 0.35% 0.51% 1.61% (0.26)% 1.35%
Income & Growth Fund 0.75% 0.30% 0.35% 1.40% -- --
Balance Sheet
Opportunities Fund 0.65% 0.30% 0.57% 1.52% -- --
Pro Forma 0.75% 0.35% 0.25% 1.35% -- 1.35%
CLASS B
Balanced Fund 0.75% 1.00% 0.51% 2.26% (0.26)% 2.00%
Income & Growth Fund 0.75% 1.00% 0.37% 2.12% -- --
Balance Sheet
Opportunities Fund 0.65% 1.00% 0.59% 2.24% -- --
Pro Forma 0.75% 1.00% 0.25% 2.00% -- 2.00%
CLASS C
Balanced Fund 0.75% 1.00% 0.51% 2.26% (0.26)% 2.00%
Income & Growth Fund 0.75% 1.00% 0.34% 2.09% -- --
Balance Sheet
Opportunities Fund 0.65% 1.00% 0.57% 2.22% -- --
Pro Forma 0.75% 1.00% 0.25% 2.00% -- 2.00%
CLASS T
Balance Sheet
Opportunities Fund (only) 0.65% 0.75% 0.54% 1.94% -- --
Pro Forma 0.75% 0.75% 0.25% 1.75% -- 1.75%
</TABLE>
- ----------
(1) The Balanced Fund's fiscal year ends on June 30 while the Income & Growth
Fund's fiscal year ends on October 31 and the Balance Sheet Opportunities
Fund's fiscal year ends on December 31. To compare the expenses of the
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 Balanced Fund to 1.35%, 2.00%, 2.00% and 1.75% 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 Balanced Fund until at least
October 31, 2001.
15
<PAGE>
EXAMPLES
The examples are intended to help you compare the cost of investing in the
each of the Funds. The examples assume that you invest $10,000 in each Fund for
the time periods indicated and then redeem all of your shares at the end of
those periods. The examples also assume that your investment has a 5% return
each year and that each Fund's operating expenses remain the same. The 5% return
is an assumption and is not intended to portray past or future investment
results. Based on the above assumptions, you would pay the following expenses if
you redeem your shares at the end of each period shown; your actual costs may be
higher or lower.
<TABLE>
<CAPTION>
Balanced Fund Income & Growth Fund
Class Class
-------------------------------------- -------------------------------------
A B C T A B C T
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 year $ 705 $ 703 $ 303 N/A $ 709 $ 715 $ 312 N/A
3 years 1,005 955 655 N/A 993 964 655 N/A
5 years 1,353 1,361 1,161 N/A 1,297 1,339 1,124 N/A
10 years 2,334 2,389* 2,554 N/A 2,158 2,268* 2,421 N/A
Pro Forma:
Balance Sheet Opportunities Fund the Funds Combined**
Class Class
-------------------------------------- -------------------------------------
A B C T A B C T
------- ------- ------- ------- ------- ------- ------- -------
1 year $ 721 $ 727 $ 325 $ 597 $ 702 $ 700 $ 300 $ 575
3 years 1,028 1,000 694 809 969 918 618 742
5 years 1,356 1,400 1,190 1,047 1,257 1,262 1,062 933
10 years 2,283 2,394* 2,554 2,156* 2,074 2,128* 2,296 1,925*
You would pay the following expenses if you did not redeem your shares:
Balanced Fund Income & Growth Fund
Class Class
-------------------------------------- -------------------------------------
A B C T A B C T
------- ------- ------- ------- ------- ------- ------- -------
1 year $ 705 $ 203 $ 203 N/A $ 709 $ 215 $ 212 N/A
3 years 1,005 655 655 N/A 993 664 655 N/A
5 years 1,353 1,161 1,161 N/A 1,297 1,139 1,124 N/A
10 years 2,334 2,389* 2,554 N/A 2,158 2,268* 2,421 N/A
Pro Forma:
Balance Sheet Opportunities Fund the Funds Combined**
Class Class
-------------------------------------- -------------------------------------
A B C T A B C T
------- ------- ------- ------- ------- ------- ------- -------
1 year $ 721 $ 227 $ 225 $ 197 $ 702 $ 200 $ 200 $ 175
3 years 1,028 700 694 609 969 618 618 542
5 years 1,356 1,200 1,190 1,047 1,257 1,062 1,062 933
10 years 2,283 2,394* 2,554 2,156* 2,074 2,128* 2,296 1,925*
</TABLE>
- ----------
* The ten year calculations for Class B and Class T Shares assume conversion
of the Class B and Class T Shares to Class A Shares at the end of the
eighth year following the date of purchase.
** Estimated.
16
<PAGE>
EXPENSE LIMITATION ARRANGEMENTS
Pilgrim Investments has entered into an expense limitation agreement with
respect to Balanced Fund, 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 1.35%, 2.00%, 2.00% and 1.75% for Class A, B, C and T shares,
respectively. Balanced Fund 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.
GENERAL INFORMATION
Class A, Class B, Class C and Class T shares of the Balanced Fund issued to
a shareholder in connection with the Reorganization will be subject to the same
contingent deferred sales charge, if any, applicable to the corresponding shares
of the Income & Growth Fund or the Balance Sheet Opportunities Fund held by that
shareholder immediately prior to the Reorganization.
In addition, the period that the shareholder held shares of the Target
Funds will be included in the holding period of the Balanced Fund shares for
purposes of calculating any contingent deferred sales charge. Similarly, Class B
and Class T shares of the Balanced Fund issued to a shareholder in connection
with the Reorganization that were purchased prior to November 1, 1999, will
convert to Class A shares eight years after the date that the corresponding
Class B or Class T shares of the Target Funds were purchased by the shareholder.
Purchases of shares of the Balanced Fund after the Reorganization will be
subject to the sales load structure described in the table below for the
Balanced Fund. This is the same sales load structure that is currently in effect
for the Target Funds.
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) 5.75%(1) None None None
Maximum deferred sales charge (load) (as a
percentage of the lower of original purchase
price or redemption proceeds) None (2) 5.00%(3) 1.00%(4) 4.00%(5)
</TABLE>
Neither the Balanced Fund nor the Target Funds have any redemption fees,
exchange fees or sales charges on reinvested dividends.
(1) Reduced for purchases of $50,000 and over. See "Class A Shares: Initial
Sales Charge Alternative" in Appendix B.
(2) A contingent deferred sales charge of no more than 1.00% may be assessed on
redemptions of Class A shares that were purchased without an initial sales
charge as part of an investment of $1 million or more. See "Class A Shares:
Initial Sales Charge Alternative" in Appendix B.
(3) The fee has scheduled reductions after the first year. See "Class B Shares:
Deferred Sales Charge Alternative" in Appendix B and "Deferred Sales
Charges" in the Pilgrim Prospectus.
(4) Imposed upon redemptions within 1 year from purchase.
(5) Imposed upon redemptions within 4 years from purchase.
17
<PAGE>
SPECIAL RULES FOR SHARES OF THE INCOME & GROWTH FUND AND THE BALANCE SHEET
OPPORTUNITIES FUND PURCHASED PRIOR TO NOVEMBER 1, 1999
Prior to November 1, 1999, the contingent deferred sales charge on
purchases of Class A shares of Target Funds in excess of $1 million was
different than the contingent deferred sales charge on similar purchases of the
Balanced Fund. Shareholders of the Target Funds 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
----------------------- -----------------------
11/01/1999 Before 11/01/1999 Before
and After 11/01/1999 and After 11/01/1999
--------- ---------- --------- ----------
CDSC on Purchases of:
$1,000,000 to $2,499,999 1.00% 1.00% 24 months 18 Months
$2,500,000 to $4,999,999 0.50% 0.50% 12 months 18 Months
$5,000,000 and over 0.25% 0.25% 12 months 18 Months
In addition, prior to November 1, 1999, the contingent deferred sales
charge on purchases of Class B shares of the Target Funds was different than the
contingent deferred sales charge on similar purchases of the Balanced Fund.
Shareholders of Target Funds that purchased Class B shares subject to a
contingent deferred sales charge prior to November 1, 1999 will continue to be
subject to the contingent deferred sales charge in place when those shares were
purchased. The contingent deferred sales charge on such purchases before and
after November 1, 1999 were as follows:
CDSC On Shares Being Sold
----------------------------
11/01/1999 Before
Years After Purchase and After 11/01/1999
-------------------- --------- ----------
1st Year 5% 5%
2nd Year 4% 4%
3rd year 3% 3%
4th Year 3% 2%
5th Year 2% 2%
6th Year 1% --
After 6th Year -- --
18
<PAGE>
ADDITIONAL INFORMATION ABOUT BALANCED FUND
INVESTMENT PERSONNEL
The following individuals share responsibility for the day-to-day
management of Balanced Fund:
* G. David Underwood, Vice President and Senior Portfolio Manager for
Pilgrim Investments, has served as Senior Portfolio Manager of the
equity portion of Balanced Fund's assets since May 24, 1999. Prior to
joining Pilgrim Investments in December 1996, Mr. Underwood served as
Director of Funds Management for First Interstate Capital Management.
Mr. Underwood's prior experience includes a 10 year association with
Integra Trust Company of Pittsburgh where he served as Director of
Research and Senior Portfolio Manager.
* Kevin G. Mathews, Senior Vice President and Senior Portfolio Manager
of Pilgrim Investments, has served as Senior Portfolio Manager of the
fixed income portion of Balanced Fund's assets since May 24, 1999. Mr.
Mathews has served as Portfolio Manager of other funds within the
Pilgrim Funds since 1995. Prior to joining Pilgrim Investments, Mr.
Mathews was a Vice President and Senior Portfolio Manager with Van
Kampen American Capital.
* Robert K. Kinsey, Vice President of Pilgrim Investments, has served as
a Portfolio Manager of the fixed income portion of Balanced Fund's
assets since May 24, 1999. Prior to joining Pilgrim Investments, Mr.
Kinsey was a Vice President and Fixed Income Portfolio Manager for
Federated Investors from January 1995 to March 1999. From July 1992 to
January 1995, Mr. Kinsey was a Principal and Portfolio Manager for
Harris Investment Management.
19
<PAGE>
PERFORMANCE OF BALANCED FUND
The bar chart and table that follow provide an indication of the risks of
investing in Balanced Fund by showing (on a calendar year basis) changes in
Balanced Fund's annual total return from year to year and by showing (on a
calendar year basis) how Balanced Fund's average annual returns for one year,
five years and since inception compare to those of the Standard & Poor's Barra
Value Index, the Lehman Aggregate Bond Index, the Lipper Balanced Fund Average
and the Composite Index. The information in the bar chart is based on the
performance of the Class A shares of Balanced Fund although the bar chart does
not reflect the deduction of the sales load on Class A shares. If the bar chart
included the sales load, returns would be less than those shown. Prior to May
24, 1999, a firm other than Pilgrim Investments managed the Balanced Fund. The
Fund's past performance is not necessarily an indication of how the Fund will
perform in the future.
CALENDAR YEAR-BY-YEAR RETURNS*
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
-6.29% 23.44% 16.39% 20.50% 23.34%
- ----------
* During the period shown in the chart, the Fund's best quarterly performance
was 14.44% for the quarter ended September 30, 1997, and the Fund's worst
quarterly performance was -5.88% for the quarter ended June 30, 1994. For
the period January 1, 1999 through September 30, 1999, the total return of
the Balanced Fund was 2.58%.
20
<PAGE>
The table below shows what the average annual total returns of Balanced
Fund would equal if you averaged out actual performance over various lengths of
time, compared to the S&P Barra Value Index, the Lehman Aggregate Bond Index,
the Lipper Balanced Fund Average and the Composite Index. The indices have an
inherent performance advantage over the Balanced Fund since they have no cash in
their portfolios, impose no sales charges and incur no operating expenses. An
investor cannot invest directly in an index. The Balanced Fund's performance
reflected in the table assumes the deduction of the maximum sales charge in all
cases.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
Since Since
Inception of Inception
Classes A and C of Class B
1 Year 5 Years (4/19/93) (5/31/95)
------ ------- --------- ---------
Balanced Fund Class A (1) 16.26% 13.52% 14.25% --
Balanced Fund Class B (2) 17.80% -- -- 18.75%
Balanced Fund Class C (3) 21.52% 14.14% 14.75% --
S&P Barra Value Index (4) 14.66% 19.42% 17.62% 22.75%
Lehman Aggregate Bond Index (5) 8.69% 7.27% 7.12% 8.12%
Lipper Balanced Fund Average (6) 15.09% 13.87% 13.55% 16.93%
Composite Index (7) 20.93% 17.34% 15.27% 20.48%
- ----------
(1) Reflects deduction of sales charge of 5.75%.
(2) Reflects deduction of deferred sales charge of 5% and 3% for the 1 year and
since inception returns, respectively.
(3) Reflects deduction of a deferred sales charge of 1% for the 1 year return.
(4) The Standard & Poor's Barra Value Index is a capitalization-weighted index
of all stocks in the Standard & Poor's 500 Composite Stock Price Index
("S&P 500 Index") that have low price-to-book ratios. It is designed so
that approximately 50% of the market capitalization of the S&P 500 Index is
in the Standard & Poor's Barra Value Index.
(5) The Lehman Aggregate Bond Index is an unmanaged index that measures the
performance of the U.S. investment grade fixed rate bond market, including
government and corporate securities, mortgage pass-through securities, and
asset-backed securities.
(6) The Lipper Balanced Fund Average measures the performance of balanced funds
(funds that seek current income balanced with capital appreciation).
(7) The Composite Index consists of 60% of the S&P 500 Index and 40% of the
Lehman Brothers Government/Corporate Bond Index.
The table below shows the performance of Balanced Fund if sales charges are
not reflected.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1998
Since Since
Inception of Inception
Classes A and C of Class B
1 Year 5 Years (4/19/93) (5/31/95)
------ ------- --------- ---------
Balanced Fund Class A 23.35% 14.88% 15.44% --
Balanced Fund Class B 22.80% -- -- 19.28%
Balanced Fund Class C 22.49% 14.14% 14.75% --
Additional information about Balanced Fund is included in Appendix B to
this Proxy/Prospectus.
21
<PAGE>
INFORMATION ABOUT THE REORGANIZATION
THE REORGANIZATION AGREEMENTS. The Reorganization Agreements provide for
the transfer of all of the assets and liabilities of the Target Funds to the
Balanced Fund in exchange for shares in the Balanced Fund. The Target Funds will
distribute the shares of the Balanced Fund received in the exchange to the
shareholders of the Target Funds and then each of the Target Funds will be
liquidated.
After the Reorganization, each shareholder of each of the Target Funds will
own shares in the Balanced Fund having an aggregate value equal to the aggregate
value of each respective class of shares in either the Income & Growth Fund or
the Balance Sheet Opportunities Fund, as applicable, 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 the Target Funds will receive shares of the
corresponding Class of the Balanced Fund. In the interest of economy and
convenience, shares of the Balanced Fund generally will not be represented by
physical certificates.
In the event that the shareholders of only one of the Target Funds were to
approve the Reorganization, the Target Fund approving the Reorganization would
be reorganized into the Balanced Fund. The Target Fund not approving the
Reorganization may continue to operate as a separate entity.
Until the Closing, shareholders of the Target Funds will continue to be
able to redeem their shares. Redemption requests received after the Closing will
be treated as requests received by the Balanced Fund for the redemption of its
shares received by the shareholder in the Reorganization.
The obligations of the Funds under the Reorganization Agreements are
subject to various conditions, including approval of the shareholders of each of
the Target Funds. The Reorganization Agreements also require that all of the
Funds take, or cause to be taken, all action, and do or cause to be done, all
things reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated by the Reorganization Agreement. The
Reorganization Agreements 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, please refer to the Reorganization Agreements
at Appendix A.
REASONS FOR THE REORGANIZATION. On October 29, 1999, the parent company of
Pilgrim Advisors, formerly Northstar Investment Management Corporation, acquired
Pilgrim Capital Corporation. Pilgrim Capital Corporation is the parent to
Pilgrim Investments - investment manager to a group of funds that are called the
Pilgrim Funds. As a result of that transaction, Pilgrim Investments and Pilgrim
Advisors are now affiliated subsidiaries of the same holding company.
Additionally each Northstar Fund changed its name so that it is now called
"Pilgrim." Many of the mutual funds advised by Pilgrim Advisors and Pilgrim
Investments share similar investment objectives, strategies and risks. Because
the Balanced Fund may invest in substantially the same types of securities as
the Target Funds, the three Funds would be duplicative in the same group of
funds. This could impede the ability of one or more of the Funds to attract
sufficient assets in the future to enjoy reduced expenses per share from
economies of scale. It was determined that the Funds should be reorganized to
realize economic efficiencies that would benefit the shareholders of each of the
Funds by spreading costs across a larger, combined asset base.
The proposed Reorganization was presented to the Boards of Trustees of the
Target Funds for consideration and approval at a meeting on November 16, 1999.
For the reasons discussed below, the Trustees, including all of the Trustees who
are not "interested persons" (as defined in the Investment Company Act of 1940)
of the Target Funds, determined that the interests of the shareholders of the
Target Funds will not be diluted as a result of the proposed Reorganization, and
that the proposed Reorganization is in the best interests of the Target Funds
and their shareholders.
The Reorganization will allow the Target Funds' shareholders to continue to
participate in a professionally-managed portfolio which seeks to achieve its
objective of long-term capital appreciation and current income. As Class A,
22
<PAGE>
Class B, Class C and Class T shareholders of the Balanced Fund, these
shareholders will continue to be able to exchange into other mutual funds in the
larger Pilgrim Funds that offer the same class of shares in which such
shareholder is currently invested. A list of the current Pilgrim Funds, and
their available classes, is attached as Appendix D.
BOARD CONSIDERATION. The Board of Trustees of the Pilgrim Mayflower Trust,
on behalf of the Income & Growth Fund, and the Balance Sheet Opportunities Fund,
in recommending the proposed transaction, considered a number of factors,
including the following:
(1) expense ratios and information regarding fees and expenses of the
Target Funds and the Balanced Fund, including the expense limitation
arrangements offered by Pilgrim Investments;
(2) elimination of duplication of costs, market confusion and
inefficiencies of having three similar funds;
(3) shareholders who purchased shares of the Target Funds prior to
November 1, 1999 would retain the sales charge structure in place
prior to that date;
(4) estimates that show that combining the Funds would result in lower
expense ratios because of economies of scale;
(5) the Reorganization would not dilute the interests of the Target Funds'
current shareholders;
(6) the relative investment performance and risks of the Balanced Fund as
compared to the Target Funds;
(7) the similarity of Balanced Fund's investment objectives, policies and
restrictions with those of the Target Funds and the fact that the
Funds are duplicative within the overall group of funds;
(8) the tax-free nature of the Reorganization to the Target Funds and
their shareholders.
The Board of Trustees also considered the future potential benefits to
Pilgrim Investments in that its costs to limit the expenses of Balanced Fund are
likely to be reduced if the Reorganization is approved.
THE TRUSTEES OF THE PILGRIM MAYFLOWER TRUST, ON BEHALF OF INCOME & GROWTH FUND,
AND THE BALANCE SHEET OPPORTUNITIES FUND EACH RECOMMEND THAT SHAREHOLDERS OF THE
TARGET FUNDS APPROVE THE REORGANIZATION WITH THE BALANCED FUND.
TAX CONSIDERATIONS. The Reorganization is intended to qualify for Federal
income tax purposes as a tax-free reorganization under Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, pursuant to
this treatment, neither the Target Funds nor their shareholders nor the Balanced
Fund is expected to recognize any gain or loss for federal income tax purposes
from the transactions contemplated by the Reorganization Agreement. As a
condition to the Closing of the Reorganization, the Funds will receive an
opinion from the law firm of Dechert 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, each Target Fund will pay a
dividend or dividends which, together with all previous dividends, will have the
effect of distributing to its shareholders all of that Target Fund's investment
company taxable income for taxable years ending on or prior to the
Reorganization (computed without regard to any deduction for dividends paid) and
all of its net capital gain, if any, realized in taxable years ending on or
prior to the Reorganization (after reduction for any available capital loss
carryforward). Such dividends will be included in the taxable income of the
Target Funds' shareholders.
EXPENSES OF THE REORGANIZATION. The Funds will bear the expenses relating
to the proposed Reorganization including but not limited to the costs of the
proxy solicitation, which will be allocated ratably on the basis of their
relative net asset values immediately before Closing.
23
<PAGE>
ADDITIONAL INFORMATION ABOUT THE FUNDS
FORM OF ORGANIZATION. Balanced Fund 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 this Reorganization. Income & Growth Fund is a
series of Pilgrim Mayflower Trust, which is a Massachusetts business trust.
Balance Sheet Opportunities Fund is also a Massachusetts business trust. Pilgrim
Mutual Funds, Pilgrim Mayflower Trust and Balance Sheet Opportunities Fund are
each governed by a Board of Trustees. Pilgrim Mayflower Trust has nine Trustees,
Balance Sheet Opportunities Fund has twelve Trustees, and Pilgrim Mutual Funds
has thirteen Trustees. The nine trustees of the Pilgrim Mayflower Trust also
serve on the Boards of Pilgrim Mutual Funds and Balance Sheet Opportunities
Fund. The twelve trustees of the Balance Sheet Opportunities Fund also serve on
the Board of Pilgrim Mutual Funds.
DISTRIBUTOR. Pilgrim Securities, Inc. (the "Distributor"), whose address is
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004, is the principal
distributor for Balanced Fund and the Target Funds. Formerly, Northstar
Distributors, Inc. served as distributor for the Target Funds. However, on
November 16, 1999, Northstar Distributors, Inc. merged with the Distributor.
DIVIDENDS AND OTHER DISTRIBUTIONS. Each Fund pays dividends from net
investment income and net capital gains, if any, on a quarterly basis. For each
Fund, dividends and distributions are determined on a class basis. Dividends and
distributions of the Balanced Fund 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 Agreements are approved by the Target Funds'
shareholders, then as soon as practicable before the Closing, the Target Funds
will pay their shareholders a cash distribution of all undistributed 1999 net
investment income and undistributed realized net capital gains.
24
<PAGE>
CAPITALIZATION. The following table shows on an unaudited basis the
capitalization of each of the Target Funds and Balanced Fund as of June 30, 1999
and on a PRO FORMA basis as of June 30, 1999 giving effect to the
Reorganization:
Net Asset Value Shares
Net Assets Per Share Outstanding
---------- --------- -----------
BALANCED FUND
Class A $ 9,618,676 $ 19.23 500,291
Class B $ 7,157,205 $ 20.59 347,552
Class C $ 21,330,586 $ 18.53 1,150,957
Class T N/A N/A N/A
INCOME & GROWTH FUND
Class A $ 44,185,207 $ 12.00 3,683,044
Class B $ 47,972,153 $ 11.98 4,004,074
Class C $ 23,118,836 $ 11.96 1,933,312
Class T N/A N/A N/A
BALANCE SHEET OPPORTUNITIES FUND
Class A $ 17,685,927 $ 13.34 1,325,589
Class B $ 5,178,874 $ 13.28 389,829
Class C $ 653,349 $ 13.32 49,068
Class T $ 20,116,115 $ 13.40 1,501,011
PRO FORMA -- BALANCED FUND INCLUDING TARGET FUNDS
Class A $ 71,489,810 $ 19.23 3,717,619
Class B $ 60,308,232 $ 20.59 2,929,006
Class C $ 45,102,771 $ 18.53 2,434,041
Class T $ 20,116,115 $ 18.64 1,079,191
25
<PAGE>
GENERAL INFORMATION ABOUT THE PROXY STATEMENT
SOLICITATION OF PROXIES
Solicitation of proxies is being made primarily by the mailing of this
Notice and Proxy Statement with its enclosures on or about February 8, 2000.
Shareholders of the Target Funds 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. The Target
Funds have retained Shareholder Communications Corporation, a professional proxy
solicitation firm, to assist with any necessary solicitation of proxies.
Shareholders of the Target Funds 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 Income & Growth Fund or Balance Sheet Opportunities Fund, as
applicable, 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 each Board of Trustees of the Target
Funds that may be presented at the Meeting.
VOTING RIGHTS
Shareholders of Income & Growth Fund and Balance Sheet Opportunities Fund
are entitled to one vote for each share held as to any matter on which they are
entitled to vote and each fractional share shall be entitled to a proportionate
fractional vote. Shares have noncumulative voting rights and no preemptive or
subscription rights.
Shareholders of the Income & Growth Fund and the Balance Sheet
Opportunities Fund at the close of business on January 24, 2000 (the "Record
Date") will be entitled to be present and give voting instructions for the
Target Funds at the Meeting with respect to their shares owned as of that Record
Date. As of the Record Date, 3,278,254 shares of the Balance Sheet Opportunities
Fund were outstanding and entitled to vote and 8,918,949 shares of the Income &
Growth Fund were outstanding and entitled to vote.
Approval of the Reorganization requires the affirmative vote of a majority
of the outstanding shares of both the Income & Growth Fund and the Balance Sheet
Opportunities Fund. In the event that the shareholders of only one of these
Funds approve the Reorganization, that particular Fund whose shareholders
approved the Reorganization would be reorganized into Balanced Fund. The Fund
not approving the Reorganization may continue to operate as a separate entity.
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 time to time until a quorum is present.
If a shareholder abstains from voting as to any matter, or if a broker
returns a "non-vote" proxy, indicating a lack of authority to vote on a matter,
the shares represented by the abstention or non-vote will be deemed present at
the Meeting for purposes of determining a quorum. However, abstentions and
broker non-votes will not be deemed represented at the Meeting for purposes of
calculating the vote on any matter. As a result, an abstention or broker
non-vote will have the same effect as a vote against the Reorganization. Prior
to the Meeting, the Funds expect that broker-dealer firms holding their shares
of the Funds in "street name" for their customers will request voting
instructions from their customers and beneficial owners.
26
<PAGE>
To the knowledge of Income & Growth Fund, as of December 1, 1999, no
current Trustee of Income & Growth Fund owns 1% or more of the outstanding
shares of the Fund and the officers and Trustees of Income & Growth Fund own, as
a group, less than 1% of the shares of the Fund.
To the knowledge of Balance Sheet Opportunities Fund, as of December 1,
1999, no current Trustee of Balance Sheet Opportunities Fund owns 1% or more of
the outstanding shares of the Fund and the officers and Trustees of Balance
Sheet Opportunities Fund own, as a group, less than 1% of the shares of the
Fund.
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
the Target Funds or Balanced Fund.
OTHER MATTERS TO COME BEFORE THE MEETING
The Target Funds do 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
The Target Funds are not required to hold regular annual meetings and, in
order to minimize their costs, do not intend to hold meetings of shareholders
unless so required by applicable law, regulation, regulatory policy or if
otherwise deemed advisable by the Target Funds' management. Therefore it is not
practicable to specify a date by which shareholder proposals must be received in
order to be incorporated in an upcoming proxy statement for an annual meeting.
REPORTS TO SHAREHOLDERS
Pilgrim Advisors will furnish, without charge, a copy of the most recent
Annual Report regarding each of the Target Funds and the most recent Semi-Annual
Report succeeding the Annual Report, if any, on request. Requests for such
reports should be directed to Pilgrim at 40 North Central Avenue, Suite 1200,
Phoenix, Arizona 85004 or at (800) 992-0180.
IN ORDER THAT THE PRESENCE OF A QUORUM AT THE MEETING MAY BE ASSURED,
PROMPT EXECUTION AND RETURN OF THE ENCLOSED PROXY IS REQUESTED. A
SELF-ADDRESSED, POSTAGE-PAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
/s/ James M. Hennessy
James M. Hennessy, Secretary
February 8, 2000
40 North Central Avenue
Phoenix, AZ 85004
27
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this 16th day of November, 1999, by and between Pilgrim Mutual Funds (the
"Acquiring Company"), a Delaware business trust with its principal place of
business at 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004, on
behalf of Pilgrim Balanced Fund (the "Acquiring Fund"), a separate series of the
Acquiring Company, and Pilgrim Mayflower Trust (the "Acquired Company"), a
Massachusetts business trust with its principal place of business at 40 North
Central Avenue, Suite 1200, Phoenix, Arizona 85004, on behalf of Pilgrim Income
& Growth Fund (the "Acquired Fund"), a separate series of the Acquired Company.
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 and
Class C 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 Company 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;
WHEREAS, the Trustees of the Acquired Company, have determined that the
exchange of all of the assets of the Acquired Fund for Acquiring Fund Shares and
the assumption of all liabilities of the Acquired Fund by the Acquiring Fund is
in the best interests of the Acquired Fund and its shareholders and that the
interests of the existing shareholders of the Acquired Fund would not be diluted
as a result of this transaction; and
WHEREAS, the Acquiring Company, on behalf of the Acquiring Fund, presently
intends to acquire all of the assets and assume all of the liabilities of
Pilgrim Balance Sheet Opportunities Fund in a transaction substantially similar
to the one set forth in this Agreement;
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 Company 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
A-1
<PAGE>
and Class C 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").
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 and Class C Acquiring Fund Shares to be so credited to Class A,
Class B and Class C 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 and Class C 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 and Class C 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.
A-2
<PAGE>
2. VALUATION
2.1 The value of the Acquired Fund's assets to be acquired by the Acquiring
Fund hereunder shall be the value of such assets computed as of immediately
after the close of business of the New York Stock Exchange and after the
declaration of any dividends on the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Acquiring Company's Declaration of Trust and then-current
prospectus or statement of additional information with respect to the Acquiring
Fund, and valuation procedures established by the Acquiring Company's Board of
Trustees.
2.2 The net asset value of a Class A, Class B and Class C 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 and Class C Acquiring Fund Shares to
be issued (including fractional shares, if any) in exchange for the Acquired
Fund's assets shall be determined with respect to each such class by dividing
the value of the net assets with respect to the Class A, Class B, Class C and
Class T shares of the Acquired Fund, as the case may be, determined using the
same valuation procedures referred to in paragraph 2.1, by the net asset value
of an Acquiring Fund Share, determined in accordance with paragraph 2.2.
2.4 All computations of value shall be made by the Acquiring Fund's
designated record keeping agent.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be April 1, 2000, or such other date as the
parties may agree to in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of immediately after the close of
business on the Closing Date unless otherwise agreed to by the parties. The
close of business on the Closing Date shall be as of 4:00 p.m., Eastern Time.
The Closing shall be held at the offices of the Acquiring Company or at such
other time and/or place as the parties may agree.
3.2 The Acquiring Company shall direct State Street Bank and Trust Company,
as custodian for the Acquired Fund (the "Custodian"), to deliver, at the
Closing, a certificate of an authorized officer stating that (i) the Acquired
Fund's portfolio securities, cash, and any other assets ("Assets") shall have
been delivered in proper form to the Acquiring Fund within two business days
prior to or on the Closing Date, and (ii) all necessary taxes in connection with
the delivery of the Assets, including all applicable federal and state stock
transfer stamps, if any, have been paid or provision for payment has been made.
The Acquired Fund's portfolio securities represented by a certificate or other
written instrument shall be presented by the Acquired Fund Custodian to the
custodian for the Acquiring Fund for examination no later than five business
days preceding the Closing Date, and shall be transferred and delivered by the
Acquired Fund as of the Closing Date for the account of the Acquiring Fund duly
endorsed in proper form for transfer in such condition as to constitute good
delivery thereof. The Acquired Fund's portfolio securities and instruments
deposited with a securities depository, as defined in Rule 17f-4 under the
Investment Company Act of 1940, as amended (the "1940 Act"), shall direct the
Custodian to deliver as of the Closing Date by book entry in accordance with the
customary practices of such depositories and the custodian for Acquiring Fund.
The cash to be transferred by the Acquired Fund shall be delivered by wire
transfer of federal funds on the Closing Date.
A-3
<PAGE>
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 and Class C 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 Company, 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 Company, on behalf of the Acquired Fund, represents and
warrants to the Acquiring Fund as follows:
(a) The Acquired Fund is duly organized as a series of the Acquired
Company, which is a business trust duly organized and validly existing under the
laws of the Commonwealth of Massachusetts with power under the Trust'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 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 Securities Act of 1933, as amended ("1933 Act"), are in
full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquired Fund of
the transactions contemplated herein, except such as have been obtained under
the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act")
and the 1940 Act and such as may be required by state securities laws;
(d) The current prospectus and statement of additional information of
the Acquired Fund and each prospectus and statement of additional information of
the Acquired Fund used during the three years previous to the date of this
Agreement conforms or conformed at the time of its use in all material respects
to the applicable requirements of the 1933 Act and the 1940 Act and the rules
and regulations of the Commission thereunder and does not or did not at the time
of its use include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
materially misleading;
(e) On the Closing Date, the Acquired Fund will have good and
marketable title to the Acquired Fund's assets to be transferred to the
Acquiring Fund pursuant to paragraph 1.2 and full right, power, and authority to
sell, assign, transfer and deliver such assets hereunder free of any liens or
other encumbrances, and upon delivery and payment for such assets, the Acquiring
Fund will acquire good and marketable title thereto, subject to no restrictions
on the full transfer thereof, including such restrictions as might arise under
the 1933 Act, other than as disclosed to the Acquiring Fund;
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(f) The Acquired Fund is not engaged currently, and the execution,
delivery and performance of this Agreement will not result, in (i) a material
violation of the Acquired Company's 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
October 31, 1999 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 October 31, 1999, 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;
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(m) All issued and outstanding shares of the Acquired Fund are, and on
the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable by the Acquired Company (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 Company, 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;
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(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;
(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
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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 and Class C 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 materially
misleading provided, however, that the representations and warranties in this
subparagraph (p) shall not apply to statements in or omissions from the
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Registration Statement made in reliance upon and in conformity with information
that was furnished by the Acquired Fund for use therein, and (ii) comply in all
material respects with the provisions of the 1933 Act, the 1934 Act and the 1940
Act and the rules and regulations thereunder.
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 Company 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 and Class C
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 Company
(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 and Class C 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.
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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:
7.1 All representations and warranties of the Acquired Company and the
Acquired Fund contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date;
7.2 The Acquired Company, on behalf of 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 Company, on behalf of 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;
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7.4 The Acquired Company and the Acquired Fund shall have performed all of
the covenants and complied with all of the provisions required by this Agreement
to be performed or complied with by the Acquired Company or 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 Company'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
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8.5 The parties shall have received the opinion of Dechert Price & Rhoads
addressed to the Acquiring Company and Acquired Company substantially to the
effect that, based upon certain facts, assumptions, and representations, the
transaction contemplated by this Agreement shall constitute a tax-free
reorganization for Federal income tax purposes, 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 Company and
the Acquired Company. Notwithstanding anything herein to the contrary, neither
the Acquiring Company nor the Acquired Company may waive the condition set forth
in this paragraph 8.5.
9. BROKERAGE FEES AND EXPENSES
9.1 The 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 Company agree that neither
party has made any representation, warranty or covenant not set forth herein and
that this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder. The
covenants to be performed after the Closing shall survive the Closing.
11. TERMINATION
This Agreement and the transactions contemplated hereby may be terminated
and abandoned by 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 Company and the Acquiring Company; provided, however, that following
the meeting of the shareholders of the Acquired Fund called by the Acquired Fund
pursuant to paragraph 5.2 of this Agreement, no such amendment may have the
effect of changing the provisions for determining the number of the Class A,
Class B and Class C Acquiring Fund Shares to be issued to the Acquired Fund
Shareholders under this Agreement to the detriment of such shareholders without
their further approval.
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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 Company, 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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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
BALANCED FUND series
/s/ James M. Hennessy By: /s/ Michael J. Roland
- ------------------------------ ----------------------------------
SECRETARY Its: Principal Accounting Officer
Attest: PILGRIM MAYFLOWER TRUST on behalf of
THE PILGRIM INCOME & GROWTH FUND
/s/ James M. Hennessy By: /s/ Michael J. Roland
- ------------------------------ ----------------------------------
SECRETARY Its: Principal Accounting Officer
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AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this 16th day of November, 1999, by and between Pilgrim Mutual Funds (the
"Acquiring Company"), a Delaware business trust with its principal place of
business at 40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004, on
behalf of Pilgrim Balanced Fund (the "Acquiring Fund"), a separate series of the
Acquiring Company, and Pilgrim Balance Sheet Opportunities Fund (the "Acquired
Fund"), a Massachusetts business trust with its principal place of business at
40 North Central Avenue, Suite 1200, Phoenix, Arizona 85004.
This Agreement is intended to be and is adopted as a plan of reorganization
and liquidation within the meaning of Section 368(a)(1) of the United States
Internal Revenue Code of 1986, as amended (the "Code"). The reorganization (the
"Reorganization") will consist of the transfer of all of the assets of the
Acquired Fund to the Acquiring Fund in exchange solely for Class A, Class B,
Class C and Class T voting shares of 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;
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;
WHEREAS, the Acquiring Company, on behalf of the Acquiring Fund, presently
intends to acquire all of the assets and assume all of the liabilities of
Pilgrim Income & Growth Fund, a separate series of Pilgrim Mayflower Trust, in a
transaction substantially similar to the one set forth in this Agreement; and
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").
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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.
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2. VALUATION
2.1 The value of the Acquired Fund's assets to be acquired by the Acquiring
Fund hereunder shall be the value of such assets computed as of immediately
after the close of business of the New York Stock Exchange and after the
declaration of any dividends on the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Acquiring Company's Declaration of Trust and then-current
prospectus or statement of additional information with respect to the Acquiring
Fund, and valuation procedures established by the Acquiring Company's Board of
Trustees.
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 Acquiring Fund's
designated record keeping agent.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be April 1, 2000, or such other date as the
parties may agree to in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of immediately after the close of
business on the Closing Date unless otherwise agreed to by the parties. The
close of business on the Closing Date shall be as of 4:00 p.m., Eastern Time.
The Closing shall be held at the offices of the Acquiring Company or at such
other time and/or place as the parties may agree.
3.2 The Acquiring Company shall direct State Street Bank and Trust Company,
as custodian for the Acquired Fund (the "Custodian"), to deliver, at the
Closing, a certificate of an authorized officer stating that (i) the Acquired
Fund's portfolio securities, cash, and any other assets ("Assets") shall have
been delivered in proper form to the Acquiring Fund within two business days
prior to or on the Closing Date, and (ii) all necessary taxes in connection with
the delivery of the Assets, including all applicable federal and state stock
transfer stamps, if any, have been paid or provision for payment has been made.
The Acquired Fund's portfolio securities represented by a certificate or other
written instrument shall be presented by the Acquired Fund Custodian to the
custodian for the Acquiring Fund for examination no later than five business
days preceding the Closing Date, and shall be transferred and delivered by the
Acquired Fund as of the Closing Date for the account of the Acquiring Fund duly
endorsed in proper form for transfer in such condition as to constitute good
delivery thereof. The Acquired Fund's portfolio securities and instruments
deposited with a securities depository, as defined in Rule 17f-4 under the
Investment Company Act of 1940, as amended (the "1940 Act"), shall direct the
Custodian to deliver as of the Closing Date by book entry in accordance with the
customary practices of such depositories and the custodian for Acquiring Fund.
The cash to be transferred by the Acquired Fund shall be delivered by wire
transfer of federal funds on the Closing Date.
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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 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
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violation of its Declaration of Trust or By-Laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which the Acquired Fund is a
party or by which it is bound, or (ii) the acceleration of any obligation, or
the imposition of any penalty, under any agreement, indenture, instrument,
contract, lease, judgment or decree to which the Acquired Fund is a party or by
which it is bound;
(g) The Acquired Fund has no material contracts or other commitments
(other than this Agreement) that will be terminated with liability to it prior
to the Closing Date;
(h) Except as otherwise disclosed in writing to and accepted by the
Acquiring Fund, no litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or, to its
knowledge, threatened against the Acquired Fund or any of its properties or
assets that, if adversely determined, would materially and adversely affect its
financial condition or the conduct of its business. The Acquired Fund knows of
no facts which might form the basis for the institution of such proceedings and
is not a party to or subject to the provisions of any order, decree or judgment
of any court or governmental body which materially and adversely affects its
business or its ability to consummate the transactions herein contemplated;
(i) The Statement of Assets and Liabilities, Statements of Operations
and Changes in Net Assets, and Schedule of Investments of the Acquired Fund at
December 31, 1998 have been audited by PricewaterhouseCoopers LLP, independent
accountants, and are in accordance with generally accepted accounting principles
("GAAP") consistently applied, and such statements (copies of which have been
furnished to the Acquiring Fund) present fairly, in all material respects, the
financial condition of the Acquired Fund as of such date in accordance with
GAAP, and there are no known contingent liabilities of the Acquired Fund
required to be reflected on a balance sheet (including the notes thereto) in
accordance with GAAP as of such date not disclosed therein;
(j) Since December 31, 1998, there has not been any material adverse
change in the Acquired Fund's financial condition, assets, liabilities or
business, other than changes occurring in the ordinary course of business, or
any incurrence by the Acquired Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this subparagraph (j), a
decline in net asset value per share of the Acquired Fund due to declines in
market values of securities in the Acquired Fund's portfolio, the discharge of
Acquired Fund liabilities, or the redemption of Acquired Fund Shares by
shareholders of the Acquired Fund shall not constitute a material adverse
change;
(k) On the Closing Date, all Federal and other tax returns and reports
of the Acquired Fund required by law to have been filed by such date (including
any extensions) shall have been filed and are or will be correct in all material
respects, and all Federal and other taxes shown as due or required to be shown
as due on said returns and reports shall have been paid or provision shall have
been made for the payment thereof, and to the best of the Acquired Fund's
knowledge, no such return is currently under audit and no assessment has been
asserted with respect to such returns;
(l) For each taxable year of its operation (including the taxable year
ending on the Closing Date), the Acquired Fund has met the requirements of
Subchapter M of the Code for qualification as a regulated investment company and
has elected to be treated as such, has been eligible to and has computed its
federal income tax under Section 852 of the Code, and will have distributed all
of its investment company taxable income and net capital gain (as defined in the
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;
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(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:
(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;
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(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquiring Fund of
the transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act and the 1940 Act and such as may be required by state
securities laws;
(d) The current prospectus and statement of additional information of
the Acquiring Fund and each prospectus and statement of additional information
of the Acquiring Fund used during the three years previous to the date of this
Agreement conforms or conformed at the time of its use in all material respects
to the applicable requirements of the 1933 Act and the 1940 Act and the rules
and regulations of the Commission thereunder and does not or did not at the time
of its use include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
materially misleading;
(e) On the Closing Date, the Acquiring Fund will have good and
marketable title to the Acquiring Fund's assets, free of any liens of other
encumbrances, except those liens or encumbrances as to which the Acquired Fund
has received notice and necessary documentation at or prior to the Closing;
(f) The Acquiring Fund is not engaged currently, and the execution,
delivery and performance of this Agreement will not result, in (i) a material
violation of the Acquiring 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;
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(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
(p) That insofar as it relates to the 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 materially
misleading provided, however, that the representations and warranties in this
subparagraph (p) shall not apply to statements in or omissions from the
Registration Statement 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.
A-22
<PAGE>
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 The Acquiring Fund and the Acquired Fund each will operate its business
in the ordinary course between the date hereof and the Closing Date, it being
understood that such ordinary course of business will include the declaration
and payment of customary dividends and distributions, and any other distribution
that may be advisable.
5.2 The Acquired Fund will call a meeting of the shareholders of the
Acquired Fund to consider and act upon this Agreement and to take all other
action necessary to obtain approval of the transactions contemplated herein.
5.3 The Acquired Fund covenants that the Class A, Class B, Class C 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 Company
(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.
A-23
<PAGE>
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 Company and the
Acquiring Fund contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date;
6.2 The Acquiring Company, 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:
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;
A-24
<PAGE>
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;
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 Company nor the Acquired Fund may waive the condition set forth in
this paragraph 8.5.
A-25
<PAGE>
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.
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.
A-26
<PAGE>
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by 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.
A-27
<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
BALANCED FUND series
/s/ James M. Hennessy By: /s/ Michael J. Roland
- ------------------------------ ------------------------------------
SECRETARY Its: Principal Accounting Officer
Attest: PILGRIM BALANCE SHEET OPPORTUNITIES FUND
/s/ James M. Hennessy By: /s/ Michael J. Roland
- ------------------------------ ------------------------------------
SECRETARY Its: Principal Accounting Officer
A-28
<PAGE>
APPENDIX B
ADDITIONAL INFORMATION REGARDING PILGRIM BALANCED FUND
(THE "FUND")
SHAREHOLDER GUIDE
PILGRIM PURCHASE OPTIONS(TM)
This Proxy Statement/Prospectus relates to four separate classes of the
Pilgrim Balanced Fund: Class A, Class B, Class C and Class T, each of which
represents an identical interest in the Fund's investment portfolio, but are
offered with different sales charges and distribution fee (Rule 12b-1)
arrangements. As described below and elsewhere in this Proxy
Statement/Prospectus, the contingent deferred sales load structure and
conversion characteristics of the Fund shares issued to you in the
Reorganization will be the same as those that applied to the shares of either
the Income & Growth Fund or the Balance Sheet Opportunities Fund held by you
immediately prior to the Reorganization, and the period that you held the shares
of either the Income & Growth Fund or the Balance Sheet Opportunities Fund will
be included in the holding period of the Balanced Fund shares for purposes of
calculating contingent deferred sales charges and determining conversion rights.
Purchases of the shares of the Balanced Fund after the Reorganization will be
subject to the sales load structure and conversion rights discussed below.
The Balanced Fund also offers Class Q shares, which have different
distribution fee arrangements than the Classes discussed in this Proxy
Statement/Prospectus. The sales charges and fees for Class A, Class B, Class C
and Class T shares are shown and contrasted in the chart below.
<TABLE>
<CAPTION>
Class A Class B Class C Class T(1)
------- ------- ------- ----------
<S> <C> <C> <C> <C>
Maximum Initial Sales Charge on Purchases 5.75%(2) None None None
CDSC None(3) 5.00%(4) 1.00%(5) 4.00%(6)
Annual Service and Distribution (12b-1) Fee (7) 0.35% 1.00% 1.00% 0.65%
Maximum Purchase Unlimited $250,000 Unlimited Unlimited
Automatic Conversion to Class A N/A 8 Years(8) N/A 8 Years(8)
</TABLE>
- ----------
(1) Class T shares are no longer available for purchase, unless you are
investing income earned on Class T shares or exchanging Class T shares of
another fund.
(2) Imposed upon purchase. Reduced for purchases of $50,000 and over.
(3) For investments of $1 million or more, a CDSC of no more than 1% may be
assessed on redemptions of shares that were purchased without an initial
sales charge. See "Class A Shares: Initial Sales Charge Alternative."
(4) Imposed upon redemption within 6 years from purchase. Shares exchanged from
the Target Funds are subject to CDSC until after the fifth year from
purchase. Fee has scheduled reductions after the first year. See "Class B
Shares: Deferred Sales Charge Alternative."
(5) Imposed upon redemption within 1 year from purchase.
(6) Imposed upon redemption within 4 years from purchase.
(7) Annual asset-based distribution charge.
(8) Class B and Class T shares of the Balanced Fund issued to shareholders of
the Target Funds in the Reorganization will convert to Class A shares in
the eighth year from the original date of purchase of the Class B or Class
T shares of the Target Funds, as applicable.
The relative impact of the initial sales charges and ongoing annual
expenses will depend on the length of time a share is held. Orders for Class B
shares in excess of $250,000 will be accepted as orders for Class A shares or
declined.
B-1
<PAGE>
CLASS A SHARES: INITIAL SALES CHARGE ALTERNATIVE. Class A shares of the
Fund are sold at the net asset value ("NAV") per share in effect plus a sales
charge as described in the following table. For waivers or reductions of the
Class A shares sales charges, see "Special Purchases without a Sales Charge" and
"Reduced Sales Charges."
As a % of the As a % of Net Dealers' Reallowance as
Your Investment Offering Price Asset Value a % of Offering Price
- --------------- -------------- ----------- ---------------------
Less than $50,000 5.75% 6.10% 5.00%
$50,000 - $99,999 4.50% 4.71% 3.75%
$100,000 - $249,999 3.50% 3.63% 2.75%
$250,000 - $499,999 2.50% 2.56% 2.00%
$500,000 - $1,000,000 2.00% 2.04% 1.75%
There is no initial sales charge on purchases of $1,000,000 or more.
However, Pilgrim Securities, Inc. (the "Distributor") will pay Authorized
Dealers of record commissions at the rates shown in the table below for
investments subject to a CDSC. If shares are redeemed within one or two years of
purchase, depending on the amount of the purchase, a CDSC will be imposed on
certain redemptions as follows:
Period During
Your Investment CDSC Which CDSC Applies
- --------------- ---- ------------------
$1,000,000 to $2,499,999 1.00% 2 years
$2,500,000 to $4,999,999 0.50% 1 year
$5,000,000 and over 0.25% 1 year
However, Class A shares of the Balanced Fund issued in connection with the
Reorganization with respect to Class A shares of either of the Target Funds 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 either of the Target Funds.
REDUCED SALES CHARGES. An investor may immediately qualify for a reduced
sales charge on a purchase of Class A shares of the Fund or other open-end funds
in the Pilgrim funds which offer Class A shares, or shares with front-end sales
charges ("Participating Funds") by completing the Letter of Intent section of an
Application to purchase Fund shares. Executing the Letter of Intent expresses an
intention to invest during the next 13 months a specified amount, which, if made
at one time, would qualify for a reduced sales charge. An amount equal to the
Letter amount multiplied by the maximum sales charge imposed on purchases of the
Fund and class will be restricted within your account to cover additional sales
charges that may be due if your actual total investment fails to qualify for the
reduced sales charges. See the Statement of Additional Information for the Fund
for details on the Letter of Intent option or contact the Shareholder Servicing
Agent at (800) 992-0180 for more information.
A sales charge may also be reduced by taking into account the current value
of your existing holdings in the Fund or any other open-end funds in the Pilgrim
funds (excluding Pilgrim Money Market Fund) ("Rights of Accumulation"). The
reduced sales charges apply to quantity purchases made at one time or on a
cumulative basis over any period of time. See the Statement of Additional
Information for the Fund for details or contact the Shareholder Servicing Agent
at (800) 992-0180 for more information.
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 Balanced Fund
which imposes a CDSC.
B-2
<PAGE>
SPECIAL PURCHASES WITHOUT A SALES CHARGE. Class A shares may be purchased
without a sales charge by certain individuals and institutions. For additional
information, contact the Shareholder Servicing Agent at (800) 992-0180, or see
the Statement of Additional Information for the Fund.
CLASS B SHARES: DEFERRED SALES CHARGE ALTERNATIVE. Class B shares 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%
After Sixth Year 0%
However, Class B shares of the Balanced Fund issued in connection with the
Reorganization with respect to Class B shares of the Target Funds that were
purchased prior to November 1, 1999 and were subject to a CDSC at the time of
the Reorganization will be subject to the CDSC in place when those shares were
purchased.
Class B shares will automatically convert into Class A shares approximately
eight years after purchase. Class B shares of the Balanced Fund issued in
connection with the Reorganization with respect to Class B shares of the Target
Funds that were held prior to November 1, 1999 will convert to Class A shares
eight years after the purchase of the original shares of the Target Funds. For
additional information on the CDSC and the conversion of Class B, see the Fund's
Statement of Additional Information.
CLASS C SHARES. Class C shares are offered at their net asset value per
share without an initial sales charge. Class C shares may be subject to a CDSC
of 1% if redeemed within one year of purchase. The Distributor pays a commission
of 1% to financial institutions that initiate purchases of Class C shares.
CLASS T SHARES. Class T shares are only available to shareholders that
previously held shares of Class T of the Balance Sheet Opportunities Fund, and
may only be obtained by such shareholders by reinvesting dividends distributed
to the Class T shareholders or by exchanging Class T shares from another fund
within the Pilgrim 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.
B-3
<PAGE>
Class T shares will automatically convert into Class A shares approximately
eight years after purchase, except that Class T shares of the Balanced Fund
issued in connection with the Reorganization will convert to Class A shares
eight years after the purchase of the original shares of the Balance Sheet
Opportunities Fund. For additional information about Class T shares, see the
Pilgrim Prospectus and the Statement of Additional Information for the Pilgrim
Funds.
WAIVERS OF CDSC. The CDSC on Class A, Class B or Class C shares will be
waived in the following cases. In determining whether a CDSC is applicable, it
will be assumed that shares held in the shareholder's account that are not
subject to such charge are redeemed first.
1) The CDSC on Class A, Class B or Class C shares will be waived in the
case of redemption following the death or permanent disability of a shareholder
if made within one year of death or initial determination of permanent
disability. The waiver is available only for those shares held at the time of
death or initial determination of permanent disability.
2) The CDSC also may be waived for Class B shares redeemed pursuant to a
Systematic Withdrawal Plan, up to a maximum of 12% per year of a shareholder's
account value based on the value of the account at the time the plan is
established and annually thereafter, provided all dividends and distributions
are reinvested and the total redemptions do not exceed 12% annually.
3) The CDSC also will be waived in the case of mandatory distributions from
a tax-deferred retirement plan or an IRA.
If you think you may be eligible for a CDSC waiver, contact the Shareholder
Servicing Agent at (800) 992-0180.
REINSTATEMENT PRIVILEGE. Class B and Class C shareholders who have redeemed
their shares in any open-end Pilgrim Fund may reinvest some or all of the
proceeds in the same share class within 90 days without a sales charge.
Reinstated Class B and Class C shares will retain their original cost and
purchase date for purposes of the CDSC. This privilege can be used only once per
calendar year. See the Statement of Additional Information for the Fund for
details or contact the Shareholder Servicing Agent at (800) 992-0180 for more
information.
RULE 12b-1. Plan The Fund has a distribution plan pursuant to Rule 12b-1
under the 1940 Act applicable to each class of shares of the Fund ("Rule 12b-1
Plan"). Under the Rule 12b-1 Plan, the Distributor may receive from the Fund an
annual fee in connection with the offering, sale and shareholder servicing of
the Fund's Class A, Class B, Class C and Class T shares.
DISTRIBUTION AND SERVICING FEES. As compensation for services rendered and
expenses borne by the Distributor in connection with the distribution of shares
of the Fund and in connection with services rendered to shareholders of the
Fund, the Fund pays the Distributor servicing fees and distribution fees up to
the annual rates set forth below (calculated as a percentage of the Fund's
average daily net assets attributable to that class):
Servicing Fee Distribution Fee
------------- ----------------
Class A 0.25% none
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class T 0.25% 0.50%
Fees paid under the Rule 12b-1 Plan may be used to cover the expenses of
the Distributor from the sale of Class A, Class B, Class C or Class T shares of
the Fund, including payments to Authorized Dealers, and for shareholder
servicing. Because these fees are paid out of the Fund's assets on an on-going
basis, over time these fees will increase the cost of your investment and may
cost you more than paying other types of sales charges.
B-4
<PAGE>
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% 0.00%
OTHER EXPENSES. In addition to the management fee and other fees described
previously, the Fund pays other expenses, such as legal, audit, transfer agency
and custodian fees, proxy solicitation costs, and the compensation of Directors
who are not affiliated with Pilgrim Investments. Most Fund expenses are
allocated proportionately among all of the outstanding shares of that Fund.
However, the Rule 12b-1 Plan fees for each class of shares are charged
proportionately only to the outstanding shares of that class.
PURCHASING SHARES. The Fund reserves the right to liquidate sufficient
shares to recover annual Transfer Agent fees should the investor fail to
maintain his/her account value at a minimum of $1,000.00 ($250.00 for IRA's).
The minimum initial investment in the Fund is $1,000 ($250 for IRAs), and the
minimum for additional investment in the Fund is $100.
The Fund and the Distributor reserve the right to reject any purchase
order. Please note cash, travelers checks, third party checks, money orders and
checks drawn on non-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
opened for business. Each class' NAV represents that class' pro rata share of
that Fund's net assets as adjusted for any class specific expenses (such as fees
under a Rule 12b-1 plan), and divided by that class' outstanding shares. In
general, the value of the Fund's assets is based on actual or estimated market
value, with special provisions for assets not having readily available market
quotations, and short-term debt securities. 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 Directors, although the actual
calculations will be made by persons acting under the supervision of the Board.
For information on valuing foreign securities, see the Fund's Statement of
Additional Information.
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) 992-0181.
B-5
<PAGE>
RETIREMENT PLANS. The Fund has available prototype qualified retirement
plans for both corporations and for self-employed individuals. Also available
are prototype IRA, Roth IRA and Simple IRA plans (for both individuals and
employers), Simplified Employee Pension Plans, Pension and Profit Sharing Plans
and Tax Sheltered Retirement Plans for employees of public educational
institutions and certain non-profit, tax-exempt organizations. Investors
Fiduciary Trust Company ("IFTC") acts as the custodian under these plans. For
further information, contact the Shareholder Servicing Agent at (800) 992-0180.
IFTC currently receives a $12 custodian fee annually for the maintenance of such
accounts.
EXECUTION OF REQUESTS. Purchase and sale requests are executed at the next
NAV determined after the order is received in proper form by the Transfer Agent
or Distributor. A purchase order will be deemed to be in proper form when all of
the required steps set forth above under "Purchase of Shares" have been
completed. If you purchase by wire, however, the order will be deemed to be in
proper form after the telephone notification and the federal funds wire have
been received. If you purchase by wire, you must submit an application form in a
timely fashion. If an order or payment by wire is received after the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. Eastern
Time), the shares will not be credited until the next business day.
You will receive a confirmation of each new transaction in your account,
which also will show you the number of shares of the Fund you own including the
number of shares being held in safekeeping by the Transfer Agent for your
account. You may rely on these confirmations in lieu of certificates as evidence
of your ownership. Certificates representing shares of the Fund will not be
issued unless you request them in writing.
TELEPHONE ORDERS. The Fund and its Transfer Agent will not be responsible
for the authenticity of phone instructions or losses, if any, resulting from
unauthorized shareholder transactions if they reasonably believe that such
instructions were genuine. The Fund and its Transfer Agent have established
reasonable procedures to confirm that instructions communicated by telephone are
genuine. These procedures include recording telephone instructions for exchanges
and expedited redemptions, requiring the caller to give certain specific
identifying information, and providing written confirmation to shareholders of
record not later than five days following any such telephone transactions. If
the Fund and its Transfer Agent do not employ these procedures, they may be
liable for any losses due to unauthorized or fraudulent telephone instructions.
Telephone redemptions may be executed on all accounts other than retirement
accounts.
EXCHANGE PRIVILEGES AND RESTRICTIONS
An exchange privilege is available. Exchange requests may be made in
writing to the Transfer Agent or by calling the Shareholder Servicing Agent at
(800) 992-0180. There is no specific limit on exchange frequency; however, the
Fund is intended for long term investment and not as a trading vehicle. 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 any other
open-end Pilgrim Fund without payment of any additional sales charge. In
addition, Class T shares of any fund may be exchanged for Class B shares of the
Pilgrim Money Market Fund. If you exchange and subsequently redeem your shares,
any applicable CDSC will be based on the full period of the share ownership.
Shareholders exercising the exchange privilege with any other open-end Pilgrim
Fund should carefully review the Prospectus of that Fund. Exchanges of
shares are sales and may result in a gain or loss for federal and state income
tax purposes.
B-6
<PAGE>
You will automatically be assigned the telephone exchange privilege unless
you mark the box on the Account Application that signifies you do not wish to
have this privilege. The exchange privilege is only available in states where
shares of the fund being acquired may be legally sold.
SYSTEMATIC EXCHANGE PRIVILEGE. With an initial account balance of at least
$5,000 and subject to the information and limitations outlined above, you may
elect to have a specified dollar amount of shares systematically exchanged,
monthly, quarterly, semi-annually or annually (on or about the 10th of the
applicable month), from your account to an identically registered account in the
same class of any other open-end Pilgrim Fund. This exchange privilege may be
modified at any time or terminated upon 60 days written notice to shareholders.
SMALL ACCOUNTS. Due to the relatively high cost of handling small
investments, the Fund reserves the right upon 30 days written notice to redeem,
at NAV, the shares of any shareholder whose account (except for IRAs) has a
value of less than $1,000, other than as a result of a decline in the NAV per
share.
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-7
<PAGE>
MANAGEMENT OF THE FUND
INVESTMENT MANAGER. Pilgrim Investments has overall responsibility for the
management of the Fund. The Fund and Pilgrim Investments have entered into an
agreement that requires Pilgrim Investments to provide or oversee all investment
advisory and portfolio management services for the Fund. The agreement also
requires Pilgrim Investments to assist in managing and supervising all aspects
of the general day-to-day business activities and operations of the Fund,
including custodial, transfer agency, dividend disbursing, accounting, auditing,
compliance and related services. Pilgrim Investments provides the Fund with
office space, equipment and personnel necessary to administer the Fund. The
agreement with Pilgrim Investments can be canceled by the Board of Directors of
the Fund upon 60 days written notice. Organized in December 1994, Pilgrim
Investments is registered as an investment adviser with the Securities and
Exchange Commission. As of September 30, 1999, Pilgrim Investments managed over
$7.7 billion in assets. Pilgrim Investments acquired certain assets of the
previous advisers to certain of the Funds in separate transactions that closed
on April 7, 1995 and May 24, 1999. Pilgrim Investments bears its expenses of
providing the services described above. Investment management fees are computed
and accrued daily and paid monthly.
PARENT COMPANY AND DISTRIBUTOR. Pilgrim Investments and the Distributor are
indirect, wholly owned subsidiaries of ReliaStar Financial Corp. (NYSE: RLR)
("ReliaStar"). Through its subsidiaries, ReliaStar offers individuals and
institutions life insurance and annuities, employee benefits products and
services, life and health reinsurance, retirement plans, mutual funds, bank
products and personal finance education.
In addition to providing for the expenses discussed above, the Rule 12b-1
Plan also recognizes that Pilgrim Investments may use its investment management
fees or other resources to pay expenses associated with activities primarily
intended to result in the promotion and distribution of the Fund's shares. The
Distributor will, from time to time, pay to Authorized Dealers in connection
with the sale or distribution of shares of the Fund material compensation, which
includes, but is not limited to, cash, merchandise, trips and financial
assistance in connection with pre-approved conferences or seminars, sales or
training programs for invited sales personnel, payment for travel expenses
(including meals and lodging) incurred by sales personnel to various locations
for such seminars or training programs, seminars for the public, advertising and
sales campaigns regarding the Fund or other open-end Pilgrim Funds and/or events
sponsored by Authorized Dealers. In addition, the Distributor may, at its own
expense, pay concessions in addition to those described above to dealers that
satisfy certain criteria established from time to time by the Distributor. These
conditions relate to increasing sales of shares of the Fund over specified
periods and to certain other factors. Salespersons and any other person entitled
to receive any compensation for selling or servicing Fund shares may receive
different compensation with respect to one particular class of shares over
another in the Fund.
SHAREHOLDER SERVICING AGENT. Pilgrim Group, Inc. serves as Shareholder
Servicing Agent for the Fund. The Shareholder Servicing Agent is responsible for
responding to written and telephonic inquiries from shareholders. The Fund pays
the Shareholder Servicing Agent a monthly fee on a per-contact basis, based upon
incoming and outgoing telephonic and written correspondence.
PORTFOLIO TRANSACTIONS. Pilgrim Investments will place orders to execute
securities transactions that are designed to implement the Balanced 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
B-8
<PAGE>
a broker's sale of Fund shares if Pilgrim Investments is satisfied that the Fund
would receive best execution of the transaction from that broker.
DIVIDENDS, DISTRIBUTIONS & TAXES
DIVIDENDS AND DISTRIBUTIONS. The Balanced Fund has a policy of paying
quarterly 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.
All dividends and capital gains are taxable whether they are reinvested or
received in cash, unless you are exempt from taxation or entitled to tax
deferral. Dividends declared in October, November, or December with a record
date in such month and paid during the following January will be treated as
having been paid by the Fund and received by shareholders on December 31 of the
calendar year in which declared, rather than the calendar year in which the
dividends are actually received.
Upon the sale or other disposition of shares of the Fund, a shareholder may
realize a gain or loss which will be a capital gain or loss if the shares are
held as a capital asset and, if so, may be eligible for reduced federal tax
rates, depending on the shareholder's holding period for the shares.
This is a brief summary of some of the tax laws that affect your investment
in the Fund. Please see the Fund's Statement of Additional Information and your
tax adviser for further information.
B-9
<PAGE>
FINANCIAL HIGHLIGHTS
PILGRIM
BALANCED
FUND
- --------------------------------------------------------------------------------
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 other independent
auditors.
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------
Three Months Year Ended March 31,
Ended -------------------------------------
June 30, 1999 (b) 1999 1998 1997 1996 1995
----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 19.03 19.53 15.54 16.16 13.74 13.52
---------- ----- ----- ----- ----- -----
Income from investment operations:
Net investment income $ 0.10 0.36 0.26 0.32 0.34 0.21
Net realized and unrealized gains on
investments $ 0.17 2.58 5.70 0.84 2.42 0.22
---------- ----- ----- ----- ----- -----
Total from investment operations $ 0.27 2.94 5.96 1.16 2.76 0.43
Less distributions from:
Net investment income $ 0.07 0.43 0.27 0.32 0.34 0.21
Net realized gains on investments -- 3.01 1.70 1.46 -- --
---------- ----- ----- ----- ----- -----
Net asset value, end of period $ 19.23 19.03 19.53 15.54 16.16 13.74
========== ===== ===== ===== ===== =====
TOTAL RETURN (c): % 1.42 17.10 39.34 6.74 20.16 3.22
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands) $ 9,619 9,519 6,675 4,898 5,902 4,980
Ratio to average net assets:
Net expenses after expense reimbursement (d) % 1.49 1.59 1.61 1.60 1.60 1.60
Gross expenses prior to expense
reimbursement (d) % 1.75 1.97 2.56 3.00 3.30 2.78
Net investment income (loss) after expense
reimbursement (d) % 2.06 2.08 3.58 1.87 2.16 1.44
Portfolio turnover % 63 165 260 213 197 110
</TABLE>
- ----------
(a) Commencement of offering of shares.
(b) Effective May 24, 1999, Pilgrim Investments, Inc., became the Investment
Manager of the Fund.
(c) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(d) Annualized
B-10
<PAGE>
<TABLE>
<CAPTION>
Class B Class C
- ---------------------------------------------------------- ---------------------------------------------------------
Three Months May 31, 1995(a) Three Months
Ended Year Ended March 31, to Ended Year Ended March 31,
June 30,1999 (b) 1999 1998 1997 March 31, 1996 June 30, 1999(b) 1999 1998 1997 1996 1995
- ---------------- ---- ---- ---- -------------- ---------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 20.38 20.07 14.88 14.18 12.50 18.35 19.90 15.59 16.20 13.76 13.54
-------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
$ 0.07 0.28 0.15 0.17 0.12 0.06 0.26 0.15 0.21 0.24 0.11
$ 0.18 2.74 5.58 0.70 1.68 0.16 2.52 5.71 0.85 2.44 0.22
-------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
$ 0.25 3.02 5.73 0.87 1.80 0.22 2.78 5.86 1.06 2.68 0.33
$ 0.04 0.31 0.15 0.17 0.12 0.04 0.28 0.15 0.21 0.24 0.11
-------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
-- 2.40 0.39 -- -- -- 4.05 1.40 1.46 -- --
-------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
$ 20.59 20.38 20.07 14.88 14.18 l8.53 18.35 19.90 15.59 16.20 13.76
======== ===== ===== ===== ===== ==== ===== ===== ===== ===== =====
% 1.24 16.49 38.79 6.10 14.45 1.21 16.34 38.35 6.05 19.58 2.47
$ 7,157 6,048 4,254 2,133 673 21,331 21,655 20,784 16,990 16,586 16,470
% 2.14 2.24 2.26 2.25 2.25 2.14 2.23 2.26 2.25 2.25 2.25
% 2.40 2.62 2.71 6.44 13.05 2.40 2.61 2.68 2.83 3.01 2.60
% 1.41 1.43 2.99 1.25 1.38 1.41 1.43 2.93 1.23 1.53 0.83
% 63 165 260 213 197 63 165 260 213 197 110
</TABLE>
B-11
<PAGE>
APPENDIX C
SUMMARY DESCRIPTION OF BOND RATINGS
The following are excerpts from S&P's description of its bond ratings: BB,
B, CCC, CC, C- predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with terms of the obligation; BB
indicates the lowest degree of speculation and C the highest. D- in payment
default. S&P applies indicators "+," no character, and "-" to its rating
categories. The indicators show relative standing within the major rating
categories.
The following are excerpts from Moody's description of its bond ratings:
Ba- judged to have speculative elements; their future cannot be considered as
well assured. B- generally lack characteristics of a desirable investment. Caa-
are of poor standing; such issues may be in default or there may be present
elements of danger with respect to principal or interest. Ca- speculative in a
high degree; often in default. C- lowest rate class of bonds; regarded as having
extremely poor prospects. Moody's also applies numerical indicators 1, 2 and 3
to rating categories. The modifier 1 indicates that the security is in the
higher end of its rating category; 2 indicates a mid-range ranking; and 3
indicates a ranking towards the lower end of the category.
C-1
<PAGE>
APPENDIX D
The following is a list of the current funds in the Pilgrim Funds and the
classes of shares that are currently offered by each fund or are expected to be
offered at or shortly after the Reorganization:
Fund Classes Offered
---- ---------------
Pilgrim MagnaCap Fund A, B, C, M and Q
Pilgrim LargeCap Leaders Fund A, B, C, M and Q
Pilgrim Research Enhanced Index Fund A, B, C, I and Q
Pilgrim Growth Opportunities Fund A, B, C, I, Q and T
Pilgrim LargeCap Growth Fund A, B, C and Q
Pilgrim MidCap Value Fund A, B, C, M, and Q
Pilgrim MidCap Opportunities Fund A, B, C, I and Q
Pilgrim MidCap Growth Fund A, B, C and Q
Pilgrim Growth + Value Fund A, B, C and Q
Pilgrim SmallCap Opportunities Fund A, B, C, I, Q and T
Pilgrim SmallCap Growth Fund A, B, C and Q
Pilgrim Bank and Thrift Fund A and B
Pilgrim Worldwide Growth Fund A, B, C and Q
Pilgrim International Value Fund A, B, C and Q
Pilgrim International Core Growth Fund A, B, C and Q
Pilgrim International SmallCap Growth Fund A, B, C and Q
Pilgrim Emerging Markets Value Fund A, B and C
Pilgrim Emerging Countries Fund A, B, C and Q
Pilgrim Asia-Pacific Equity Fund A, B and M
Pilgrim Government Securities Income Fund A, B, C, M, Q and T
Pilgrim Government Securities Fund (1) A, B, C and T
Pilgrim Strategic Income Fund A, B, C and Q
Pilgrim High Yield Fund A, B, C, M and Q
Pilgrim High Yield Fund II A, B, C, Q and T
Pilgrim High Yield Fund III (2) A, B, C and T
Pilgrim High Total Return Fund A, B and C
Pilgrim High Total Return Fund II A, B and C
Pilgrim Money Market Fund A, B and C
Pilgrim Balanced Fund A, B, C, Q and T
Pilgrim Income & Growth Fund (3) A, B and C
Pilgrim Balance Sheet Opportunities Fund (3) A, B, C and T
Pilgrim Convertible Fund A, B, C and Q
- ----------
(1) If approved by shareholders, this fund will be reorganized into the Pilgrim
Government Securities Income Fund.
(2) If approved by shareholders, this fund will be reorganized into the Pilgrim
High Yield Fund II.
(3) If approved by shareholders, these funds will be reorganized into the
Pilgrim Balanced Fund.
D-1
<PAGE>
APPENDIX E
As of November 22, 1999, the following persons owned of record 5% or more
of the outstanding shares of the specified class of Income & Growth Fund:
<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, B 29.35% 12.60% 6.53%
For the Sole Benefit of its Customers,
Attn: Fund Admin
4800 Deer Lake Drive E 2nd Floor
Jacksonville, FL 32246-6484
</TABLE>
As of November 22, 1999, the following persons owned of record 5% or more
of the outstanding shares of the specified class of Balance Sheet Opportunities
Fund:
<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, B 6.84% 0.88% 0.20%
For the Sole Benefit of its Customers,
Attn: Fund Admin
4800 Deer Lake Drive E 2nd Floor
Jacksonville, FL 32246-6484
Wexford Clearing Services FBO C 10.67% 0.14% 0.03%
Nicholas de Morato IRA
527 Hillside St.
Forest City, PA 18421
Wexford Clearing Services FBO C 7.13% 0.09% 0.02%
Frances A Tartaglione IRA
114 Holden Blvd
Staten Island, NY 10314
Wexford Clearing Services FBO C 15.98% 0.21% 0.05%
Anthony F Costa IRA
52 Hayrick Ln
Commack, NY 11725
Wexford Clearing Services FBO C 6.31% 0.08% 0.02%
Teresa R Costa IRA
52 Hayrick Ln
Commack, NY 11725
Wexford Clearing Services FBO C 27.13% 0.36% 0.08%
Colt Collectors Assn Inc.
c/o Richard Burdick
PO Box 4667
Ventura, CA 93007
</TABLE>
E-1
<PAGE>
As of November 22, 1999, the following persons owned of record 5% or more
of the outstanding shares of the specified class of Balanced Fund:
<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, A 30.92% 8.06% 2.16%
For the Sole Benefit of its Customers,
Attn: Fund Admin
4800 Deer Lake Drive E 2nd Floor
Jacksonville, FL 32246-6484
Merrill Lynch Pierce Fenner & Smith, B 15.04% 2.84% 0.82%
For the Sole Benefit of its Customers,
Attn: Fund Admin
4800 Deer Lake Drive E 2nd Floor
Jacksonville, FL 32246-6484
Merrill Lynch Pierce Fenner & Smith, C 62.80% 34.25% 9.02%
For the Sole Benefit of its Customers,
Attn: Fund Admin
4800 Deer Lake Drive E 2nd Floor
Jacksonville, FL 32246-6484
E-2
</TABLE>
