As filed with the Securities and Exchange Commission on December 12, 2001
Securities Act File No. 333-___
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. [ ]
PILGRIM SMALLCAP OPPORTUNITIES FUND
(Exact Name of Registrant as Specified in Charter)
7337 East Doubletree Ranch Road, Scottsdale, Arizona 85258-2034
(Address of Principal Executive Offices) (Zip Code)
1-800-992-0180
(Registrant's Area Code and Telephone Number)
Kimberly A. Anderson
ING Pilgrim Investments, LLC
7337 East Doubletree Ranch Road
Scottsdale, Arizona 85258-2034
(Name and Address of Agent for Service)
With copies to:
Jeffrey S. Puretz, Esq.
Dechert
1775 Eye Street, N.W.
Washington, DC 20006-2401
Approximate Date of Proposed Public Offering:
As soon as practicable after this Registration Statement becomes effective.
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It is proposed that this filing will become effective on January 11, 2002
pursuant to Rule 488 under the Securities Act of 1933, as amended.
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No filing fee is required because an indefinite number of shares have previously
been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended.
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Pilgrim SmallCap Growth Fund
7337 East Doubletree Ranch Road
Scottsdale, Arizona 85258-2034
1-800-992-0180
February 5, 2002
Dear Shareholder:
Your Board of Trustees has called a special meeting of shareholders
("Special Meeting") of Pilgrim SmallCap Growth Fund ("SmallCap Growth Fund")
scheduled to be held at 8:00 a.m., local time, on April 4, 2002 at 7337 East
Doubletree Ranch Road, Scottsdale, Arizona 85258-2034.
The Board of Trustees of SmallCap Growth Fund has reviewed and recommends
the proposed reorganization (the "Reorganization") of SmallCap Growth Fund,
which is managed by ING Pilgrim Investments, LLC ("ING Pilgrim"), into Pilgrim
SmallCap Opportunities Fund ("SmallCap Opportunities Fund"), which is also
managed by ING Pilgrim (each a "Fund," and collectively, the "Funds"). Both
Funds are members of the mutual fund group called the "Pilgrim Funds."
If approved by Shareholders, you will become a shareholder of SmallCap
Opportunities Fund on the date that the Reorganization occurs. The
Reorganization would provide shareholders of SmallCap Growth Fund with an
opportunity to participate in a larger fund with similar investment objectives
and strategies.
You are being asked to approve an Agreement and Plan of Reorganization. The
accompanying document describes the proposed transaction and compares the
strategies and expenses of each of the Funds for your evaluation.
After careful consideration, the Board of Trustees of SmallCap Growth Fund,
unanimously approved this proposal and recommends shareholders vote "FOR" the
proposal.
A Proxy Statement/Prospectus that describes the Reorganization is enclosed.
We hope that you can attend the Special Meeting in person; however, we urge you
in any event to vote your shares by completing and returning the enclosed proxy
in the envelope provided at your earliest convenience.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. 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 APRIL 3, 2002.
SmallCap Growth Fund is using Shareholder Communications Corporation, a
professional proxy solicitation firm, to assist shareholders in the voting
process. As the date of the meeting approaches, if we have not already heard
from you, you may receive a telephone call from Shareholder Communications
Corporation reminding you to exercise your right to vote.
We appreciate your participation and prompt response in this matter and
thank you for your continued support.
Sincerely,
James M. Hennessy,
President and Chief Executive Officer
Pilgrim SmallCap Growth Fund
7337 East Doubletree Ranch Road
Scottsdale, Arizona 85258-2034
1-800-992-0180
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF
PILGRIM SMALLCAP GROWTH FUND
SCHEDULED FOR APRIL 4, 2002
To the Shareholders:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders ("Special
Meeting") of Pilgrim SmallCap Growth Fund ("SmallCap Growth Fund") is scheduled
for April 4, 2002 at 8:00 a.m., local time, at 7337 East Doubletree Ranch Road,
Scottsdale, Arizona 85258-2034.
At the Special Meeting, you will be asked to consider and approve the
following proposals:
1. To approve an Agreement and Plan of Reorganization (the
"Reorganization Agreement") by and among SmallCap Growth Fund and
Pilgrim SmallCap Opportunities Fund ("SmallCap Opportunities Fund")
providing for the merger of SmallCap Growth Fund with and into
SmallCap Opportunities Fund; and
2. To transact such other business, not currently contemplated, that may
properly come before the Special Meeting in the discretion of the
proxies or their substitutes.
Shareholders of record at the close of business on January 11, 2002, are
entitled to notice of, and to vote at, the Special Meeting or any adjournment
thereof. Your attention is called to the accompanying Proxy
Statement/Prospectus. Regardless of whether you plan to attend the Special
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.
Proxies may be revoked at any time before they are exercised by executing and
submitting a revised proxy, by giving written notice of revocation to SmallCap
Growth Fund or by voting in person at the Special Meeting.
By Order of the Board of Trustees
Kimberly A. Anderson,
Vice President and Secretary
February 5, 2002
PILGRIM SMALLCAP OPPORTUNITIES FUND
PROXY STATEMENT/PROSPECTUS
FEBRUARY 5, 2002
TABLE OF CONTENTS
INTRODUCTION...................................................................1
SUMMARY........................................................................2
The Proposed Reorganization..................................................2
Comparison of Investment Objectives and Strategies...........................4
Comparison of Portfolio Characteristics......................................5
Relative Performance.........................................................6
Performance of SmallCap Opportunities Fund...................................7
Comparison of Investment Techniques and Principal Risks of
Investing in the Funds.....................................................9
COMPARISON OF FEES AND EXPENSES...............................................10
Management Fees.............................................................10
Administration Fees.........................................................10
Distribution and Service Fees...............................................10
Expense Limitation Agreements...............................................10
Expense Table...............................................................11
General Information.........................................................13
INFORMATION ABOUT THE REORGANIZATION..........................................14
The Reorganization Agreement................................................14
Reasons for the Reorganization..............................................14
Board Considerations........................................................15
Tax Considerations..........................................................15
Expenses of the Reorganization..............................................16
ADDITIONAL INFORMATION ABOUT THE FUNDS........................................16
Form of Organization........................................................16
Distributor.................................................................16
Dividends and Other Distributions...........................................16
Capitilization..............................................................17
Portfolio Manager of SmallCap Opportunities Fund ...........................17
GENERAL INFORMATION ABOUT THE PROXY STATEMENT.................................17
Solicitation of Proxies.....................................................17
Voting Rights...............................................................18
Other Matters to Come Before the Special Meeting............................18
Shareholder Proposals.......................................................18
Reports to Shareholders.....................................................19
APPENDICES...................................................................A-E
Management's Discussion and Analysis.......................................A-1
Form of Agreement and Plan of Reorganization...............................B-1
Additional Information Regarding Pilgrim SmallCap Opportunities Fund.......C-1
List of Pilgrim Funds......................................................D-1
Control Persons and Principal Shareholders.................................E-1
PROXY STATEMENT/PROSPECTUS
February 5, 2002
PILGRIM SMALLCAP OPPORTUNITIES FUND
7337 East Doubletree Ranch Road
Scottsdale, Arizona 85258-2034
1-800-992-0180
INTRODUCTION
This Proxy Statement/Prospectus is being furnished to you in connection
with a special meeting of shareholders of Pilgrim SmallCap Growth Fund
("SmallCap Growth Fund") to be held on April 4, 2002 ("Special Meeting"). As
more fully described in this Proxy Statement, the purpose of the Special Meeting
is to vote on a proposed reorganization ("Reorganization") of SmallCap Growth
Fund into Pilgrim SmallCap Opportunities Fund ("SmallCap Opportunities Fund")
(each a "Fund" and collectively, the "Funds").
Under an Agreement and Plan of Reorganization (the "Reorganization
Agreement"), SmallCap Growth Fund would transfer all of its assets to SmallCap
Opportunities Fund in exchange for shares of beneficial interest of SmallCap
Opportunities Fund and the assumption by SmallCap Opportunities Fund of SmallCap
Growth Fund's liabilities. SmallCap Opportunities Fund shares would then be
distributed to shareholders of SmallCap Growth Fund so that each shareholder
would receive a number of full and fractional shares of SmallCap Opportunities
Fund equal to the aggregate value of shares of SmallCap Growth Fund held by such
shareholder. As a result of the Reorganization, SmallCap Growth Fund will
distribute shares of SmallCap Opportunities Fund in liquidation of SmallCap
Growth Fund on April 19, 2002, or such other date as the parties may agree (the
"Closing Date").
Because you, as a shareholder of SmallCap Growth Fund, are being asked to
approve the Reorganization Agreement that will result in a transaction in which
you ultimately hold shares of SmallCap Opportunities Fund, this Proxy Statement
also serves as a Prospectus for SmallCap Opportunities Fund. SmallCap
Opportunities Fund is a diversified, open-end management investment company.
SmallCap Opportunities Fund's investment objective is to seek capital
appreciation. The Fund, under normal market conditions, seeks to achieve its
investment objective by investing at least 65% of its total assets in the common
stocks of smaller, lesser-known companies that the portfolio manager believes
have above average prospectus for growth, as described more fully below.
This Proxy Statement/Prospectus, which should be read and retained for
future reference, sets forth concisely the information that a shareholder should
know before voting on the Reorganization Agreement. A Statement of Additional
Information ("SAI") relating to this Proxy Statement dated January __, 2002
containing additional information about the Reorganization and the parties
thereto, has been filed with the U.S. Securities and Exchange Commission (the
"SEC") and is incorporated herein by reference. For a more detailed discussion
of the investment objectives, strategies and restrictions of the Funds, see the
Class A, B, C, M and T and Class Q Prospectuses for the Funds dated October 1,
2001 and the SAI for the Funds dated November 9, 2001, which are incorporated
herein by reference. Each Fund also provides periodic reports to its
shareholders, which highlight certain important information about the Funds,
including investment results and financial information. The annual report for
the SmallCap Opportunities Fund, dated May 31, 2001 is incorporated herein by
reference. You may receive a copy of the most recent Prospectus, SAI, SAI
relating to this Proxy Statement, annual report and any more recent semi-annual
report for either of the Funds, without charge, by contacting the Funds at
Pilgrim Funds, 7337 East Doubletree Ranch Road, Scottsdale, Arizona 85258-2034
or by calling 1-800-992-0180.
You can copy and review information about each Fund (including each SAI) at
the SEC's Public Reference Room in Washington, D.C. You may obtain information
on the operation of the Public Reference Room by calling the SEC at
1-202-942-8090. Reports and other information about each Fund are available on
the EDGAR Database on the SEC's internet site at http://www.sec.gov. You may
obtain copies of this information, after paying a duplicating fee, by electronic
request at the following E-mail address: publicinfo@sec.gov, or by writing the
SEC's Public Reference Section, Washington, D.C. 20549-0102.
THE U.S. 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.
SUMMARY
You should read this entire Proxy Statement/Prospectus carefully. For
additional information, you should consult the Class A, B, C, M and T and Class
Q U.S. Equity Prospectuses (the "Pilgrim Prospectuses") and the Reorganization
Agreement, which is attached hereto as Appendix B.
THE PROPOSED REORGANIZATION
On November 2, 2001, the Board of Trustees of SmallCap Growth Fund approved
the Reorganization Agreement. Subject to shareholder approval, the
Reorganization Agreement provides for:
* the transfer of all of the assets of SmallCap Growth Fund to SmallCap
Opportunities Fund, in exchange for shares of beneficial interest of
SmallCap Opportunities Fund;
* the assumption by SmallCap Opportunities Fund of all of the
liabilities of SmallCap Growth Fund;
* the distribution of SmallCap Opportunities Fund shares to the
shareholders of SmallCap Growth Fund; and
* the complete liquidation of SmallCap Growth Fund.
The Reorganization is expected to be effective upon the Closing Date. As a
result of the Reorganization, each owner of shares of each Class of shares of
SmallCap Growth Fund would become a shareholder of the same Class of shares of
SmallCap Opportunities Fund.
Each shareholder would hold, immediately after the Closing Date, shares of
the corresponding Class of SmallCap Opportunities Fund having an aggregate value
equal to the aggregate value of the shares of the Class of SmallCap Growth Fund
held by that shareholder as of the Closing Date.
The Reorganization is one of several reorganizations that are proposed
among various Pilgrim Funds. The Pilgrim Fund complex has grown in recent years
through the addition of many funds. Management of the Pilgrim Funds has proposed
the consolidation of several Pilgrim Funds that they believe have similar or
compatible investment strategies. The proposed reorganizations are designed to
reduce the overlap in funds in the Pilgrim Fund complex, thereby eliminating
inefficiencies arising from having similar portfolios in the same fund group and
confusion about overlapping funds. ING Pilgrim Investments, LLC ("ING Pilgrim"
or the "Adviser"), the investment adviser to both of the Funds, also believes
that the reorganizations may benefit fund shareholders by resulting in surviving
funds with a greater asset base. This is expected to provide greater investment
opportunities for the surviving funds and the potential to take larger portfolio
positions.
In considering whether to approve the Reorganization, you should note that:
* The Funds have investment objectives and strategies that are
substantially similar;
* The selection criteria for investments for each of the Funds are
substantially similar;
* Although the 1 year performance of SmallCap Growth Fund is slightly
better than that of SmallCap Opportunities Fund, the 3 and 5 year
performance of SmallCap Opportunities Fund is superior to that of
SmallCap Growth Fund(1);
- ----------
(1) Past performance is not necessarily an indication of how either Fund will
perform in the future.
2
* The proposed Reorganization is expected to result in a reduction in
total operating expenses per share for shareholders of Class A, Class
B, and Class C shares of SmallCap Growth Fund. It is expected that
Class Q shareholders of SmallCap Growth Fund will experience a slight
increase in total operating expenses per share. For example, the total
operating expenses before and after the merger, expressed as a
percentage of net asset value per share for each Class of each Fund,
based on the fiscal period ended May 31, 2001, are as follows:
BEFORE THE MERGER
CLASS A CLASS B CLASS C CLASS Q
------- ------- ------- -------
* SmallCap Growth Fund before
expense reimbursement from
management 1.72% 2.37% 2.37% 1.49%
* SmallCap Growth Fund after
expense reimbursement from
management(1) 1.73% 2.38% 2.38% 1.50%
* SmallCap Opportunities Fund 1.66% 2.36% 2.36% 1.53%
AFTER THE MERGER
* PRO FORMA estimated expenses
after the Reorganization: 1.65% 2.35% 2.35% 1.52%
Approval of the Reorganization Agreement requires the vote, if a quorum is
present, of the lesser of (i) 67% or more of the shares, provided that 50% of
shares are present in person or represented by proxy at the Special Meeting, or
(ii) a majority of the shares. The Declaration of Trust defines a "quorum" as
one-third of the shares entitled to vote.
AFTER CAREFUL CONSIDERATION, THE BOARD OF TRUSTEES OF SMALLCAP GROWTH FUND
UNANIMOUSLY APPROVED THE PROPOSED REORGANIZATION AGREEMENT. THE BOARD RECOMMENDS
THAT YOU VOTE "FOR" THE PROPOSED REORGANIZATION AGREEMENT.
- ----------
(1) ING Pilgrim has entered into an expense limitation agreement with SmallCap
Growth Fund, which limits expenses of the Fund to 1.95%, 2.60%, 2.60% and
1.85% for Class A, Class B, Class C and Class Q, respectively. The expense
limitation agreement will continue at lease through February 28, 2002;
however, there is no assurance that the expense limitation agreement will
continue after that date. The Fund is currently in a recoupment period, in
which ING Pilgrim is reimbursed for expenses previously waived pursuant to
the expense limitation agreement, up to the amount of the expense limit.
3
COMPARISON OF INVESTMENT OBJECTIVES AND STRATEGIES
The following summarizes the investment objective, strategies and
management differences, if any, between SmallCap Growth Fund and SmallCap
Opportunities Fund:
SMALLCAP GROWTH FUND SMALLCAP OPPORTUNITIES FUND
-------------------- ---------------------------
INVESTMENT OBJECTIVE Seeks maximum long-term capital appreciation. Seeks capital appreciation.
PRIMARY INVESTMENT * Normally invests at least 65% of its * Normally invests at least 65% of its
STRATEGIES total assets in equity securities of total assets in the common stocks of
smaller U.S. companies, and at least 75% smaller, lesser-known U.S. companies
of its total assets in common stocks that the portfolio manager believes have
that the portfolio manager feels have above average prospects for growth.
above average prospects for growth. Smaller companies are those with market
Smaller companies are those with market capitalizations that fall within the
capitalizations that fall within the range of companies in the Russell 2000
range of companies in the Russell 2000 Index.
Growth Index.
* The portfolio manager uses a "top-down"
* The portfolio emphasizes a growth disciplined investment process, which
approach by utilizing both a "bottom-up" includes extensive database screening,
analysis that evaluates the financial frequent fundamental research,
condition and competitiveness of identification and implementation of a
individual companies and a "top down" trend-oriented approach in structuring
disciplined investment process that the portfolio.
attempts to articulate the major social,
economic and technological trends that * The portfolio manager seeks to invest in
are likely to shape the future of companies expected to benefit most from
business and commerce over the next the major social, economic and
three to five years, and provide a technological trends that are likely to
framework for identifying the industries shape the future of business and
and companies expected to benefit most. commerce over the next three to five
years and attempts to provide a
* The top-down approach is combined with framework for identifying the companies
rigorous fundamental research (a and industries expected to benefit the
bottom-up approach) to guide stock most.
selection and portfolio structure.
* The top-down approach is combined with
* The Fund may invest in initial public rigorous fundamental research (a
offerings. bottom-up approach) to guide stock
selection and portfolio structure.
* The Fund is generally expected to engage
in frequent and active trading of * The Fund may invest in initial public
portfolio securities. offerings.
* The Fund is generally expected to engage
in frequent and active trading of
portfolio securities.
INVESTMENT ADVISER ING Pilgrim* ING Pilgrim
PORTFOLIO MANAGER Mary Lisanti Mary Lisanti
As you can see from the chart above, the investment objectives and
strategies of the Funds are substantially similar.
- ----------
* Prior to April 1, 2000, SmallCap Growth Fund was managed by a different
adviser.
4
COMPARISON OF PORTFOLIO CHARACTERISTICS
The following table compares certain characteristics of the portfolios of
the Funds as of May 31, 2001:
SMALLCAP GROWTH FUND SMALLCAP OPPORTUNITIES FUND
-------------------- ---------------------------
Net Assets $363,430,381 $464,413,918
Number of Holdings 111 110
As a percentage of net assets:
Equity Securities 100% 99%
Short Term Debt Investments -- --
Companies with market
capitalization less than $5
billion 98% 99%
Companies with market
capitalization between $5
billion and $10 billion 2% 1%
Companies with market
capitalization over $10
billion -- --
Average market
capitalization of companies
in portfolio $1.6 billion $1.6 billion
Median market capitalization
of companies in portfolio $1.1 billion $1.1 billion
Market capitalization range
of companies in portfolio $136 million - $9.4 billion $136 million - $9.4 billion
Portfolio Turnover Rate(2) 170% 104%
Top 5 Industries
(as a % of net assets) Retail 13.23% Oil and Gas 14.55%
Semiconductors 12.95% Retail 12.90%
Oil and Gas 12.93% Semiconductors 12.73%
Healthcare - Products 6.91% Healthcare - Products 7.89%
Software 6.23% Telecommunications 6.93%
Top 10 Holdings Microsemi Corp. 2.46% Microsemi Corp. 2.47%
(as a % of net assets) Abercrombie and Fitch Co. 2.06% Abercrombie and Fitch Co. 2.06%
Pride International Inc. 2.00% Digital Lightwave Inc. 1.73%
Caremark RX, Inc. 1.92% Pride International Inc. 1.72%
Digital Lightwave, Inc. 1.72% Spinnaker Exploration Co. 1.70%
Spinnaker Exploration Co. 1.67% Henry Schein Inc. 1.67%
Manugistics Group Inc. 1.66% Manugistics Group Inc. 1.66%
Waste Connections, Inc. 1.63% Lam Research Corp. 1.61%
Lam Research Corp. 1.61% Books Automation Inc. 1.60%
Books Automation, Inc. 1.59% Shaw Group Inc. 1.52%
- ----------
(1) For the fiscal period ended May 31, 2001.
5
RELATIVE PERFORMANCE
The following table shows, for the periods shown, the average annual total
return for: (a) Class A shares of SmallCap Growth Fund; (b) Class A shares of
SmallCap Opportunities Fund and, prior to the commencement of operations of
Class A shares, Class T shares of SmallCap Opportunities Fund; (c) the Russell
2000 Index; and (d) the Russell 2000 Growth Index. Performance of the Funds in
the table does not reflect the deduction of sales loads, and would be lower if
it did. The indices have an inherent performance advantage over the Funds since
they have no cash in their portfolios, impose no sales charges and incur no
operating expenses. An investor cannot invest directly in an index. Total return
is calculated assuming reinvestment of all dividends and capital gain
distributions at net asset value and excluding the deduction of sales charges.
Each Fund's past performance is not an indication of its future performance.
SMALLCAP SMALLCAP RUSSELL 2000
CALENDAR YEAR/ GROWTH OPPORTUNITIES RUSSELL 2000 GROWTH
PERIOD ENDED FUND(2)(3) FUND(4) INDEX(5) INDEX(6)
------------ ---------- ------- -------- --------
12/31/91 N/A 57.27% 46.05% 51.19%
12/31/92 N/A 14.54% 18.41% 7.77%
12/31/93 N/A 20.16% 18.91% 13.36%
12/31/94 -4.03% -4.86% -1.82% -2.43%
12/31/95 34.87% 11.34% 28.44% 31.04%
12/31/96 18.27% 18.16% 16.49% 11.26%
12/31/97 11.24% 14.92% 22.36% 12.95%
12/31/98 3.68% 7.59% -2.55% 1.23%
12/31/99 89.97% 146.94% 21.26% 43.09%
12/31/00 -5.52% -6.04% -3.02% -22.43%
1/1/01 - 9/30/01(1) -42.50% -43.18% -15.36% -28.05%
- ----------
(1) Not annualized.
(2) Class A and Class C shares of SmallCap Growth Fund commenced operations on
December 27, 1993. Class B and Class Q shares of SmallCap Growth Fund
commenced operations on May 31, 1995 and August 31, 1995, respectively.
(3) ING Pilgrim has been the investment adviser for SmallCap Growth Fund since
May 24, 1999; and prior to April 1, 2000, the Fund was managed by a
sub-adviser.
(4) Class A, Class B, and Class C shares of SmallCap Opportunities Fund
commenced operations on June 5, 1995. Class T shares of the Fund commenced
operations on February 3, 1986. Class Q shares of SmallCap Opportunities
Fund commenced operations on April 4, 2000. The figures shown for the years
1991 to 1995 provide performance for Class T shares of SmallCap
Opportunities Fund. Class T shares of the Fund would have substantially
similar annual returns as Class A shares because the Classes are invested
in the same portfolio of securities. Annual returns would differ only to
the extent Class A shares and Class T shares have different expenses.
(5) The Russell 2000 Index is an unmanaged index that measures the performance
of securities of small companies.
(6) The Russell 2000 Growth Index is an unmanaged index that measures the
performance of securities of smaller U.S. companies with
greater-than-average growth orientation.
6
PERFORMANCE OF SMALLCAP OPPORTUNITIES FUND
The following bar chart and table provide an indication of the risks of
investing in SmallCap Opportunities Fund by showing (on a calendar year basis)
changes in the Fund's annual total return from year to year and by showing (on a
calendar year basis) how the Fund's average annual returns for one year, five
years, ten years and since inception compare to those of the Russell 2000 Index.
The information in the bar chart is based on the performance of the Class A
shares of the 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, the
returns would be less than those shown. SmallCap Opportunities Fund's past
performance is not necessarily an indication of how the Fund will perform in the
future. Total returns include reinvestment of dividends and capital gains
distributions, if any. All indices are unmanaged.
CALENDAR YEAR-BY-YEAR RETURNS (%) (1),(2)
1991 1992 1993 1994 1995 1996 1997 1998 1999(3) 2000
---- ---- ---- ---- ---- ---- ---- ---- ------- ----
57.27 14.54 20.16 -4.86 11.34 18.16 14.92 7.59 146.94 -6.04
- ----------
(1) During the periods shown in the chart, the Fund's best quarterly
performance was 68.12% for the quarter ended December 31, 1999, and the
Fund's worst quarterly performance was -24.07% for the quarter ended
September 30, 1998. The Fund's year-to-date return as of September 30, 2001
was -43.18%.
(2) The figures shown for the years 1996 to 2000 provide performance for Class
A shares of the Fund. The figures shown for the years 1991 to 1995 provide
performance for Class T shares of the Fund. Class T shares would have
substantially similar annual returns as Class A shares because the Classes
are invested in the same portfolio of securities. Annual returns would
differ only to the extent Class A shares and Class T shares have different
expenses.
(3) Returns in 1999 were achieved during unusually favorable conditions in the
market, particularly for technology companies and initial public offerings.
You should not expect that such favorable returns can be consistently
achieved.
7
The following table shows what the average annual total returns of SmallCap
Opportunities Fund would equal if you average out actual performance over
various lengths of time, compared to the Russell 2000 Index, assuming that a
shareholder paid the maximum front-end or contingent deferred sales charge for
the applicable class. The Russell 2000 Index has an inherent performance
advantage over SmallCap Opportunities Fund since it has no cash in its
portfolio, imposes no sales charges and incurs no operating expenses. An
investor cannot invest directly in an index. SmallCap Opportunities Fund's
performance reflected in the following table assumes the deduction of the
maximum sales charge in all cases.
AVERAGE ANNUAL TOTAL RETURNS FOR THE YEAR ENDED DECEMBER 31, 2000(1)
SINCE INCEPTION OF SINCE INCEPTION
1 YEAR 5 YEARS 10 YEARS CLASSES A, B AND C OF CLASS T
------ ------- -------- ------------------ ----------
SmallCap Opportunities Fund -
Class A (2) -11.44% 26.15% N/A 25.71% N/A
SmallCap Opportunities Fund -
Class B (3) -11.71% 26.62% N/A 26.11% N/A
SmallCap Opportunities Fund -
Class C (4) -7.76% 26.72% N/A 26.14% N/A
SmallCap Opportunities Fund -
Class T (5) -10.52% 26.93% 22.41% N/A 15.00%
Russell 2000 Index (6) -3.02% 10.31% 15.53% 12.49% 10.93%(7)
- ----------
(1) Class A, Class B and Class C shares commenced operations on June 5, 1995.
Class T shares commenced operations on February 3, 1986. Because Class Q
shares were first offered during 2000, average annual total return
information is not presented for Class Q. Class Q shares would have
substantially similar performance to the Class A shares because the Classes
are invested in the same portfolio of securities. Annual returns would
differ only to the extent that Class Q and Class A shares have different
expenses.
(2) Reflects deduction of sales charge of 5.75%.
(3) Reflects deduction of deferred sales charge of 5%, 2% and 1%, respectively,
for the 1 year, 5 year and since inception returns.
(4) Reflects deduction of a deferred sales charge of 1% for the 1 year return.
(5) Reflects the deduction of a deferred sales charge of 4% for the 1 year
return.
(6) The Russell 2000 Index is an unmanaged index that measures the performance
of securities of small companies.
(7) Index return is for the period beginning February 1, 1986.
8
The following table shows the performance of SmallCap Opportunities Fund if
sales charges are not reflected.
AVERAGE ANNUAL TOTAL RETURNS FOR THE YEAR ENDED DECEMBER 31, 2000(1)
SINCE INCEPTION OF SINCE INCEPTION
1 YEAR 5 YEARS 10 YEARS CLASSES A, B AND C OF CLASS T
------ ------- -------- ------------------ ----------
SmallCap Opportunities Fund -
Class A -6.04% 27.66% N/A 27.05% N/A
SmallCap Opportunities Fund -
Class B -6.72% 26.77% N/A 26.17% N/A
SmallCap Opportunities Fund -
Class C -6.76% 26.72% N/A 26.14% N/A
SmallCap Opportunities Fund -
Class T -6.52% 26.93% 22.41% N/A 15.00%
- ----------
(1) Class T shares commenced operations on February 3, 1986. Class A, Class B
and Class C shares commenced operations on June 5, 1995. Because Class Q
shares were first offered during 2000, average annual total return
information is not presented for Class Q. Class Q shares would have
substantially similar performance to the Class A shares because the Classes
are invested in the same portfolio of securities. Annual returns would
differ only to the extent that Class Q and Class A shares have different
expenses.
For a discussion by the portfolio manager regarding the performance of
SmallCap Opportunities Fund for the fiscal year ended May 31, 2001, see Appendix
A to this Proxy Statement/Prospectus. Additional information about SmallCap
Opportunities Fund is included in Appendix C to this Proxy Statement/Prospectus.
COMPARISON OF INVESTMENT TECHNIQUES AND PRINCIPAL RISKS OF INVESTING IN THE
FUNDS
Because the Funds have investment objectives and policies that are
substantially similar in many respects, many of the risks of investing in
SmallCap Opportunities Fund are similar to the risks of investing in SmallCap
Growth Fund. You may lose money on an investment in either Fund. The value of
each Fund's shares may go up or down, sometimes rapidly and unpredictably.
Market conditions, financial conditions of issuers represented in the portfolio,
investment strategies, portfolio management, and other factors affect the
volatility of each Fund's shares. The following summarizes the principal
investment techniques and risks of investing in the Funds.
EQUITY SECURITIES. Both SmallCap Opportunities Fund and SmallCap Growth
Fund invest in equity securities and equity equivalent securities (preferred
stocks, convertible securities and warrants and other stock purchase rights).
Both Funds normally invest at least 65% of their assets in smaller companies.
Both SmallCap Growth Fund and SmallCap Opportunities Fund are subject to risks
associated with investing primarily in equity securities, including market risk,
issuer risk, credit risk, price volatility risk and market trend risk. 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. Credit risk is the
risk that an issuer may not be able to meet its financial obligations when due,
including payments on outstanding debt. Market trend risk is the risk that the
market may not favor the mid-cap growth securities in which the Fund invests.
The market could instead favor value-oriented stocks or large or small company
stocks, or may not favor equities at all. While equities may offer the potential
for greater long-term growth than most debt securities, they generally have
higher volatility.
Investment in small-cap companies may involve greater risk than is
customarily associated with securities of larger, more established companies.
Small-cap companies may experience relatively higher growth rates and higher
failure rates than do larger companies. Small-cap companies may be more
susceptible to price swings than larger companies because they have fewer
financial resources, more limited product and market diversification and many
are dependent on a few key managers.
INABILITY TO SELL SECURITIES. The securities of the small-sized companies
in which both Funds invest may trade in lower volume and may be less liquid than
securities of larger, more established companies. Either Fund could lose money
if it cannot sell a security at the time and price that would be most beneficial
to the Fund.
9
INITIAL PUBLIC OFFERINGS. Both Funds may invest in initial public
offerings. A significant portion of a Fund's return may be attributable to its
investment in initial public offerings. When a Fund's asset base is small, the
impact of such investments on a Fund's return will be magnified. As a Fund's
assets grow, it is probable that the effect of a Fund's investment in initial
public offerings on the Fund's total return will decline.
PORTFOLIO TURNOVER. Each Fund is generally expected to engage in frequent
and active trading of portfolio securities to achieve its investment objective.
A high portfolio turnover rate involves greater expenses to a Fund, including
brokerage commissions and other transaction costs, and is likely to generate
more taxable short-term gains for shareholders which may have an adverse effect
on the performance of the Fund. For the fiscal period ended May 31, 2001, the
portfolio turnover rate for SmallCap Growth Fund was 170% and the portfolio
turnover rate for SmallCap Opportunities Fund was 104%.
TEMPORARY DEFENSIVE STRATEGIES. When the Adviser to the Fund anticipates
unusual market or other conditions, each Fund may temporarily depart from its
principal investment strategies as a defensive measure. To the extent a Fund is
engaged in temporary defensive investments, it will not be pursuing its
investment objective.
COMPARISON OF FEES AND EXPENSES
The following discussion describes and compares the fees and expenses of
the Funds. For further information on the fees and expenses of SmallCap
Opportunities Fund, see Appendix C, "Additional Information Regarding SmallCap
Opportunities Fund."
MANAGEMENT FEES
Both Funds pay an annual management fee of 1.00% of the Fund's average
daily net assets.
ADMINISTRATION FEES
SmallCap Opportunities Fund pays an annual administration fee of 0.10% of
the Fund's average daily net assets to ING Pilgrim Group, LLC. SmallCap Growth
Fund does not currently pay an administration fee.
DISTRIBUTION AND SERVICE FEES
The distribution (12b-1) and service fees of Class B and Class C shares of
SmallCap Opportunities Fund are the same as those of SmallCap Growth Fund (1.00%
for Class B and Class C), and the distribution (12b-1) fees for Class A shares
of SmallCap Growth Fund are 0.05% higher than those of the SmallCap
Opportunities Fund (0.35% verses 0.30%). Class Q shares of both Funds pay a
service fee of 0.25%.
EXPENSE LIMITATION AGREEMENT
An expense limitation agreement is in place for SmallCap Growth Fund. Under
the terms of the expense limitation agreement, ING Pilgrim has agreed to limit
the expenses of the Fund, excluding interest, taxes, brokerage and extraordinary
expenses, subject to possible reimbursement to ING Pilgrim within three years.
The current expense limitation agreement for the Fund provides that it will
remain in effect until February 28, 2002. There is no assurance that the expense
limitation will be continued after that date. The expense limitations for Class
A, Class B, Class C and Class Q shares of SmallCap Growth Fund are 1.95%, 2.60%,
2.60%, and 1.85%, respectively.
The expense ratio for SmallCap Growth Fund is currently below the amount
set by the expense limitation agreement. The Fund is currently in a recoupment
period during which it must reimburse ING Pilgrim for amounts previously waived
pursuant to the expense limitation agreement.
10
EXPENSE TABLE
The current expenses of each of the Funds and estimated PRO FORMA expenses
giving effect to the proposed Reorganization are shown in the following table.
Expenses of both Funds are based upon the annual operating expenses incurred by
Class A, Class B, Class C and Class Q shares of the Fund for the fiscal period
ended May 31, 2001. PRO FORMA fees show estimated fees of SmallCap Opportunities
Fund after giving effect to the proposed Reorganization. PRO FORMA numbers are
estimated in good faith and are hypothetical.
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets, shown as a ratio of expenses to
average daily net assets) (1)
DISTRIBUTION
(12b-1) AND
SHAREHOLDER TOTAL FUND FEE WAIVER
MANAGEMENT SERVICING OTHER OPERATING BY NET FUND
FEES FEES(2) EXPENSES EXPENSES ADVISER(3) EXPENSES
---- ------- -------- -------- ---------- --------
CLASS A
SmallCap Growth Fund 1.00% 0.35% 0.37% 1.72% 0.01%(4) 1.73%
SmallCap Opportunities Fund 1.00% 0.30% 0.36% 1.66% -- 1.66%
SmallCap Opportunities Fund -
After the Reorganization
(PRO FORMA) 1.00% 0.30% 0.35% 1.65% -- 1.65%
CLASS B
SmallCap Growth Fund 1.00% 1.00% 0.37% 2.37% 0.01%(4) 2.38%
SmallCap Opportunities Fund 1.00% 1.00% 0.36% 2.36% -- 2.36%
SmallCap Opportunities Fund -
After the Reorganization
(PRO FORMA) 1.00% 1.00% 0.35% 2.35% -- 2.35%
CLASS C
SmallCap Growth Fund 1.00% 1.00% 0.37% 2.37% 0.01%(4) 2.38%
SmallCap Opportunities Fund 1.00% 1.00% 0.36% 2.36% -- 2.36%
SmallCap Opportunities Fund -
After the Reorganization
(PRO FORMA) 1.00% 1.00% 0.35% 2.35% -- 2.35%
CLASS Q
SmallCap Growth Fund 1.00% 0.25% 0.24% 1.49% 0.01%(4) 1.50%
SmallCap Opportunities Fund 1.00% 0.25% 0.28% 1.53% -- 1.53%
SmallCap Opportunities Fund -
After the Reorganization
(PRO FORMA) 1.00% 0.25% 0.27% 1.52% -- 1.52%
- ----------
(1) The fiscal year end for each Fund is May 31.
(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.
(3) ING Pilgrim has entered into an expense limitation contract that limits
expenses (excluding interest, taxes, brokerage and extraordinary expenses)
for SmallCap Growth Fund to annual rates of 1.95%, 2.60%, 2.60%, and 1.85%,
for Class A, Class B, Class C and Class Q shares respectively. The
agreement is valid through February 28, 2002. There is no assurance that
the expense limitation agreement will be continued after that date.
(4) Amount recouped by ING Pilgrim pursuant to the expense limitation agreement
between the Fund and ING Pilgrim.
11
Following the Reorganization and in the ordinary course of business as a
mutual fund, certain holdings of SmallCap Growth Fund that are transferred to
SmallCap Opportunities Fund in connection with the Reorganization may be sold.
Such sales may result in increased transaction costs for SmallCap Opportunities
Fund and the realization of taxable gains or losses for SmallCap Opportunities
Fund.
EXAMPLES. The following examples are intended to help you compare the cost
of investing in each Fund and the combined Fund. The examples assume that you
invest $10,000 in each Fund and in the combined Fund after the Reorganization
for the time periods indicated. The examples also assume that your investment
has a 5% return each year and that each Fund's operating expenses remain the
same. The 5% return is an assumption and is not intended to portray past or
future investment results. Based on the above assumptions, you would pay the
following expenses if you redeem your shares at the end of each period shown.
Your actual costs may be higher or lower.
SMALLCAP GROWTH FUND SMALLCAP OPPORTUNITIES FUND
------------------------------------- -------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------- ------ ------- ------- --------
CLASS A $740 $1,086 $1,455 $2,488 $734 $1,068 $1,425 $2,427
CLASS B $740 $1,039 $1,465 $2,545* $739 $1,036 $1,460 $2,522*
CLASS C $340 $ 739 $1,265 $2,706 $339 $ 736 $1,260 $2,696
CLASS Q $152 $ 471 $ 813 $1,779 $156 $ 483 $ 834 $1,824
PRO FORMA: THE FUNDS COMBINED**
-------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS A $733 $1,065 $1,420 $2,417
CLASS B $738 $1,033 $1,455 $2,512*
CLASS C $338 $ 733 $1,255 $2,686
CLASS Q $155 $ 480 $ 829 $1,813
You would pay the following expenses if you did not redeem your shares:
SMALLCAP GROWTH FUND SMALLCAP OPPORTUNITIES FUND
------------------------------------- -------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------- ------ ------- ------- --------
CLASS A $740 $1,086 $1,455 $2,488 $734 $1,068 $1,425 $2,427
CLASS B $240 $ 739 $1,265 $2,545* $239 $ 736 $1,260 $2,522*
CLASS C $240 $ 739 $1,265 $2,706 $239 $ 736 $1,260 $2,696
CLASS Q $152 $ 471 $ 813 $1,779 $156 $ 483 $ 834 $1,824
PRO FORMA: THE FUNDS COMBINED**
-------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
CLASS A $733 $1,065 $1,420 $2,417
CLASS B $238 $ 733 $1,255 $2,512*
CLASS C $238 $ 733 $1,255 $2,686
CLASS Q $155 $ 480 $ 829 $1,813
- ----------
* The ten year calculations for Class B shares assume conversion of the Class
B shares to Class A shares at the end of the eighth year following the date
of purchase.
** Estimated.
12
GENERAL INFORMATION
Class A shares of SmallCap Opportunities Fund issued to a shareholder in
connection with the Reorganization will not be subject to an initial sales
charge, but Class B and Class C shares will be subject to the same contingent
deferred sales charge, if any, applicable to the corresponding shares of
SmallCap Growth Fund held by that shareholder immediately prior to the
Reorganization. Class Q shares are not subject to an initial sales charge or a
contingent deferred sales charge.
In addition, the period that the shareholder held shares of SmallCap Growth
Fund will be included in the holding period of SmallCap Opportunities Fund's
shares for purposes of calculating any contingent deferred sales charge.
Similarly, Class B shares of SmallCap Opportunities Fund issued to a shareholder
in connection with the Reorganization will convert to Class A shares eight years
after the date that the Class B shares of SmallCap Growth Fund were purchased by
the shareholder. Purchases of shares of SmallCap Opportunities Fund will be
subject to the sales load structure described in the table below on new
investments. This is the same sales load structure that is currently in effect
for SmallCap Growth Fund.
TRANSACTION FEES ON NEW INVESTMENTS
(fees paid directly from your investment)
CLASS A CLASS B CLASS C CLASS Q
------- ------- ------- -------
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) None
- ----------
(1) Reduced for purchases of $50,000 and over. See "Class A Shares: Initial
Sales Charge Alternative" in Appendix C.
(2) A contingent deferred sales charge of no more than 1.00% may be assessed on
redemptions of Class A shares that were purchased without an initial sales
charge as part of an investment of $1 million or more. See "Class A Shares:
Initial Sales Charge Alternative" in Appendix C.
(3) Imposed upon redemptions within 6 years of purchase. The fee has scheduled
reductions after the first year. See "Class B Shares: Deferred Sales Charge
Alternative" in Appendix C and "Shareholder Guide -- Sales Charge
Calculation" in the Pilgrim Prospectus.
(4) Imposed upon redemptions within 1 year from purchase.
Neither SmallCap Opportunities Fund nor SmallCap Growth Fund have any
redemption fees, exchange fees or sales charges on reinvested dividends.
13
INFORMATION ABOUT THE REORGANIZATION
THE REORGANIZATION AGREEMENT
The terms and conditions under which the proposed transaction may be
consummated are set forth in the Reorganization Agreement. Significant
provisions of the Reorganization Agreement are summarized below; however, this
summary is qualified in its entirety by reference to the Reorganization
Agreement, a copy of which is attached as Appendix B.
The Reorganization Agreement provides for (i) the transfer, as of the
Closing Date, of all of the assets of SmallCap Growth Fund in exchange for
shares of beneficial interest of SmallCap Opportunities Fund and the assumption
by SmallCap Opportunities Fund of SmallCap Growth Fund's liabilities; and (ii)
the distribution of shares of SmallCap Opportunities Fund to shareholders of
SmallCap Growth Fund, as provided for in the Reorganization Agreement. SmallCap
Growth Fund will then be liquidated.
After the Reorganization, each shareholder of SmallCap Growth Fund will own
shares of SmallCap Opportunities Fund having an aggregate value equal to the
aggregate value of each respective Class of shares of SmallCap Growth Fund held
by that shareholder as of the Closing Date. Shareholders of each Class of shares
of SmallCap Growth Fund will receive the same Class of shares of SmallCap
Opportunities Fund. In the interest of economy and convenience, shares of
SmallCap Opportunities Fund generally will not be represented by physical
certificates unless requested in writing.
Until the Closing Date, shareholders of SmallCap Growth Fund will continue
to be able to redeem their shares. Redemption requests received after the
Closing Date will be treated as requests received by SmallCap Opportunities Fund
for the redemption of its shares.
The obligations of the Funds under the Reorganization Agreement are subject
to various conditions, including approval of the shareholders of SmallCap Growth
Fund. The Reorganization Agreement also requires that each of the Funds take, or
cause to be taken, all action, and do or cause to be done, all things reasonably
necessary, proper or advisable to consummate and make effective the transactions
contemplated by the Reorganization Agreement. The Reorganization Agreement may
be terminated by mutual agreement of the parties or on certain other grounds.
Please refer to Appendix B to review the terms and conditions of the
Reorganization Agreement.
REASONS FOR THE REORGANIZATION
The Reorganization is one of several reorganizations that are proposed
among various Pilgrim Funds. The Pilgrim Funds complex has grown in recent years
through the addition of many funds. Management of the Pilgrim Funds has proposed
the consolidation of several of the Pilgrim Funds that management believes have
similar or compatible investment policies. The proposed reorganizations are
designed to reduce the overlap in funds in the complex, thereby eliminating
inefficiencies arising from having similar portfolios within the same fund group
and confusion about overlapping funds. ING Pilgrim also believes that the
reorganizations may benefit fund shareholders by resulting in surviving funds
with a greater asset base. This is expected to provide greater investment
opportunities for the surviving funds and the potential to take larger portfolio
positions.
The proposed Reorganization was presented to the Board of Trustees of
SmallCap Growth Fund for consideration at a meeting held on November 2, 2001.
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,
as amended), determined that the interests of the shareholders of SmallCap
Growth Fund will not be diluted as a result of the proposed Reorganization, and
that the proposed Reorganization is in the best interests of SmallCap Growth
Fund and its shareholders.
14
The Reorganization will allow SmallCap Growth Fund's shareholders to
continue to participate in a professionally managed portfolio that seeks to
achieve an objective of capital appreciation. As shareholders of SmallCap
Opportunities Fund, these shareholders will continue to be able to exchange into
other mutual funds in the group of Pilgrim Funds that offer the same Class of
shares in which such shareholder is currently invested. A list of the current
Pilgrim Funds and the Classes available after the Reorganization is contained in
Appendix D.
BOARD CONSIDERATIONS
The Board of Trustees of SmallCap Growth Fund, in recommending the proposed
transaction, considered a number of factors, including the following:
* the plans of management to reduce the overlap in Funds in the Pilgrim
Fund Complex;
* the relative investment performance of SmallCap Opportunities Fund as
compared to SmallCap Growth Fund;
* expense ratios and information regarding fees and expenses of SmallCap
Growth Fund and SmallCap Opportunities Fund, including the expense
limitation arrangement offered by ING Pilgrim with respect to SmallCap
Growth Fund;
* the current management team of SmallCap Opportunities Fund and
SmallCap Growth Fund, which has managed SmallCap Opportunities Fund
since 1998, rendering that Fund a better indication of the current
portfolio manager's track record;
* the relative size of the Funds;
* whether the Reorganization would dilute the interests of SmallCap
Growth Fund's current shareholders;
* the similarity of SmallCap Opportunities Fund's investment objectives,
strategies and restrictions with those of SmallCap Growth Fund;
* the costs to be borne by SmallCap Growth Fund, SmallCap Opportunities
Fund and ING Pilgrim; and
* the tax consequences of the Reorganization to SmallCap Growth Fund and
its shareholders, including the tax-free nature of the transaction.
The Board of Trustees also considered the future potential benefits to ING
Pilgrim in that its costs to administer both Funds may be reduced if the
Reorganization is approved.
THE TRUSTEES OF SMALLCAP GROWTH FUND RECOMMEND THAT SHAREHOLDERS APPROVE
THE REORGANIZATION WITH SMALLCAP OPPORTUNITIES 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. Accordingly, pursuant to this treatment, neither SmallCap
Growth Fund nor its shareholders, nor SmallCap Opportunities Fund nor its
shareholders, is expected to recognize any gain or loss for federal income tax
purposes from the transactions contemplated by the Reorganization Agreement. As
a condition to the closing of the Reorganization, the Funds will receive an
opinion from the law firm of Dechert to the effect that the Reorganization will
qualify as a tax-free reorganization for Federal income tax purposes. That
opinion will be based in part upon certain assumptions and upon certain
representations made by the Funds.
15
Immediately prior to the Reorganization, SmallCap Growth Fund will pay a
dividend or dividends which, together with all previous dividends, will have the
effect of distributing to its shareholders all of SmallCap Growth 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 SmallCap
Growth Fund's shareholders.
EXPENSES OF THE REORGANIZATION
ING Pilgrim will bear half the cost of the Reorganization. The Funds will
bear the other half of the expenses relating to the proposed Reorganization,
including, but not limited to, the costs of solicitation of voting instructions
and any necessary filings with the Commission. Of the Reorganization expenses
allocated to the Funds, each Fund will bear a pro rata portion based on their
relative net asset values immediately before Closing.
ADDITIONAL INFORMATION ABOUT THE FUNDS
FORM OF ORGANIZATION
SmallCap Opportunities Fund is an open-end, diversified management
investment company organized as a Massachusetts business trust. SmallCap Growth
Fund is a diversified series of Pilgrim Mutual Funds, an open-end diversified
management investment company organized as a Delaware business trust. SmallCap
Opportunities Fund and Pilgrim Mutual Funds are both governed by Trustees. The
Board of Trustees of each Fund consists of the same nine members. For more
information about the history of the Funds, refer to the Funds' SAI.
DISTRIBUTOR
ING Pilgrim Securities, Inc. (the "Distributor"), whose address is 7337
East Doubletree Ranch Road, Scottsdale, Arizona 85258-2034, is the principal
distributor for both Funds.
SmallCap Opportunities Fund also offers Class I shares, which has different
sales charges and other expenses that may affect its performance. You can obtain
more information about this other share Class by calling 1-800-992-0180.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund pays dividends from net investment income and net capital gains,
if any, on an annual basis. Dividends and distributions of each of the Funds are
automatically reinvested in additional shares of the respective Class of the
particular Fund, unless the shareholder elects to receive distributions in cash.
If the Reorganization Agreement is approved by the SmallCap Growth Fund's
shareholders, then as soon as practicable before the Closing Date, SmallCap
Growth Fund will pay its shareholders a cash distribution of substantially all
undistributed net investment income and undistributed realized net capital
gains.
16
CAPITALIZATION
The following table shows on an unaudited basis the capitalization of each
of the Funds as of May 31, 2001 and on a PRO FORMA basis as of May 31, 2001
giving effect to the Reorganization:
NET ASSET
VALUE PER SHARES
NET ASSETS SHARE OUTSTANDING
---------- ----- -----------
SMALLCAP GROWTH FUND
Class A $119,135,822 $12.04 9,897,451
Class B $ 75,304,291 $15.00 5,019,038
Class C $159,910,378 $11.74 13,616,035
Class Q $ 9,079,890 $13.46 674,733
SMALLCAP OPPORTUNITIES FUND
Class A $159,640,668 $38.78 4,116,358
Class B $206,967,557 $36.60 5,654,371
Class C $ 78,657,813 $36.53 2,153,520
Class I $ 218 $39.02 6
Class Q $ 2,831,854 $38.81 72,960
Class T $ 16,315,808 $36.94 441,696
PRO FORMA -- SMALLCAP OPPORTUNITIES FUND
INCLUDING SMALLCAP GROWTH FUND
Class A $278,776,490 $38.78 7,188,452
Class B $282,271,848 $36.60 7,711,865
Class C $238,568,191 $36.53 6,531,028
Class I $ 218 $39.02 6
Class Q $ 11,911,744 $38.81 306,917
Class T $ 16,315,808 $36.94 441,696
PORTFOLIO MANAGER OF SMALLCAP OPPORTUNITIES FUND
Mary Lisanti, Executive Vice President and Chief Investment Officer --
Domestic Equities of ING Pilgrim, has served as Senior Portfolio Manager of
SmallCap Opportunities Fund since July 1998. Prior to joining ING Pilgrim in
October 1999, Ms. Lisanti was Executive Vice President and Chief Investment
Officer -- Domestic Equities with Northstar Investment Management Corp., which
subsequently merged into ING Pilgrim. From 1996 to 1998, Ms. Lisanti was a
Portfolio Manager at Strong Capital Management. From 1993 to 1996, Ms. Lisanti
was a Managing Director and Head of Small- and Mid-Capitalization Equity
Strategies at Bankers Trust Corp.
GENERAL INFORMATION ABOUT THE PROXY STATEMENT
SOLICITATION OF PROXIES
Solicitation of proxies is being made primarily by the mailing of the
Notice and this Proxy Statement with its enclosures on or about February 5,
2002. Shareholders of SmallCap Growth Fund whose shares are held by nominees,
such as brokers, can vote their proxies by contacting their respective nominee.
In addition to the solicitation of proxies by mail, employees of ING Pilgrim and
its affiliates, without additional compensation, may solicit proxies in person
or by telephone, telegraph, facsimile, or oral communication. SmallCap Growth
Fund has retained Shareholder Communications Corporation, a professional proxy
solicitation firm, to assist with any necessary solicitation of proxies.
Shareholders of SmallCap Growth Fund may receive a telephone call from the
professional proxy solicitation firm asking the shareholder to vote.
A shareholder may revoke the accompanying proxy card at any time prior to
its use by filing with SmallCap Growth Fund a written revocation or duly
executed proxy card bearing a later date. In addition, any shareholder who
attends the Special Meeting in person may vote by ballot at the Special Meeting,
thereby canceling any proxy card previously given. The persons named in the
accompanying proxy card will vote as directed by the proxy card, but in the
17
absence of voting directions in any proxy card that is signed and returned, they
intend to vote "FOR" the Reorganization proposal and may vote in their
discretion with respect to other matters not now known to the Board of Trustees
of SmallCap Growth Fund that may be presented at the Special Meeting.
VOTING RIGHTS
As a shareholder of SmallCap Growth Fund, you are entitled to one vote for
each whole share held as to any matter on which you are entitled to vote and for
each fractional share that you own, you shall be entitled to a proportionate
fractional vote. Shares have no preemptive or subscription rights.
Only shareholders of SmallCap Growth Fund at the close of business on
January 11, 2002 (the "Record Date") will be entitled to be present and give
voting instructions for SmallCap Growth Fund at the Special Meeting with respect
to their shares owned as of the Record Date. As of the Record Date, ___________
shares of SmallCap Growth Fund were outstanding and entitled to vote.
Approval of the Reorganization Agreement requires the vote, if a quorum is
present, of the lesser of (i) 67% or more of the shares, provided that 50% or
more of the shares are present in person or represented by proxy at the Special
Meeting, or (ii) a majority of the shares. The Declaration of Trust defines a
"quorum" as one-third of the shares entitled to vote.
If a shareholder abstains from voting as to any matter, or if a broker
returns a "non-vote" proxy, indicating a lack of authority to vote on a matter,
the shares represented by the abstention or non-vote will be deemed present at
the Special Meeting for purposes of determining a quorum. However, abstentions
and broker non-votes will not be deemed represented at the Special Meeting for
purposes of calculating the vote on any matter. As a result, an abstention or
broker non-vote will not have the same effect as a vote against the
Reorganization.
SmallCap Growth Fund expects that, before the Special Meeting,
broker-dealer firms holding shares of the Fund in "street name" for their
customers will request voting instructions from their customers and beneficial
owners. If these instructions are not received by the date specified in the
broker-dealer firms' proxy solicitation materials, SmallCap Growth Fund
understands that the broker-dealers that are members of the New York Stock
Exchange may vote on the items to be considered at the Special Meeting on behalf
of their customers and beneficial owners under the rules of the New York Stock
Exchange.
To the knowledge of SmallCap Opportunities Fund, as of January __, 2002, no
current Trustee owned 1% or more of the outstanding shares of SmallCap
Opportunities Fund, and the officers and Trustees owned, as a group, less than
1% of the shares of SmallCap Opportunities Fund.
Appendix E hereto lists the persons that, as of January __, 2002, owned
beneficially or of record 5% or more of the outstanding shares of any Class of
SmallCap Growth Fund or SmallCap Opportunities Fund.
OTHER MATTERS TO COME BEFORE THE SPECIAL MEETING
SmallCap Growth Funds does not know of any matters to be presented at the
Special Meeting other than those described in this Proxy Statement/Prospectus.
If other business should properly come before the Special Meeting, the
proxyholders will vote thereon in accordance with their best judgment.
SHAREHOLDER PROPOSALS
SmallCap Growth Fund is not required to hold regular annual meetings and,
in order to minimize its costs, does not intend to hold meetings of shareholders
unless so required by applicable law, regulation, regulatory policy or if
otherwise deemed advisable by SmallCap Growth Fund's management. Therefore it is
not practicable to specify a date by which shareholder proposals must be
received in order to be incorporated in an upcoming proxy statement for an
annual meeting.
18
REPORTS TO SHAREHOLDERS
ING Pilgrim will furnish, without charge, a copy of the most recent Annual
Report regarding either of the Funds and the most recent Semi-Annual Report
succeeding the Annual Report, if any, on request. Requests for such reports
should be directed in writing to the Pilgrim Funds at 7337 East Doubletree Ranch
Road, Scottsdale, Arizona 85258-2034 or by calling 1-800-992-0180.
IN ORDER THAT THE PRESENCE OF A QUORUM AT THE MEETING MAY BE ASSURED,
PROMPT EXECUTION AND RETURN OF THE ENCLOSED PROXY CARD IS REQUESTED. A
SELF-ADDRESSED, POSTAGE-PAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
Kimberly A. Anderson,
Vice President and Secretary
February 5, 2002
7337 East Doubletree Ranch Road
Scottsdale, Arizona 85258-2034
19
APPENDIX A
PILGRIM SMALLCAP OPPORTUNITIES FUND
Set forth below is an excerpt from SmallCap Opportunities Fund's Annual
Report, dated May 31, 2001.
Portfolio Management Team: Mary Lisanti, Executive Vice-President and Portfolio
Manager, ING Pilgrim Investments, LLC.
Goal: The Fund seeks capital appreciation by investing at least 65% of its total
assets in the common stock of smaller, lesser-known U.S. companies that the
Portfolio Manager feels have above average prospects for growth.
Market Overview: The year 2001 began with surprise rate cut by the Federal
Reserve, and the Fed's influence on the economy and the stock market continued
to be the story of the year. At this time last year, GDP was growing close to
6%, but the effect of 175 basis points in interest rate hikes dramatically
slowed growth in the second half of 2000. By the fourth quarter of 2000, US GDP
had slowed to a 1.0% growth rate, and the United States faced the prospect of
its first recession since 1990-91. Since the start of the year 2001, the Fed has
cut interest rates by 250 basis points, as the lagging economic indicators and
corporate earnings pointed to a further deterioration in the economy.
The deterioration in the growth of earnings was most apparent in the fastest
growing sectors of the economy, namely technology and telecommunications.
Healthcare stocks also struggled as investors sought the relative safety of
value stocks, in consumer-related stocks, energy, and basic materials. The
technology-heavy NASDAQ Composite was the hardest hit benchmark with a decline
of 14.57% during the first five months of the year. While smaller cap stocks
showed some strength with the Russell 2000 Index gaining 3.29%, the performance
of other benchmarks was mixed. The Dow Jones Industrials gained 1.16% in 2001
and the S&P Midcap Index rose 1.38%, while the S&P 500 dipped 4.37%. While there
was some evidence of a recovery in stocks, the signs of a classic bear market
were apparent, as the S&P 500 dropped 26% from peak to trough, while the NASDAQ
suffered a decline of 68%.
Performance: For the five months ended May 31, 2001, the Fund's Class A shares,
excluding sales charges, provided a total return of -17.79%, compared to the
Russell 2000 Index, which returned 3.29% over the same period.
Portfolio Specifics: The spread between growth and value remained wide during
the first five months of 2001, as the Russell 2000 Growth Index dropped 2.62%,
while the Russell 2000 Value Index gained 8.36%. While the Fund started the year
with weightings in "defensive" sectors such as energy, healthcare, and consumer
stocks, we found the opportunity to invest in higher growth companies at
attractive valuations. Thus, we increased our weightings in selected technology
industries and companies.
For the year to date period, the Fund has seen the biggest impact from the
"Re-Energizing America" and the "New Consumer" themes, while the strongest
contributors among the individual stocks were HS Resources, Hot Topic,
Abercrombie & Fitch, and Wet Seal.
Market Outlook: The months of April and May gave some evidence to our belief
that the higher end of the growth market was close to a bottom. We still believe
that the current economic decline is distinct from the last two recessions of
1980-81 and 1990-1991 in that this slowdown was not caused by structural
imbalances. Rather, this slowdown was caused by a decline in capital spending,
centered largely around technology. Technology spending has been slowing for
close to a year in the wake of the "Y2K" boom and the Internet boom and bust,
and incremental data suggest that these excesses have largely been wrung out of
the system. Although we entered the current economic slowdown with unprecedented
speed, the aggressive rate cuts by the Federal Reserve and the lack of excess
inventory in the system could imply a more rapid recovery than in the past.
Unless the current economic slowdown stretches beyond the end of 2001, we
believe that we are very close to the bottom--if not beyond it. Some parts of
the market, in particular technology, had priced in significantly lower growth
for several years, and if the recovery plays out over the second half of the
year, then the market will continue its recent good performance. We believe that
this market is more similar to the 1990-1991 time frame than the 1994-1995 or
1998 corrections; the values seen at the bottom in the 1990-1991 bear market
turned out to be the lows for the decade on many stocks. Thus, we are taking
advantage of market volatility to initiate or add to positions in high quality
growth companies. Our focus is on companies who we believe can deliver
above-average earnings growth in 2002 and beyond, and we are particularly
focused on those companies who are improving their business models through this
downturn and have significant opportunities for improvement in profitability
ahead of them.
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Portfolio
Manager's Report PILGRIM SMALLCAP OPPORTUNITIES FUND
- --------------------------------------------------------------------------------
6/5/95 5/31/96 5/31/97 5/31/98 5/31/99 5/31/00 5/31/01
------- ------- ------- ------- ------- ------- -------
Pilgrim SmallCap Opportunities Fund
Class A With Sales Charge $ 9,427 $13,196 $12,928 $15,263 $16,604 $34,571 $29,485
Pilgrim SmallCap Opportunities Fund
Class A Without Sales Charge $10,000 $13,998 $13,714 $16,191 $17,614 $36,674 $31,279
Russell 2000 Index $10,000 $13,589 $14,536 $17,624 $17,150 $18,851 $19,923
Average Annual Total Returns for the Periods Ended May 31, 2001
---------------------------------------------------------------------------------
Since Inception Since Inception
of Class A, B and C of Class I
1 Year 5 Year 10 Year 6/5/95 4/1/99
------ ------ ------- ------ ------
Including Sales Charge:
Class A(1) -19.64% 16.06% -- 19.78% --
Class B(2) -18.89% 16.39% -- 20.07% --
Class C(3) -16.05% 16.58% -- 20.11% --
Class T(4) -18.04% 16.76% 16.81% -- --
Class I -14.20% -- -- -- 18.74%
Excluding Sales Charge:
Class A -14.73% 17.44% -- 20.97% --
Class B -15.34% 16.61% -- 20.13% --
Class C -15.34% 16.58% -- 20.11% --
Class T -15.19% 16.76% 16.81% -- --
Class I -14.20% -- -- -- 18.74%
Russell 2000 Index 5.69% 7.95% 12.43% 12.17%(5) 12.24%
Based on a $10,000 initial investment, the graph and table above illustrate the
total return of Pilgrim SmallCap Opportunities Fund against the Russell 2000
Index. The Index has an inherent performance advantage over the Fund since it
has no cash in its portfolio, imposes no sales charges and incurs no operating
expenses. An investor cannot invest directly in an index. The Fund's performance
is shown both with and without the imposition of sales charges.
Total returns reflect the fact that the Investment Manager has waived certain
fees and expenses otherwise payable by the Fund. Total returns would have been
lower had there been no waiver to the Fund.
Performance data represents past performance and is no assurance of future
results. Investment return and principal value of an investment in the Fund will
fluctuate. Shares, when sold, may be worth more or less than their original
cost.
This report contains statements that may be "forward-looking" statements. Actual
results may differ materially from those projected in the "forward-looking"
statements.
The views expressed in this report reflect those of the portfolio manager, only
through the end of the period as stated on the cover. The portfolio manager's
views are subject to change at any time based on market and other conditions.
Fund holdings are subject to change daily.
(1) Reflects deduction of the maximum Class A sales charge of 5.75%.
(2) Reflects deduction of the Class B deferred sales charge of 5%, 2% and 1%,
respectively, for the 1 year, 5 year and since inception returns.
(3) Reflects deduction of the Class C deferred sales charge of 1% for the 1
year return.
(4) Reflects deduction of the deferred Class T sales charge of 4% for the 1
year return.
(5) Since inception performance for the index is shown from 6/1/95.
Principal Risk Factor(s): Exposure to financial and market risks that accompany
investments in equities. In exchange for higher growth potential, investing in
stocks of smaller companies may entail greater price volatility than investing
in stocks of larger companies.
See accompanying index descriptions on page 32 of
the Annual Report, dated May 31, 2001.
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APPENDIX B
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this __ day of _____________, 2001, by and between Pilgrim SmallCap
Opportunities Fund, a Massachusetts business trust, with its principal place of
business at 7337 East Doubletree Ranch Road, Scottsdale, Arizona 85258-2034, on
behalf of its sole series, Pilgrim SmallCap Opportunities Fund (the "Acquiring
Fund"), and Pilgrim Mutual Funds, a Delaware business trust, with its principal
place of business at 7337 East Doubletree Ranch Road, Scottsdale, Arizona
85258-2034, on behalf of its series, Pilgrim SmallCap Growth Fund (the "Acquired
Fund").
This Agreement is intended to be and is adopted as a plan of reorganization
and liquidation within the meaning of Section 368(a)(1) of the United States
Internal Revenue Code of 1986, as amended (the "Code"). The reorganization (the
"Reorganization") will consist of the transfer of all of the assets of the
Acquired Fund to the Acquiring Fund in exchange solely for Class A, Class B,
Class C and Class Q voting shares of beneficial interest of the Acquiring Fund
(the "Acquiring Fund Shares"), the assumption by the Acquiring Fund of all
liabilities of the Acquired Fund, and the distribution of the Acquiring Fund
Shares to the shareholders of the Acquired Fund in complete liquidation of the
Acquired Fund as provided herein, all upon the terms and conditions hereinafter
set forth in this Agreement.
WHEREAS, the Acquired Fund and the Acquiring Fund are open-end, registered
investment companies of the management type or a series thereof and the Acquired
Fund owns securities, which generally are assets of the character in which the
Acquiring Fund is permitted to invest;
WHEREAS, the Trustees of Pilgrim SmallCap Opportunities Fund have
determined that the exchange of all of the assets of the Acquired Fund for
Acquiring Fund Shares and the assumption of all liabilities of the Acquired Fund
by the Acquiring Fund is in the best interests of the Acquiring Fund and its
shareholders and that the interests of the existing shareholders of the
Acquiring Fund would not be diluted as a result of this transaction; and
WHEREAS, the Trustees of the Pilgrim Mutual Funds have determined that the
exchange of all of the assets of the Acquired Fund for Acquiring Fund Shares and
the assumption of all liabilities of the Acquired Fund by the Acquiring Fund is
in the best interests of the Acquired Fund and its shareholders and that the
interests of the existing shareholders of the Acquired Fund would not be diluted
as a result of this transaction;
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND TO THE ACQUIRING FUND IN EXCHANGE
FOR THE ACQUIRING FUND SHARES, THE ASSUMPTION OF ALL ACQUIRED FUND
LIABILITIES AND THE LIQUIDATION OF THE ACQUIRED FUND
1.1 Subject to the requisite approval of the Acquired Fund Shareholders and
the other terms and conditions herein set forth and on the basis of the
representations and warranties contained herein, the Acquired Fund agrees to
transfer all of the Acquired Fund's assets, as set forth in paragraph 1.2, to
the Acquiring Fund, and the Acquiring Fund agrees in exchange therefor: (i) to
deliver to the Acquired Fund the number of full and fractional Class A, Class B,
Class C and Class Q 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, as set forth in paragraph 1.3. Such
transactions shall take place at the closing provided for in paragraph 3.1 (the
"Closing").
1.2 The assets of the Acquired Fund to be acquired by the Acquiring Fund
shall consist of all assets and property, including, without limitation, all
cash, securities, commodities and futures interests and dividends or interests
receivable that are owned by the Acquired Fund and any deferred or prepaid
expenses shown as an asset on the books of the Acquired Fund on the closing date
provided for in paragraph 3.1 (the "Closing Date") (collectively, "Assets").
B-1
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, as defined in
paragraph 2.1 (collectively, "Liabilities"). On or as soon as practicable prior
to the Closing Date, the Acquired Fund will declare and pay to its shareholders
of record one or more dividends and/or other distributions so that it will have
distributed substantially all (and in no event less than 98%) of its investment
company taxable income (computed without regard to any deduction for dividends
paid) and realized net capital gain, if any, for the current taxable year
through the Closing Date.
1.4 Immediately after the transfer of assets provided for in paragraph 1.1,
the Acquired Fund will distribute to the Acquired Fund's Shareholders of record
with respect to each Class of its shares, determined as of immediately after the
close of business on the Closing Date (the "Acquired Fund Shareholders"), on a
pro rata basis within that Class, the Acquiring Fund Shares of the same Class
received by the Acquired Fund pursuant to paragraph 1.1, and will completely
liquidate. Such distribution and liquidation will be accomplished, with respect
to each Class of the Acquired Fund's shares, by the transfer of the Acquiring
Fund Shares then credited to the account of the Acquired Fund on the books of
the Acquiring Fund to open accounts on the share records of the Acquiring Fund
in the names of the Acquired Fund Shareholders. The aggregate net asset value of
Class A, Class B, Class C, and Class Q Acquiring Fund Shares to be so credited
to Class A, Class B, Class C and Class Q 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 Q 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 Q 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, as defined in paragraph 3.3.
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 U.S. Securities and Exchange Commission (the
"Commission"), any state securities commission, and any federal, state or local
tax authorities or any other relevant regulatory authority, is and shall remain
the responsibility of the Acquired Fund.
2. VALUATION
2.1 The value of the Assets shall be the value 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
in the then-current prospectus and statement of additional information with
respect to the Acquiring Fund, and valuation procedures established by the
Acquiring Fund's Board of Trustees.
2.2 The net asset value of a Class A, Class B, Class C and Class Q
Acquiring Fund Share shall be the net asset value per share computed with
respect to that Class as of the Valuation Date, using the valuation procedures
set forth in the Acquiring Fund's then-current prospectus and statement of
additional information with respect to the Acquiring Fund and valuation
procedures established by the Acquiring Fund's Board of Trustees.
2.3 The number of the Class A, Class B, Class C and Class Q 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 Q 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.
B-2
2.4 All computations of value shall be made by the Acquired Fund's
designated record keeping agent and shall be subject to review by Acquiring
Fund's record keeping agent and by each Fund's respective independent
accountants.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be April 19, 2002, or such other date as the
parties may agree. All acts taking place at the Closing shall be deemed to take
place simultaneously as of immediately after the close of business on the
Closing Date unless otherwise agreed to by the parties. The close of business on
the Closing Date shall be as of 4:00 p.m., Eastern Time. The Closing shall be
held at the offices of the Acquiring Fund or at such other time and/or place as
the parties may agree.
3.2 The Acquired Fund shall direct State Street Bank and Trust Company --
Missouri, as custodian for the Acquired Fund (the "Custodian"), to deliver, at
the Closing, a certificate of an authorized officer stating that (i) the Assets
shall have been delivered in proper form to the Acquiring Fund within two
business days prior to or on the Closing Date, and (ii) all necessary taxes in
connection with the delivery of the Assets, including all applicable federal and
state stock transfer stamps, if any, have been paid or provision for payment has
been made. The Acquired Fund's portfolio securities represented by a certificate
or other written instrument shall be presented for examination by the Acquired
Fund Custodian to the custodian for the Acquiring Fund no later than five
business days preceding the Closing Date, and shall be transferred and delivered
by the Acquired Fund as of the Closing Date for the account of the Acquiring
Fund duly endorsed in proper form for transfer in such condition as to
constitute good delivery thereof. The Custodian shall deliver as of the Closing
Date by book entry, in accordance with the customary practices of any securities
depository, as defined in Rule 17f-4 under the Investment Company Act of 1940,
as amended (the "1940 Act") in which the Acquired Fund's Assets are deposited
and the Custodian, the Acquired Fund's Assets deposited with such depositories.
The cash to be transferred by the Acquired Fund shall be delivered by wire
transfer of federal funds on the Closing Date.
3.3 The Acquired Fund shall direct DST Systems, Inc. (the "Transfer
Agent"), on behalf of the Acquired Fund, to deliver at the Closing a certificate
of an authorized officer stating that its records contain the names and
addresses of the Acquired Fund Shareholders and the number and percentage
ownership of outstanding Class A, Class B, Class C and Class Q shares owned by
each such shareholder immediately prior to the Closing. The Acquiring Fund shall
issue and deliver a confirmation evidencing the Acquiring Fund Shares to be
credited on the Closing Date to the Secretary of the Acquiring Fund, or provide
evidence satisfactory to the Acquired Fund that such Acquiring Fund Shares have
been credited to the Acquired Fund's account on the books of the Acquiring Fund.
At the Closing each party shall deliver to the other such 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 Acquired Fund or the Board of Trustees of the Acquiring Fund, accurate
appraisal of the value of the net assets of the Acquiring Fund or the Acquired
Fund, respectively, is impracticable, the Closing Date shall be postponed until
the first business day after the day when trading shall have been fully resumed
and reporting shall have been restored.
4. REPRESENTATIONS AND WARRANTIES
4.1 Except as has been disclosed to the Acquiring Fund in a written
instrument executed by an officer of Pilgrim Mutual Funds, Pilgrim Mutual Funds,
on behalf of the Acquired Fund, represents and warrants to Pilgrim SmallCap
Opportunities Fund as follows:
(a) The Acquired Fund is duly organized as a series of Pilgrim Mutual
Funds, which is a business trust duly organized, validly existing and in good
standing under the laws of the State of Delaware, with power under Pilgrim
Mutual 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-3
(b) Pilgrim Mutual Funds is a registered investment company classified as a
management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act, and the registration of
shares of the Acquired Fund under the Securities Act of 1933, as amended ("1933
Act"), is in full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquired Fund of
the transactions contemplated herein, except such as have been obtained under
the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act")
and the 1940 Act and such as may be required by state securities laws;
(d) The current prospectus and statement of additional information of the
Acquired Fund and each prospectus and statement of additional information of the
Acquired Fund used during the three years previous to the date of this Agreement
conforms or conformed at the time of its use in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and does not or did not at the time of
its use include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
materially misleading;
(e) On the Closing Date, the Acquired Fund will have good and marketable
title to the Assets and full right, power, and authority to sell, assign,
transfer and deliver such Assets hereunder free of any liens or other
encumbrances, and upon delivery and payment for such Assets, the Acquiring Fund
will acquire good and marketable title thereto, subject to no restrictions on
the full transfer thereof, including such restrictions as might arise under the
1933 Act, other than as disclosed to the Acquiring Fund;
(f) The Acquired Fund is not engaged currently, and the execution, delivery
and performance of this Agreement will not result, in (i) a material violation
of the Pilgrim Mutual Fund's Declaration of Trust or By-Laws or of any
agreement, indenture, instrument, contract, lease or other undertaking to which
Pilgrim Mutual Funds, on behalf of the Acquired Fund, is a party or by which it
is bound, or (ii) the acceleration of any obligation, or the imposition of any
penalty, under any agreement, indenture, instrument, contract, lease, judgment
or decree to which Pilgrim Mutual Funds, on behalf of the Acquired Fund, is a
party or by which it is bound;
(g) All material contracts or other commitments of the Acquired Fund (other
than this Agreement and certain investment contracts including options, futures,
and forward contracts) will terminate without liability to the Acquired Fund on
or prior to the Closing Date;
(h) Except as otherwise disclosed in writing to and accepted by Pilgrim
SmallCap Opportunities Fund, on behalf of the Acquiring Fund, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or, to its knowledge, threatened against
the Acquired Fund or any of its properties or assets that, if adversely
determined, would materially and adversely affect its financial condition or the
conduct of its business. Pilgrim Mutual Funds, on behalf of the Acquired Fund,
knows of no facts which might form the basis for the institution of such
proceedings and is not a party to or subject to the provisions of any order,
decree or judgment of any court or governmental body which materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated;
(i) The Statement of Assets and Liabilities, Statements of Operations and
Changes in Net Assets, and Schedule of Investments of the Acquired Fund at May
31, 2001 have been audited by KPMG LLP, independent auditors, and are in
accordance with generally accepted accounting principles ("GAAP") consistently
applied, and such statements (copies of which have been furnished to the
Acquiring Fund) present fairly, in all material respects, the financial
condition of the Acquired Fund as of such date in accordance with GAAP, and
there are no known contingent liabilities of the Acquired Fund required to be
reflected on a balance sheet (including the notes thereto) in accordance with
GAAP as of such date not disclosed therein;
(j) Since May 31, 2001, 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
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asset value per share of the Acquired Fund due to declines in market values of
securities in the Acquired Fund's portfolio, the discharge of Acquired Fund
liabilities, or the redemption of Acquired Fund Shares by shareholders of the
Acquired Fund shall not constitute a material adverse change;
(k) On the Closing Date, all Federal and other tax returns, dividend
reporting forms, and other tax-related reports of the Acquired Fund required by
law to have been filed by such date (including any extensions) shall have been
filed and are or will be correct in all material respects, and all Federal and
other taxes shown as due or required to be shown as due on said returns and
reports shall have been paid or provision shall have been made for the payment
thereof, and to the best of the Acquired Fund's knowledge, no such return is
currently under audit and no assessment has been asserted with respect to such
returns;
(l) For each taxable year of its operation (including the taxable year
ending on the Closing Date), the Acquired Fund has met (or will meet) the
requirements of Subchapter M of the Code for qualification as a regulated
investment company, has been (or will be) eligible to and has computed (or will
compute) its federal income tax under Section 852 of the Code, and will have
distributed all of its investment company taxable income and net capital gain
(as defined in the Code) that has accrued through the Closing Date, and before
the Closing Date will have declared dividends sufficient to distribute all of
its investment company taxable income and net capital gain for the period ending
on the Closing Date;
(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 Pilgrim Mutual Funds 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 Pilgrim Mutual Funds, on behalf of the Acquired
Fund, and, subject to the approval of the shareholders of the Acquired Fund,
this Agreement will constitute a valid and binding obligation of the Acquired
Fund, enforceable in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other laws relating to or
affecting creditors' rights and to general equity principles;
(o) The information to be furnished by the Acquired Fund for use in
registration statements, proxy materials and other documents filed or to be
filed with any federal, state or local regulatory authority (including the
National Association of Securities Dealers, Inc.), which may be necessary in
connection with the transactions contemplated hereby, shall be accurate and
complete in all material respects and shall comply in all material respects with
Federal securities and other laws and regulations thereunder applicable thereto;
and
(p) The proxy statement of the Acquired Fund (the "Proxy Statement") to be
included in the Registration Statement referred to in paragraph 5.6, insofar as
it relates to the Acquired Fund, will, on the effective date of the Registration
Statement and on the Closing Date (i) not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not materially misleading provided, however,
that the representations and warranties in this subparagraph (p) shall not apply
to statements in or omissions from the Proxy Statement and the Registration
Statement made in reliance upon and in conformity with information that was
furnished by the Acquiring Fund for use therein, and (ii) comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and
the rules and regulations thereunder.
4.2 Except as has been disclosed to the Acquired Fund in a written
instrument executed by an officer of the Pilgrim SmallCap Opportunities Fund,
Pilgrim SmallCap Opportunities Fund, on behalf of the Acquiring Fund, represents
and warrants to Pilgrim Mutual Funds as follows:
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(a) The Acquiring Fund is duly organized as a series of Pilgrim SmallCap
Opportunities Fund, which is a business trust duly organized, validly existing,
and in good standing under the laws of the Commonwealth of Massachusetts, with
power under Pilgrim SmallCap Opportunities 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) Pilgrim SmallCap Opportunities 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 the shares of the Acquired Fund under the 1933 Act, is in full
force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquiring Fund of
the transactions contemplated herein, except such as have been obtained under
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 Pilgrim SmallCap Opportunities Fund's Declaration of Trust or
By-Laws or of any agreement, indenture, instrument, contract, lease or other
undertaking to which Pilgrim SmallCap Opportunities Fund, on behalf of the
Acquiring Fund, is a party or by which it is bound, or (ii) the acceleration of
any obligation, or the imposition of any penalty, under any agreement,
indenture, instrument, contract, lease, judgment or decree to which Pilgrim
SmallCap Opportunities Fund, on behalf of the Acquiring Fund, is a party or by
which it is bound;
(g) Except as otherwise disclosed in writing to and accepted by Pilgrim
Mutual Funds, on behalf of the Acquired Fund, no litigation or administrative
proceeding or investigation of or before any court or governmental body is
presently pending or, to its knowledge, threatened against the Acquiring Fund or
any of the Acquiring Fund's properties or assets that, if adversely determined,
would materially and adversely affect the Acquiring Fund's financial condition
or the conduct of the Acquiring Fund's business. Pilgrim Mutual Funds, on behalf
of the Acquiring Fund, knows of no facts which might form the basis for the
institution of such proceedings and is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental body
which materially and adversely affects its business or its ability to consummate
the transactions herein contemplated;
(h) The Statement of Assets and Liabilities, Statements of Operations and
Changes in Net Assets and Schedule of Investments of the Acquiring Fund at May
31, 2001 have been audited by KPMG LLP, independent auditors, and are in
accordance with GAAP consistently applied, and such statements (copies of which
have been furnished to the Acquired Fund) present fairly, in all material
respects, the financial condition of the Acquiring Fund as of such date in
accordance with GAAP, and there are no known contingent liabilities of the
Acquiring Fund required to be reflected on a balance sheet (including the notes
thereto) in accordance with GAAP as of such date not disclosed therein;
(i) Since May 31, 2001, 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
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value per share of the Acquiring Fund due to declines in market values of
securities in the Acquiring Fund's portfolio, the discharge of Acquiring Fund
liabilities, or the redemption of Acquiring Fund Shares by shareholders of the
Acquiring Fund, shall not constitute a material adverse change;
(j) On the Closing Date, all Federal and other tax returns, dividend
reporting forms, and other tax-related reports of the Acquiring Fund required by
law to have been filed by such date (including any extensions) shall have been
filed and are or will be correct in all material respects, and all Federal and
other taxes shown as due or required to be shown as due on said returns and
reports shall have been paid or provision shall have been made for the payment
thereof, and to the best of the Acquiring Fund's knowledge no such return is
currently under audit and no assessment has been asserted with respect to such
returns;
(k) For each taxable year of its operation (including the taxable year that
includes the Closing Date), the Acquiring Fund has met (or will meet) the
requirements of Subchapter M of the Code for qualification as a regulated
investment company, has been eligible to (or will be eligible to) and has
computed (or will compute) its federal income tax under Section 852 of the Code,
and has distributed all of its investment company taxable income and net capital
gain (as defined in the Code) for periods ending prior to the Closing Date;
(l) All issued and outstanding Acquiring Fund Shares are, and on the
Closing Date will be, duly and validly issued and outstanding, fully paid and
non-assessable (recognizing that, under Massachusetts law, it is theoretically
possible that shareholders of the Acquiring Fund could, under certain
circumstances, be held personally liable for obligations of the Acquiring 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. 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 Pilgrim SmallCap Opportunities Fund, 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 Q 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
(recognizing that, under Massachusetts law, it is theoretically possible that
shareholders of the Acquiring Fund could, under certain circumstances, be held
personally liable for obligations of the Acquiring Fund);
(o) The information to be furnished by Pilgrim SmallCap Opportunities Fund
for use in the registration statements, proxy materials and other documents that
may be necessary in connection with the transactions contemplated hereby shall
be accurate and complete in all material respects and shall comply in all
material respects with Federal securities and other laws and regulations
applicable thereto; and
(p) That insofar as it relates to the Acquiring Fund, the Registration
Statement relating to the Acquiring Fund Shares issuable hereunder, and the
proxy materials of the Acquired Fund to be included in the Registration
Statement, and any amendment or supplement to the foregoing, will, from the
effective date of the Registration Statement through the date of the meeting of
shareholders of the Acquired Fund contemplated therein (i) not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading, provided,
however, that the representations and warranties in this subparagraph (p) shall
not apply to statements in or omissions from the Registration Statement made in
reliance upon and in conformity with information that was furnished by the
Acquired Fund for use therein, and (ii) comply in all material respects with the
provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and
regulations thereunder.
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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 Q Acquiring Fund Shares to be issued hereunder are not being acquired for
the purpose of making any distribution thereof, other than in accordance with
the terms of this Agreement.
5.4 The Acquired Fund will assist the Acquiring Fund in obtaining such
information as the Acquiring Fund reasonably requests concerning the beneficial
ownership of the Acquired Fund shares.
5.5 Subject to the provisions of this Agreement, the Acquiring Fund and the
Acquired Fund will each take, or cause to be taken, all action, and do or cause
to be done, all things reasonably necessary, proper or advisable to consummate
and make effective the transactions contemplated by this Agreement.
5.6 The Acquired Fund will provide the Acquiring Fund with information
reasonably necessary for the preparation of a prospectus (the "Prospectus")
which will include the Proxy Statement referred to in paragraph 4.1(p), all to
be included in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the 1934 Act and the
1940 Act, in connection with the meeting of the shareholders of the Acquired
Fund to consider approval of this Agreement and the transactions contemplated
herein.
5.7 As soon as is reasonably practicable after the Closing, the Acquired
Fund will make a liquidating distribution to its shareholders consisting of the
Class A, Class B, Class C and Class Q 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 Pilgrim Mutual Funds, on behalf of the Acquired Fund, covenants that
Pilgrim Mutual Funds 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 Pilgrim SmallCap Opportunities Fund, on behalf of the
Acquiring Fund, may reasonably deem necessary or desirable in order to vest in
and confirm (a) Pilgrim Mutual Funds, on behalf of the Acquired Fund's, title to
and possession of the Acquiring Fund's Shares to be delivered hereunder, and (b)
Pilgrim SmallCap Opportunities Fund's, on behalf of the Acquiring Fund's, title
to and possession of all the assets and otherwise to carry out the intent and
purpose of this Agreement.
5.10 The Acquiring Fund will use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act and such of
the state blue sky or securities laws as may be necessary in order to continue
its operations after the Closing Date.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of Pilgrim Mutual Funds, on behalf of the Acquired Fund, to
consummate the transactions provided for herein shall be subject, at Pilgrim
Mutual Funds' election, to the performance by Pilgrim SmallCap Opportunities
B-8
Fund, on behalf of the Acquiring Fund, of all the obligations to be performed by
it hereunder on or before the Closing Date, and, in addition thereto, the
following further conditions:
6.1 All representations and warranties of Pilgrim SmallCap Opportunities
Fund, on behalf of the Acquiring Fund, contained in this Agreement shall be true
and correct in all material respects as of the date hereof and, except as they
may be affected by the transactions contemplated by this Agreement, as of the
Closing Date, with the same force and effect as if made on and as of the Closing
Date;
6.2 Pilgrim SmallCap Opportunities Fund shall have delivered to Pilgrim
Mutual Funds a certificate executed in its name by its President or Vice
President and its Treasurer or Assistant Treasurer, in a form reasonably
satisfactory to Pilgrim Mutual Funds and dated as of the Closing Date, to the
effect that the representations and warranties of Pilgrim SmallCap Opportunities
Fund, on behalf of the Acquiring Fund, made in this Agreement are true and
correct at and as of the Closing Date, except as they may be affected by the
transactions contemplated by this Agreement and as to such other matters as
Pilgrim Mutual Funds shall reasonably request;
6.3 Pilgrim Mutual Funds, on behalf of the Acquiring Fund, shall have
performed all of the covenants and complied with all of the provisions required
by this Agreement to be performed or complied with by Pilgrim SmallCap
Opportunities Fund, on behalf of the Acquiring Fund, on or before the Closing
Date; and
6.4 The Acquired Fund and the Acquiring Fund shall have agreed on the
number of full and fractional Acquiring Fund Shares of each Class to be issued
in connection with the Reorganization after such number has been calculated in
accordance with paragraph 1.1.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of Pilgrim SmallCap Opportunities Fund, on behalf of the
Acquiring Fund, to complete the transactions provided for herein shall be
subject, at Pilgrim SmallCap Opportunities Fund's election to the performance by
Pilgrim Mutual Funds, on behalf of the Acquired Fund, of all of the obligations
to be performed by it hereunder on or before the Closing Date and, in addition
thereto, the following conditions:
7.1 All representations and warranties of Pilgrim Mutual Funds, on behalf
of the Acquired Fund, contained in this Agreement shall be true and correct in
all material respects as of the date hereof and, except as they may be affected
by the transactions contemplated by this Agreement, as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date;
7.2 Pilgrim Mutual Funds 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 Pilgrim Mutual Funds;
7.3 Pilgrim Mutual Funds 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 Pilgrim SmallCap Opportunities Fund and dated as of the Closing
Date, to the effect that the representations and warranties of Pilgrim Mutual
Funds, on behalf of the Acquired Fund, made in this Agreement are true and
correct at and as of the Closing Date, except as they may be affected by the
transactions contemplated by this Agreement, and as to such other matters as
Pilgrim SmallCap Opportunities Fund shall reasonably request;
7.4 Pilgrim Mutual Funds, on behalf of the Acquired Fund, shall have
performed all of the covenants and complied with all of the provisions required
by this Agreement to be performed or complied with by Pilgrim Mutual Funds, on
behalf of the Acquired Fund, on or before the Closing Date;
7.5 The Acquired Fund and the Acquiring Fund shall have agreed on the
number of full and fractional Acquiring Fund Shares of each Class to be issued
in connection with the Reorganization after such number has been calculated in
accordance with paragraph 1.1; and
B-9
7.6 The Acquired Fund shall have declared and paid a distribution or
distributions prior to the Closing that, together with all previous
distributions, shall have the effect of distributing to its shareholders (i) all
of its investment company taxable income and all of its net realized capital
gains, if any, for the period from the close of its last fiscal year to 4:00
p.m. Eastern time on the Closing; and (ii) any undistributed investment company
taxable income and net realized capital gains from any period to the extent not
otherwise already distributed.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND AND THE
ACQUIRED FUND
If any of the conditions set forth below have not been satisfied on or
before the Closing Date with respect to Pilgrim Mutual Funds, on behalf of the
Acquired Fund ,or Pilgrim SmallCap Opportunities Fund, on behalf of 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 Pilgrim Mutual Funds'
Declaration of Trust, By-Laws, applicable Delaware 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 Pilgrim SmallCap Opportunities Fund nor Pilgrim Mutual Funds
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
Pilgrim SmallCap Opportunities Fund or Pilgrim Mutual Funds to permit
consummation, in all material respects, of the transactions contemplated hereby
shall have been obtained, except where failure to obtain any such consent, order
or permit would not involve a risk of a material adverse effect on the assets or
properties of the Acquiring Fund or the Acquired Fund, provided that either
party hereto may for itself waive any of such conditions;
8.4 The Registration Statement shall have become effective under the 1933
Act and no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act; and
8.5 The parties shall have received the opinion of Dechert addressed to
Pilgrim Mutual Funds and Pilgrim SmallCap Opportunities 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. The delivery of such opinion is
conditioned upon receipt by Dechert of representations it shall request of
Pilgrim SmallCap Opportunities Fund and Pilgrim Mutual Funds. Notwithstanding
anything herein to the contrary, neither Pilgrim SmallCap Opportunities Fund nor
Pilgrim Mutual Funds may waive the condition set forth in this paragraph 8.5.
9. BROKERAGE FEES AND EXPENSES
9.1 Pilgrim SmallCap Opportunities Fund, on behalf of the Acquiring Fund,
and Pilgrim Mutual Funds, on behalf of the Acquired Fund, represent and warrant
to each other that there are no brokers or finders entitled to receive any
payments in connection with the transactions provided for herein.
9.2 The expenses relating to the proposed Reorganization will be shared so
that (1) half of such costs are borne by the investment adviser to the Acquiring
Fund, and (2) half are borne by the Acquired and Acquiring Funds and will be
paid by the Acquired Fund and Acquiring Fund pro rata based upon the relative
net assets of the Acquired Fund and Acquiring Fund as of the close of business
on the record date for determining the shareholders of the Acquired Fund
B-10
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 other party directly
incurring such expenses if and to the extent that the payment by another person
of such expenses would result in the disqualification of such party as a
"regulated investment company" within the meaning of Section 851 of the Code.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 Pilgrim SmallCap Opportunities Fund and Pilgrim Mutual Funds 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 and the obligations of each of the
Acquired Fund and Acquiring Fund in Sections 9.1 and 9.2 shall survive the
Closing.
11. TERMINATION
This Agreement may be terminated and the transactions contemplated hereby
may be abandoned by either party (i) by mutual agreement of the parties, or (ii)
by either party if the Closing shall not have occurred on or before
_______________ __, 200_, unless such date is extended by mutual agreement of
the parties, or (iii) by either party if the other party shall have materially
breached its obligations under this Agreement or made a material and intentional
misrepresentation herein or in connection herewith. In the event of any such
termination, this Agreement shall become void and there shall be no liability
hereunder on the part of any party or their respective Directors/Trustees or
officers, except for any such material breach or intentional misrepresentation,
as to each of which all remedies at law or in equity of the party adversely
affected shall survive.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be deemed necessary or advisable by the authorized officers of Pilgrim
Mutual Funds and Pilgrim SmallCap Opportunities Fund; provided, however, that
following the meeting of the shareholders of the Acquired Fund called by Pilgrim
Mutual Funds 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 Q Acquiring Fund Shares to be issued to the
Acquired Fund Shareholders under this Agreement to the detriment of such
shareholders without their further approval.
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by
facsimile, personal service or prepaid or certified mail addressed to Pilgrim
Mutual Funds, 7337 East Doubletree Ranch Road, Scottsdale, Arizona 85258, attn:
James M. Hennessy, in each case with a copy to Dechert, 1775 Eye Street, N.W.,
Washington, D.C. 20006, attn. Jeffrey S. Puretz; and to Pilgrim SmallCap
Opportunities Fund, 7337 E. Doubletree Ranch Road, Scottsdale, Arizona 85258,
attn: James M. Hennessy, in each case with a copy to Dechert, 1775 Eye Street,
N.W., Washington, D.C. 20006, attn: Jeffrey S. Puretz.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT; LIMITATION OF LIABILITY
14.1 The Article and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
B-11
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 Commonwealth of Massachusetts 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 Pilgrim SmallCap Opportunities Fund or Pilgrim Mutual
Funds personally, but shall bind only the trust property of the Acquiring Fund
or the Acquired Fund, as provided in the Declaration of Trust of Pilgrim
SmallCap Opportunities Fund and Pilgrim Mutual Funds. 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 such party.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its President or Vice President and its seal to be affixed
thereto and attested by its Secretary or Assistant Secretary.
Attest: PILGRIM SMALLCAP OPPORTUNITIES FUND
on behalf of its
PILGRIM SMALLCAP OPPORTUNITIES FUND
series
By:
- ------------------------------------ ------------------------------------
SECRETARY
Its:
-----------------------------------
Attest: PILGRIM MUTUAL FUNDS on behalf of its
PILGRIM SMALLCAP GROWTH FUND series
By:
- ------------------------------------ ------------------------------------
SECRETARY
Its:
-----------------------------------
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APPENDIX C
ADDITIONAL INFORMATION REGARDING
PILGRIM SMALLCAP OPPORTUNITIES FUND (THE "FUND")
SHAREHOLDER GUIDE
PILGRIM PURCHASE OPTIONS(TM)
This Proxy Statement/Prospectus relates to four separate Classes of shares
of the Fund*: Class A, Class B, Class C and Class Q, each of which represents an
identical interest in the Fund's investment portfolio, but are offered with
different sales charges and distribution (Rule 12b-1) and service fee
arrangements. As described below and elsewhere in this Proxy
Statement/Prospectus, the contingent deferred sales load structure and
conversion characteristics of the Fund shares that will be issued to you in the
Reorganization will be the same as those that apply to Pilgrim SmallCap Growth
Fund shares held by you immediately prior to the Reorganization, and the period
that you held shares of Pilgrim SmallCap Growth Fund will be included in the
holding period of the Fund for purposes of calculating contingent deferred sales
charges and determining conversion rights. Purchases of the shares of the Fund
after the Reorganization will be subject to the sales load structure and
conversion rights discussed below.
The sales charges and fees for each Class of shares of the Fund involved in
the Reorganization are shown and contrasted in the chart below.
CLASS A CLASS B CLASS C CLASS Q
------- ------- ------- -------
Maximum Initial Sales Charge on Purchases 5.75%(1) None None None
Contingent Deferred Sales Charge ("CDSC") None(2) 5.00%(3) 1.00%(4) None
Annual Distribution (12b-1) and Service Fees (5) 0.30% 1.00% 1.00% 0.25%
Maximum Purchase Unlimited $250,000 Unlimited Unlimited
Automatic Conversion to Class A N/A 8 Years(6) N/A N/A
- ----------
(1) Reduced for purchases of $50,000 and over. See "Class A Shares: Initial
Sales Charge Alternative" in this Appendix C.
(2) For investments of $1 million or more, a CDSC of no more than 1% may be
assessed on redemptions of Class A shares that were purchased without an
initial sales charge. See "Class A Shares: Initial Sales Charge
Alternative" in this Appendix C.
(3) Imposed upon redemption within 6 years from purchase. Fee has scheduled
reductions after the first year. See "Class B Shares: Deferred Sales Charge
Alternative" in this Appendix C.
(4) Imposed upon redemption within 1 year from purchase.
(5) Annual asset-based distribution charge.
(6) Service fee.
(7) Class B shares of the Fund issued to shareholders of Pilgrim SmallCap
Growth Fund in the Reorganization will convert to Class A shares in the
eighth year from the original date of purchase of the Class B shares of
Pilgrim SmallCap Growth Fund.
- ----------
* Only the share Classes affected by the Reorganization are discussed in the
Shareholder Guide although other share classes are available.
C-1
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.
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" below.
AS A % OF THE AS A %
YOUR INVESTMENT OFFERING PRICE OF NAV
--------------- -------------- ------
Less than $50,000 5.75% 6.10%
$50,000 - $99,999 4.50% 4.71%
$100,000 - $249,999 3.50% 3.63%
$250,000 - $499,999 2.50% 2.56%
$500,000 - $1,000,000 2.00% 2.04%
There is no initial sales charge on purchases of Class A shares of
$1,000,000 or more. However, the shares will be subject to a CDSC if they are
redeemed within one or two years of purchase, depending on the amount of the
purchase, as follows:
PERIOD DURING
WHICH CDSC
YOUR INVESTMENT CDSC APPLIES
--------------- ---- -------
$1,000,000 - $2,499,999 1.00% 2 years
$2,500,000 - $4,999,999 0.50% 1 year
$5,000,000 and over 0.25% 1 year
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 that offer Class A shares, or shares with front-end sales
charges ("Participating Funds") by completing the "Letter of Intent" section of
an Application to purchase Fund shares. Executing the Letter of Intent expresses
an intention to invest during the next 13 months a specified amount, which, if
made at one time, would qualify for a reduced sales charge. An amount equal to
the Letter of Intent amount multiplied by the maximum sales charge imposed on
purchases of the Fund and Class will be restricted within your account to cover
additional sales charges that may be due if your actual total investment fails
to qualify for the reduced sales charges. See the Statement of Additional
Information for the Fund ("SAI") for details on the Letter of Intent option or
contact the Shareholder Servicing Agent at 1-800-992-0180 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
Fund complex (excluding money market funds offered by ING Pilgrim Investments,
LLC) ("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 SAI for details or contact the Shareholder Servicing Agent at 1-800-992-0180
for more information.
For the purposes of Rights of Accumulation and the Letter of Intent
Privilege, shares held by investors in the Pilgrim Funds that impose a CDSC may
be combined with Class A shares for a reduced sales charge but will not affect
any CDSC that may be imposed upon the redemption of shares of the Fund which
imposes a CDSC.
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 1-800-992-0180, or see
the SAI.
C-2
CLASS B SHARES: DEFERRED SALES CHARGE ALTERNATIVE. Class B shares are
offered at their NAV per share without any initial sales charge. Class B shares
that are redeemed within six years of purchase, however, will be subject to a
CDSC as described in the table that follows. Class B shares of the Fund are
subject to distribution and service fees at an annual rate of 1.00% of the
average daily net assets of the Class, which is higher than the distribution and
service fees of Class A shares. The higher distribution and service fees mean a
higher expense ratio, so Class B shares pay correspondingly lower dividends and
may have a lower NAV than Class A shares. Orders for Class B shares in excess of
$250,000 will be accepted as orders for Class A shares or declined. The amount
of the CDSC is based on the lesser of the NAV of the Class B shares at the time
of purchase or redemption. There is no CDSC on Class B shares acquired through
the reinvestment of dividends and capital gains distributions. The CDSCs are as
follows:
YEAR OF REDEMPTION AFTER PURCHASE CDSC
--------------------------------- ----
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
After Sixth Year None
Class B shares will automatically convert into Class A shares approximately
eight years after purchase. Class B shares of the Fund issued in connection with
the Reorganization with respect to Class B shares of Pilgrim SmallCap Growth
Fund will convert to Class A shares eight years after the purchase of the
original shares of Pilgrim SmallCap Growth Fund. For additional information on
the CDSC and the conversion of Class B, see the SAI.
CLASS C SHARES. Class C shares are offered at their NAV per share without
an initial sales charge. Class C shares may be subject to a CDSC of 1% if
redeemed within one year of purchase. The amount of the CDSC is based on the
lesser of the NAV of the Class C shares at the time of purchase or redemption.
There is no CDSC on Class C shares acquired through the reinvestment of
dividends and capital gains distributions.
CLASS Q SHARES. Class Q shares are offered at NAV without a sales charge to
qualified retirement plans, financial and other institutions and "wrap
accounts." The minimum initial investment is $250,000, and the minimum
subsequent investment is $10,000. The Distributor may waive these minimums from
time to time.
WAIVERS OF CDSC. The CDSC will be waived in the following cases. In
determining whether a CDSC is applicable, it will be assumed that shares held in
the shareholder's account that are not subject to such charge are redeemed
first.
(i) The CDSC will be waived in the case of redemption following the death
or permanent disability of a shareholder if made within one year of
death or initial determination of permanent disability. The waiver is
available only for those shares held at the time of death or initial
determination of permanent disability.
(ii) The CDSC also may be waived for Class B shares redeemed pursuant to a
Systematic Withdrawal Plan, as described in the Pilgrim Prospectus,
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.
(iii) The CDSC also will be waived in the case of mandatory distributions
from a tax-deferred retirement plan or an IRA. However, if you
purchased shares that were part of the Nicholas-Applegate Mutual
Funds, you may be eligible for a CDSC waiver prior to the mandatory
distribution age.
C-3
If you think you may be eligible for a CDSC waiver, contact the Shareholder
Servicing Agent at 1-800-992-0180.
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 SAI for details or contact the Shareholder Servicing
Agent at 1-800-992-0180 for more information.
RULE 12b-1 PLAN. The Fund has a distribution plan pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended (the "1940 Act") applicable
to each Class of shares of the Fund ("Rule 12b-1 Plan"). Under the Rule 12b-1
Plan, ING Pilgrim Securities, Inc. (the "Distributor") may receive from the Fund
an annual fee in connection with the offering, sale and shareholder servicing of
the Fund's Class A, Class B, Class C and Class Q shares.
DISTRIBUTION AND SERVICING FEES. As compensation for services rendered and
expenses borne by the Distributor in connection with the distribution of shares
of the Fund and in connection with services rendered to shareholders of the
Fund, the Fund pays the Distributor servicing fees and distribution fees up to
the annual rates set forth below (calculated as a percentage of the Fund's
average daily net assets attributable to that Class):
SERVICING FEE DISTRIBUTION FEE
------------- ----------------
Class A 0.25% 0.05%
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class Q 0.25% None
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 Q shares of
the Fund, including payments to Authorized Dealers, and for shareholder
servicing. Because these fees are paid out of the Fund's assets on an on-going
basis, over time these fees will increase the cost of your investment and may
cost you more than paying other types of sales charges.
OTHER EXPENSES. In addition to the management fee and other fees described
previously, the Fund pays other expenses, such as legal, audit, transfer agency
and custodian fees, proxy solicitation costs and the compensation of Trustees
who are not affiliated with ING Pilgrim Investments, LLC ("ING Pilgrim
Investments"). Most Fund expenses are allocated proportionately among all of the
outstanding shares of that Fund. However, the Rule 12b-1 Plan fees for each
Class of shares are charged proportionately only to the outstanding shares of
that Class.
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 or $250,000 in the case of Class Q shares ($250 for
IRAs). The minimum initial investment in the Fund is $1,000 ($250 for IRAs), and
the minimum for additional investment in the Fund is $100 or $10,000 in the case
of Class Q shares. The minimum initial investment for a pre-authorized
retirement plan is $100, plus monthly investments of at least $100.
The Fund and the Distributor reserve the right to reject any purchase
order. Please note cash, travelers checks, third party checks, money orders and
checks drawn on non-U.S. banks (even if payment may be effected through a U.S.
bank) will not be accepted. ING Pilgrim Investments 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.
C-4
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. Eastern time) on each day that it is open
for business. The NAV of each Class represents that Class' pro rata share of
that Fund's net assets as adjusted for any Class specific expenses (such as fees
under a Rule 12b-1 plan), and divided by that Class' outstanding shares. In
general, the value of the Fund's assets is based on actual or estimated market
value, with special provisions for assets not having readily available market
quotations, for short-term debt securities, and for situations where market
quotations are deemed unreliable. The NAV per share of each Class of the Fund
will fluctuate in response to changes in market conditions and other factors.
Portfolio securities for which market quotations are readily available are
stated at market value. Short-term debt securities having a maturity of 60 days
or less are valued at amortized cost, unless the amortized cost does not
approximate market value. Securities prices may be obtained from automated
pricing services. When market quotations are not readily available or are deemed
unreliable, securities are valued at their fair value as determined in good
faith under the supervision of the Board of Trustees. Valuing securities at fair
value involves greater reliance on judgment than valuing securities that have
readily available market quotations. For information on valuing foreign
securities, see the SAI.
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 1-800-992-0180.
RETIREMENT PLANS. The Fund has available prototype qualified retirement
plans for both corporations and for self-employed individuals. Also available
are prototype IRA, Roth IRA and Simple IRA plans (for both individuals and
employers), Simplified Employee Pension Plans, Pension and Profit Sharing Plans
and Tax Sheltered Retirement Plans for employees of public educational
institutions and certain non-profit, tax-exempt organizations. State Street Bank
and Trust Company ("SSB") acts as the custodian under these plans. For further
information, contact the Shareholder Servicing Agent at 1-800-992-0180. SSB
currently receives a $12 custodian fee annually for the maintenance of such
accounts.
EXECUTION OF REQUESTS. Purchase and sale requests are executed at the NAV
next determined after the order is received in proper form by the Transfer Agent
or Distributor. A purchase order will be deemed to be in proper form when all of
the required steps set forth under the section "How to Purchase Shares" in the
Pilgrim Prospectus 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
1-800-992-0180. There is no specific limit on exchange frequency; however, the
Fund is intended for long term investment and not as a trading vehicle. ING
Pilgrim Investments reserves the right to prohibit excessive exchanges (more
C-5
than four per year). ING Pilgrim Investments reserves the right, upon 60 days'
prior notice, to restrict the frequency of, otherwise modify, or impose charges
of up to $5.00 upon exchanges. T he total value of shares being exchanged must
at least equal the minimum investment requirement of the Fund into which they
are being exchanged. The Fund may change or cancel its exchange policies at any
time, upon 60 days' written notice to shareholders.
Shares of any Class of the Fund generally may be exchanged for shares of
that same Class of any other open-end Pilgrim Fund without payment of any
additional sales charge in most instances. In most instances, if you exchange
and subsequently redeem your shares, any applicable CDSC will be based on the
full period of the share ownership. Shareholders exercising the exchange
privilege with any other open-end Pilgrim Fund should carefully review the
Prospectus of that fund. Exchanges of shares are sales and may result in a gain
or loss for federal and state income tax purposes. You will automatically be
assigned the telephone exchange privilege unless you mark the box on the Account
Application that signifies you do not wish to have this privilege. The exchange
privilege is only available in states where shares of the fund being acquired
may be legally sold. You should carefully review the prospectus of the Pilgrim
Fund you intend to exchange into before exchanging your shares.
Exchanges of shares are sales and may result in a gain or loss for federal
and state income tax purposes.
You will automatically have the ability to request an exchange by calling
the Shareholder Service Agent unless you mark the box on the Account Application
that indicates that you do not wish to have the telephone exchange privilege.
SYSTEMATIC EXCHANGE PRIVILEGE. With an initial account balance of at least
$5,000 or $250,000 for Class Q 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 or $250,000 in the case of Class Q shares, other than
as a result of a decline in the NAV per share.
With respect to Class Q shares, if you draw on a non-retirement account so
that its total value is less than the Fund minimum, you may be asked to purchase
more shares within 60 days. If you do not take action, the Fund may close out
your account and mail you the proceeds. Your account will not be closed if its
drop in value is due to Fund performance.
HOW TO REDEEM SHARES
Shares of the Fund will be redeemed at the NAV (less any applicable CDSC
and/or federal income tax withholding) next determined after receipt of a
redemption request in good form on any day the New York Stock Exchange is open
for business.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to have monthly, quarterly,
semi-annual or annual payments in any fixed amount of $100 or more made to
yourself, or to anyone else you properly designate, as long as the account has a
current value of at least $10,000. With respect to Class Q shares, you may elect
to have monthly, quarterly, semi-annual , or annual payments in any fixed amount
of $1,000 or more made to yourself or anyone else you properly designate, as
long as the account has a current value of at least $250,000. For additional
information, contact the Shareholder Servicing Agent at (800) 992-0180, or see
the SAI.
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
C-6
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 U.S. Securities and Exchange Commission. The Fund intends to pay in
cash for all shares redeemed, but under abnormal conditions that make payment in
cash harmful to the Fund, the Fund may make payment wholly or partly in
securities at their then current market value equal to the redemption price. In
such case, the Fund could elect to make payment in securities for redemptions in
excess of $250,000 or 1% of its net assets during any 90-day period for any one
shareholder. An investor may incur brokerage costs in converting such securities
to cash.
MANAGEMENT OF THE FUND
INVESTMENT MANAGER. ING Pilgrim Investments has overall responsibility for
the management of the Fund. The Fund and ING Pilgrim Investments have entered
into an agreement that requires ING Pilgrim Investments to provide or oversee
all investment advisory and portfolio management services for the Fund. ING
Pilgrim Investments provides the Fund with office space, equipment and personnel
necessary to administer the Fund. The agreement with ING Pilgrim Investments can
be canceled by the Board of Trustees of the Fund upon 60 days' written notice.
Organized in December 1994, ING Pilgrim Investments is registered as an
investment adviser with the Securities and Exchange Commission. As of October
31, 2001, ING Pilgrim Investments managed over $16.6 billion in assets. ING
Pilgrim Investments bears its expenses of providing the services described
above. Investment management fees are computed and accrued daily and paid
monthly.
PORTFOLIO MANAGER. Mary Lisanti, Executive Vice President and Chief
Investment Officer -- Domestic Equities of ING Pilgrim Investments, has served
as Senior Portfolio Manager of the Fund since July 1998. Prior to joining ING
Pilgrim Investments in October 1999, Ms. Lisanti was Executive Vice President
and Chief Investment Officer -- Domestic Equities with Northstar Investment
Management Corp., which subsequently merged into ING Pilgrim Investments. From
1996 to 1998, Ms. Lisanti was a Portfolio Manager at Strong Capital Management.
From 1993 to 1996, Ms. Lisanti was a Managing Director and Head of Small- and
Mid-Capitalization Equity Strategies at Bankers Trust Corp.
PARENT COMPANY AND DISTRIBUTOR. ING Pilgrim Investments and the Distributor
are indirect, wholly-owned subsidiaries of ING Group N.V. (NYSE: ING) ("ING
Group"). ING Group is a global financial institution active in the field of
insurance, banking and asset management in more than 65 countries, with over
100,000 employees.
SHAREHOLDER SERVICING AGENT. ING Pilgrim Group, LLC serves as Shareholder
Servicing Agent for the Fund. The Shareholder Servicing Agent is responsible for
responding to written and telephonic inquiries from shareholders. The Fund pays
the Shareholder Servicing Agent a monthly fee on a per-contact basis, based upon
incoming and outgoing telephonic and written correspondence.
PORTFOLIO TRANSACTIONS. ING Pilgrim Investments will place orders to
execute securities transactions that are designed to implement the Fund's
investment objectives and policies. ING Pilgrim Investments will use its
reasonable efforts to place all purchase and sale transactions with brokers,
dealers and banks ("brokers") that provide "best execution" of these orders. In
placing purchase and sale transactions, ING Pilgrim Investments may consider
brokerage and research services provided by a broker to ING Pilgrim Investments
or its affiliates, and the Fund may pay a commission for effecting a securities
transaction that is in excess of the amount another broker would have charged if
ING Pilgrim Investments determines in good faith that the amount of commission
is reasonable in relation to the value of the brokerage and research services
provided by the broker. In addition, ING Pilgrim Investments may place
securities transactions with brokers that provide certain services to the Fund.
ING Pilgrim Investments also may consider a broker's sale of Fund shares if ING
Pilgrim Investments is satisfied that the Fund would receive best execution of
the transaction from that broker.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS. The Fund generally distributes most or all of
its net earnings in the form of dividends. The Fund pays dividends and capital
gains, if any, annually. Dividends and distributions will be determined on a
Class basis.
C-7
Any dividends and distributions paid by the Fund will be automatically
reinvested in additional shares of the respective Class of that Fund, unless you
elect to receive distributions in cash. When a dividend or distribution is paid,
the NAV per share is reduced by the amount of the payment. You may, upon written
request or by completing the appropriate section of the Account Application in
the Pilgrim Prospectus, elect to have all dividends and other distributions paid
on a Class A, Class B, Class C, or Class Q account in the Fund invested into a
Pilgrim Fund or ING Fund which offers Class A, Class B, Class C, or Class Q
shares.
FEDERAL TAXES. The following information is meant as a general summary for
U.S. shareholders. Please see the SAI for additional information. You should
rely your own tax adviser for advice about the particular federal, state and
local tax consequences to you of investing in the Fund.
The Fund will distribute most of its net investment income and net capital
gains to its shareholders each year. Although the Fund will not be taxed on
amounts it distributes, most shareholders will be taxed on amounts they receive.
A particular distribution generally will be taxable as either ordinary income or
long-term capital gains. It does not matter how long you have held your Fund
shares or whether you elect to receive your distributions in cash or reinvest
them in additional Fund shares. For example, if the Fund designates a particular
distribution as a long-term capital gains distribution, it will be taxable to
you at your long-term capital gains rate.
Dividends declared by the Fund in October, November or December and paid
during the following January may be treated as having been received by
shareholders in the year the distributions were declared.
You will receive an annual statement summarizing your dividend and capital
gains distributions.
If you invest through a tax-deferred account, such as a retirement plan,
you generally will not have to pay tax on dividends until they are distributed
from the account. These accounts are subject to complex tax rules, and you
should consult your tax adviser about investment through a tax-deferred account.
There may be tax consequences to you if you sell or redeem Fund shares. You
will generally have a capital gain or loss, which will be long-term or
short-term, generally depending on how long you hold those shares. If you
exchange shares, you may be treated as if you sold them. You are responsible for
any tax liabilities generated by your transactions.
As with all mutual funds, the Fund may be required to withhold U.S. federal
income tax at the rate of 30.5% (30% in 2002 and 2003) of all taxable
distributions payable to you if you fail to provide the Fund with your correct
taxpayer identification number or to make required certifications, or if you
have been notified by the IRS that you are subject to backup withholding. Backup
withholding is not an additional tax; rather, it is a way in which the IRS
ensures it will collect taxes otherwise due. Any amounts withheld may be
credited against your U.S. federal income tax liability.
C-8
FINANCIAL HIGHLIGHTS
The information in the table below, for the year ended May 31, 2001 has been
audited by KPMG LLP, independent auditors. For all periods prior to May 31, 2001
were audited by other independent auditors.
FINANCIAL
PILGRIM SMALLCAP OPPORTUNITIES FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
Selected data for a share of beneficial interest outstanding throughout each
period.
Class A
---------------------------------------------------------------
Five Months
Ended Year Ended December 31,
May 31, -------------------------------------------------
2001(4) 2000 1999 1998 1997 1996
------- ---- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period $ 47.17 59.35 29.00 27.77 24.72 20.92
Income from investment operations:
Net investment loss $ (0.23) (0.54) (0.32) (0.27) (0.02) (0.04)
Net realized and unrealized gain
(loss) on investments $ (8.16) (2.74) 38.23 2.23 3.68 3.84
Total from investment operations $ (8.39) (3.28) 37.91 1.96 3.66 3.80
Less distributions from:
Net realized gain on investments $ -- 8.90 7.56 0.73 0.61 --
Total distributions $ -- 8.90 7.56 0.73 0.61 --
Net asset value, end of period $ 38.78 47.17 59.35 29.00 27.77 24.72
Total Return(1) % (17.79) (6.04) 146.94 7.59 14.92 18.16
Ratios and supplemental data:
Net assets, end of period (000s) $ 159,641 177,286 123,377 45,461 78,160 65,660
Ratios to average net assets:
Net expenses after expense
reimbursement(2) % 1.69 1.45 1.43 1.47 1.43 1.46(3)
Gross expenses prior to expense
reimbursement(2) % 1.69 1.45 1.43 1.47 1.43 1.47
Net investment loss after expense
reimbursement(2) % (1.41) (1.05) (1.21) (0.70) (0.07) (0.30)(3)
Portfolio turnover rate % 104 134 223 257 175 140
Class B
---------------------------------------------------------------
Five Months
Ended Year Ended December 31,
May 31, -------------------------------------------------
2001(4) 2000 1999 1998 1997 1996
------- ---- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period $ 44.64 57.06 28.26 27.27 24.46 20.84
Income from investment operations:
Net investment loss $ (0.33) (0.96) (0.60) (0.48) (0.19) (0.12)
Net realized and unrealized gain
(loss) on investments $ (7.71) (2.56) 36.96 2.20 3.61 3.74
Total from investment operations $ (8.04) (3.52) 36.36 1.72 3.42 3.62
Less distributions from:
Net realized gain on investments $ -- 8.90 7.56 0.73 0.61 --
Total distributions $ -- 8.90 7.56 0.73 0.61 --
Net asset value, end of period $ 36.60 44.64 57.06 28.26 27.27 24.46
Total Return(1) % (18.01) (6.71) 145.24 6.84 14.10 17.37
Ratios and supplemental data:
Net assets, end of period (000s) $ 206,968 266,348 264,677 124,065 169,516 126,859
Ratios to average net assets:
Net expenses after expense
reimbursement(2) % 2.39 2.15 2.15 2.18 2.15 2.17(3)
Gross expenses prior to expense
reimbursement(2) % 2.39 2.15 2.15 2.18 2.15 2.18
Net investment loss after expense
reimbursement(2) % (2.11) (1.75) (1.93) (1.43) (0.78) (1.01)(3)
Portfolio turnover rate % 104 134 223 257 175 140
Class C
---------------------------------------------------------------
Five Months
Ended Year Ended December 31,
May 31, -------------------------------------------------
2001(4) 2000 1999 1998 1997 1996
------- ---- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period $ 44.54 56.98 28.24 27.26 24.46 20.84
Income from investment operations:
Net investment loss $ (0.33) (0.97) (0.53) (0.55) (0.20) (0.13)
Net realized and unrealized gain
(loss) on investments $ (7.68) (2.57) 36.83 2.26 3.61 3.75
Total from investment operations $ (8.01) (3.54) 36.30 1.71 3.41 3.62
Less distributions from:
Net realized gain on investments $ -- 8,90 7.56 0.73 0.61 --
Total distributions $ -- 8.90 7.56 0.73 0.61 --
Net asset value, end of period $ 36.53 44.54 56.98 28.24 27.26 24.46
Total Return(1) % (17.98) (6.76) 145.12 6.81 14.06 17.37
Ratios and supplemental data:
Net assets, end of period (000s) $ 78,658 104,094 72,581 29,746 51,460 37,342
Ratios to average net assets:
Net expenses after expense
reimbursement(2) % 2.39 2.15 2.18 2.22 2.18 2.20(3)
Gross expenses prior to expense
reimbursement(2) % 2.39 2.15 2.18 2.22 2.18 2.21
Net investment loss after expense
reimbursement(2) % (2.11) (1.75) (1.96) (1.45) (0.82) (1.03)(3)
Portfolio turnover rate % 104 134 223 257 175 140
Class Q
--------------------------
Five Months Period
Ended Ended
May 31, December 31,
2001(4) 2000(5)
------- -------
Per Share Operating Performance:
Net asset value, beginning of period $ 47.20 60.86
Income from investment operations:
Net investment loss $ (0.20) (0.27)
Net realized and unrealized loss on investments $ (8.19) (4.49)
Total from investment operations $ (8.39) (4.76)
Less distributions from:
Net realized gains on investments $ -- 8.90
Total distributions $ -- 8.90
Net asset value, end of period $ 38.81 47.20
Total return(1) % (17.78) (8.29)
Ratios and supplemental data:
Net assets, end of period (000s) $ 2,832 2,545
Ratios to average net assets:
Expenses(2) % 1.56 1.40
Net investment loss(2) % (1.28) (1.10)
Portfolio turnover % 104 134
- ----------
(1) Total return is calculated assuming reinvestment of 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.
(2) Annualized for periods less than one year.
(3) Expenses calculated net of taxes and adviser reimbursement.
(4) The Fund changed its fiscal year end to May 31.
(5) Class Q commenced offering of shares on April 4, 2000.
C-9
APPENDIX D
The following is a list of the Pilgrim Funds and the Classes of shares of
each Fund that are expected to be offered at or shortly after the
Reorganization:
FUND CLASSES OFFERED
- ---- ---------------
U.S. EQUITY
Balanced Fund A, B, C, Q and T
Biotechnology Fund A, B, C and Q
Convertible Fund A, B, C and Q
Corporate Leaders Trust Fund A
Financial Services Fund A, C and Q
Growth and Income Fund A, B, C, I and Q
Growth + Value Fund A, B, C and Q
Growth Opportunities Fund A, B, C, Q, I and T
LargeCap Growth Fund A, B, C, I and Q
MagnaCap Fund A, B, C, I, Q and M
MidCap Opportunities Fund A, B, C, Q and I
Principal Protection Fund A, B and C
Principal Protection Fund II A, B and C
Research Enhanced Index Fund A, B, C, Q and I
SmallCap Opportunities Fund A, B, C, Q, I and T
Tax-Efficient Equity Fund A, B, and C
GLOBAL/INTERNATIONAL EQUITY
Asia-Pacific Equity Fund A, B, C, Q and M
Emerging Countries Fund A, B, C and Q
European Equity Fund A, B, and C
Global Information Technology Fund A, B, C, I and Q
Global Real Estate Fund A, B, C and Q
International Fund A, B, C, I and Q
International SmallCap Growth Fund A, B, C and Q
International Value Fund A, B, C, I and Q
Precious Metals Fund A, B, C and Q
Russia Fund A, C and Q
Worldwide Growth Fund A, B, C and Q
FIXED INCOME
GNMA Income Fund A, B, C, I, M, Q and T
High Yield Fund II A, B, C, M, Q and T
High Yield Bond Fund A, B, and C
ING Pilgrim Money Market Fund A, B, C and I
Intermediate Bond Fund A, B, C and I
Lexington Money Market Trust A
National Tax-Exempt Bond Fund A, B and C
Pilgrim Money Market Fund A, B and C
Senior Income Fund A, B, C and Q
Strategic Income Fund A, B, C and Q
D-1
APPENDIX E
As of January __, 2002 the following persons owned beneficially or of
record 5% or more of the outstanding shares of the specified Class of Pilgrim
SmallCap Opportunities Fund:
% OF CLASS % OF FUND % OF FUND
BEFORE BEFORE AFTER
NAME AND ADDRESS CLASS REORGANIZATION REORGANIZATION REORGANIZATION
- ---------------- ----- -------------- -------------- --------------
____% ____% ____%
[TO BE INSERTED IN A SUBSEQUENT FILING WITH INFORMATION NO MORE THAN 30
DAYS PRIOR TO THE DATE OF THE PROXY.]
As of January __, 2002, the following persons owned beneficially or of
record 5% or more of the outstanding shares of the specified Class of Pilgrim
SmallCap Growth Fund:
% OF CLASS % OF FUND % OF FUND
BEFORE BEFORE AFTER
NAME AND ADDRESS CLASS REORGANIZATION REORGANIZATION REORGANIZATION
- ---------------- ----- -------------- -------------- --------------
[TO BE INSERTED IN A SUBSEQUENT FILING WITH INFORMATION NO MORE THAN 30
DAYS PRIOR TO THE DATE OF THE PROXY.]
E-1
PART B
PILGRIM SMALLCAP OPPORTUNITIES FUND
- --------------------------------------------------------------------------------
Statement of Additional Information
January ___, 2002
- --------------------------------------------------------------------------------
Acquisition of the Assets and Liabilities of By and in Exchange for Shares of
Pilgrim SmallCap Growth Fund Pilgrim SmallCap Opportunities Fund
(a series of Pilgrim Mutual Funds) 7337 East Doubletree Ranch Road
7337 East Doubletree Ranch Road Scottsdale, Arizona 85258-2034
Scottsdale, Arizona 85258-2034
This Statement of Additional Information is available to the shareholders of
Pilgrim SmallCap Growth Fund in connection with a proposed transaction whereby
all of the assets and liabilities of Pilgrim SmallCap Growth Fund, a series of
Pilgrim Mutual Funds, will be transferred to Pilgrim SmallCap Opportunities Fund
in exchange for shares of Pilgrim SmallCap Opportunities Fund.
This Statement of Additional Information of the Pilgrim SmallCap Opportunities
Fund consists of this cover page and the following documents, each of which was
filed electronically with the U.S. Securities and Exchange Commission and is
incorporated by reference herein:
1. The Statement of Additional Information for Pilgrim SmallCap Opportunities
Fund and Pilgrim SmallCap Growth Fund dated November 9, 2001, as filed on
November 9, 2001.
2. The Financial Statements of Pilgrim SmallCap Growth Fund are included in
the Annual Report of Pilgrim Mutual Funds dated May 31, 2001 as filed on
July 31, 2001 (for the Fund's Class A, B, and C shares) and August 2, 2001
(for the Fund's Class Q shares).
3. The Financial Statements of Pilgrim SmallCap Opportunities Fund are
included in the Annual Report of Pilgrim SmallCap Opportunities Fund dated
May 31, 2001, as filed on July 31, 2001 (for the Fund's Class A, B, C, I
and T shares) and August 2, 2001 (for the Fund's Class Q shares).
This Statement of Additional Information is not a prospectus. A Prospectus/Proxy
Statement dated ________ ___, 2001 relating to the Reorganization of Pilgrim
SmallCap Growth Fund may be obtained, without charge, by writing to ING Pilgrim
at 7337 East Doubletree Ranch Road, Scottsdale, Arizona 85258-2034 or calling
1-800-992-0180. This Statement of Additional Information should be read in
conjunction with the Prospectus/Proxy Statement.
1
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Shown below are unaudited financial statements for each Fund and pro forma
unaudited financial statements for the combined Fund, assuming the
Reorganization is consummated, as of May 31, 2001. The first table presents
Statements of Assets and Liabilities (unaudited) for each Fund and pro forma
unaudited figures for the combined Fund. The second table presents Statements of
Operations (unaudited) for each Fund and pro forma unaudited figures for the
combined Fund. The third table presents Portfolio of Investments for each Fund
and pro forma unaudited figures for the combined Fund. The tables are followed
by the Notes to the unaudited Pro Forma Financial Statements (unaudited).
STATEMENT OF ASSETS AND LIABILITIES AS OF MAY 31, 2001 (UNAUDITED)
PILGRIM PILGRIM
SMALLCAP SMALLCAP
OPPORTUNITIES GROWTH PRO FORMA PRO FORMA
FUND FUND ADJUSTMENTS COMBINED
------------- ------------- ------------- -------------
ASSETS:
Investments in securities, at value* $ 463,728,199 $ 364,432,818 $ 828,161,017
Short-term securities, at value -- 1,592,000 1,592,000
Cash 4,005,501 3,590,465 7,595,966
Receivables:
Fund shares sold 648,697 642,147 1,290,844
Dividends and interest -- 177 177
Investment securities sold 3,911,280 3,767,819 7,679,099
Prepaid expenses 188,946 52,506 241,452
------------- ------------- ------------- -------------
Total assets 472,482,623 374,077,932 -- 846,560,555
------------- ------------- ------------- -------------
LIABILITIES:
Payable for investment securities purchased 5,890,746 8,464,200 14,354,946
Payable for fund shares redeemed 1,217,184 1,208,560 2,425,744
Payable to affiliates 744,655 699,285 1,443,940
Other accrued expenses and liabilities 216,120 275,506 491,626
------------- ------------- ------------- -------------
Total liabilities 8,068,705 10,647,551 -- 18,716,256
------------- ------------- ------------- -------------
NET ASSETS $ 464,413,918 $ 363,430,381 $ -- $ 827,844,299
============= ============= ============= =============
NET ASSETS WERE COMPRISED OF:
Paid-in capital $ 446,061,280 $ 331,520,753 777,582,033
Undistributed net investment income -- -- --
Accumulated net realized loss on investments (41,431,517) (24,163,696) (65,595,213)
Net unrealized appreciation of investments 59,784,155 56,073,324 115,857,479
------------- ------------- ------------- -------------
NET ASSETS $ 464,413,918 $ 363,430,381 $ -- $ 827,844,299
============= ============= ============= =============
*Cost of securities $ 403,944,044 $ 308,359,494 $ -- $ 712,303,538
CLASS A:
Net assets $ 159,640,668 $ 119,135,822 $ 278,776,490
Shares outstanding 4,116,358 9,897,451 (6,825,357) (A) 7,188,452
Net asset value and redemption price per share $ 38.78 $ 12.04 $ 38.78
Maximum offering price per share (5.75%) $ 41.15 $ 12.77 $ 41.15
CLASS B:
Net assets $ 206,967,557 $ 75,304,291 $ 282,271,848
Shares outstanding 5,654,371 5,019,038 (2,961,544) (A) 7,711,865
Net asset value and redemption price per share $ 36.60 $ 15.00 $ 36.60
Maximum offering price per share $ 36.60 $ 15.00 $ 36.60
CLASS C:
Net assets $ 78,657,813 $ 159,910,378 $ 238,568,191
Shares outstanding 2,153,520 13,616,035 (9,238,527) (A) 6,531,028
Net asset value and redemption price per share $ 36.53 $ 11.74 $ 36.53
Maximum offering price per share $ 36.53 $ 11.74 $ 36.53
CLASS I:
Net assets $ 218 n/a $ 218
Shares outstanding 6 n/a 6
Net asset value and redemption price per share $ 39.02 n/a $ 39.02
Maximum offering price per share $ 39.02 n/a $ 39.02
CLASS Q:
Net assets $ 2,831,854 $ 9,079,890 $ 11,911,744
Shares outstanding 72,960 674,733 (440,776) (A) 306,917
Net asset value and redemption price per share $ 38.81 $ 13.46 $ 38.81
Maximum offering price per share $ 38.81 $ 13.46 $ 38.81
CLASS T:
Net assets $ 16,315,808 n/a $ 16,315,808
Shares outstanding 441,696 n/a 441,696
Net asset value and redemption price per share $ 36.94 n/a $ 36.94
Maximum offering price per share $ 36.94 n/a $ 36.94
- ----------
(A) Reflects new shares issued, net of retired shares of SmallCap Growth Fund.
(Calculation: Net Assets / NAV per share)
See Notes to Unaudited Financial Statements
2
STATEMENTS OF OPERATIONS (UNAUDITED)
SMALLCAP SMALLCAP
OPPORTUNITIES GROWTH PRO FORMA PRO FORMA
FUND FUND ADJUSTMENTS COMBINED
------------- ------------- ------------- -------------
TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED ENDED
31-MAY 31-MAY 31-MAY 31-MAY
2001 2001 2001 2001
------------- ------------- ------------- -------------
INVESTMENT INCOME:
Dividends, net of foreign taxes $ 611,617 $ 493,026 $ 1,104,643
Interest 992,691 1,584,282 2,576,973
------------- ------------- ------------- -------------
Total investment income 1,604,308 2,077,308 3,681,616
------------- ------------- ------------- -------------
EXPENSES:
Investment management fees 5,423,006 4,408,129 9,831,135
Distribution and service fees
Class A 544,497 508,168 (72,595)(A) 980,070
Class B 2,704,000 881,337 3,585,337
Class C 1,081,895 1,953,785 3,035,680
Class Q 5,516 28,143 33,659
Class T 224,044 -- 224,044
Administrative fees 585,660 -- 440,178 (A) 1,025,838
Transfer agent fees 422,308 771,251 (362,488)(A) 831,071
Shareholder reporting fees 251,988 221,242 473,230
Registration and filing fees 81,220 100,351 (80,281)(B) 101,290
Recordkeeping and pricing fees -- 125,989 125,989
Professional fees 220,275 88,195 (70,556)(B) 237,914
Custody fees 187,671 117,323 304,994
Shareholder servicing fees 245,589 35,961 281,550
Director's fees 33,425 30,490 63,915
Insurance fees 123 5,531 5,654
Miscellaneous fees 187,682 128,222 (51,289)(B) 264,615
Interest and credit facility fees -- 3,254 3,254
Merger fees 58,589 -- 58,589
------------- ------------- ------------- -------------
Total expenses 12,257,488 9,407,371 (197,031) 21,467,828
------------- ------------- ------------- -------------
Less:
Waived and reimbursed fees -- 14,389 (14,389)(A) --
------------- ------------- ------------- -------------
Net expenses 12,257,488 9,392,982 (182,642) 21,467,828
------------- ------------- ------------- -------------
Net investment loss (10,653,180) (7,315,674) 182,642 (17,786,212)
------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENS:
Net realized gain (loss) on investments (10,235,932) 7,889,381 (2,346,551)
Net change in unrealized depreciation
of investments (66,034,123) (65,508,541) (131,542,664)
------------- ------------- ------------- -------------
Net realized and unrealized loss
on investments (76,270,055) (57,619,160) (133,889,215)
------------- ------------- ------------- -------------
Decrease in net assets resulting from
operations $ (86,923,235) $ (64,934,834) $ 182,642 $(151,675,427)
============= ============= ============= =============
- ----------
(A) Reflects adjustment in expenses due to effects of new contractual rates.
(B) Reflects adjustment in expenses due to elimination of duplicative services.
See Notes to Unaudited Financial Statements
3
PORTFOLIO OF INVESTMENTS AS OF MAY 31, 2001 (UNAUDITED)
PILGRIM PILGRIM PILGRIM PILGRIM
SMALLCAP SMALLCAP SMALLCAP SMALLCAP
OPPORTUNITIES GROWTH PRO FORMA OPPORTUNITIES GROWTH PRO FORMA
SHARES SHARES SHARES VALUE VALUE VALUE
------ ------ ------ ----- ----- -----
COMMON STOCK: 100.04%
APPAREL: 2.55%
160,466 125,502 285,968 @ Coach, Inc. $ 5,624,333 $ 4,398,845 $ 10,023,178
65,800 51,700 117,500 @ Columbia Sportswear Co. 4,612,580 3,624,170 8,236,750
-- 65,600 65,600 @ Timberland Co. -- 2,828,016 2,828,016
----------- ----------- ------------
10,236,913 10,851,031 21,087,944
----------- ----------- ------------
BANKS: 0.33%
36,400 28,300 64,700 TCF Financial Corp. 1,524,796 1,185,487 2,710,283
----------- ----------- ------------
BIOTECHNOLOGY: 4.22%
65,000 51,200 116,200 @ Enzon, Inc. 4,550,000 3,584,000 8,134,000
289,100 216,300 505,400 @,@@ Hemosol, Inc. 2,804,270 2,098,110 4,902,380
67,600 47,400 115,000 @ Invitrogen Corp. 4,840,836 3,394,314 8,235,150
44,900 35,400 80,300 @ Myriad Genetics, Inc. 2,786,045 2,196,570 4,982,615
66,000 51,600 117,600 @ Protein Design Labs, Inc. 4,897,860 3,829,236 8,727,096
----------- ----------- ------------
19,879,011 15,102,230 34,981,241
----------- ----------- ------------
BUILDING MATERIALS: 0.48%
139,100 109,100 248,200 @ Dal-Tile Intl., Inc. 2,225,600 1,745,600 3,971,200
----------- ----------- ------------
COMMERCIAL SERVICES: 4.63%
365,900 429,300 795,200 @ Caremark Rx, Inc. 5,956,852 6,989,004 12,945,856
194,400 147,800 342,200 @ Pharmaceutical Product Development 6,238,296 4,742,902 10,981,198
112,500 87,800 200,300 @ Resources Connection 3,453,750 2,695,460 6,149,210
249,900 197,700 447,600 @ Sylvan Learning Systems, Inc. 4,623,150 3,657,450 8,280,600
----------- ----------- ------------
20,272,048 18,084,816 38,356,864
----------- ----------- ------------
COMPUTERS: 3.60%
271,300 211,900 483,200 @ Electronics for Imaging, Inc. 6,513,913 5,087,719 11,601,632
83,100 42,400 125,500 @ Manhattan Associates, Inc. 2,743,131 1,399,624 4,142,755
89,600 70,000 159,600 @ Mercury Computer Systems, Inc. 4,273,920 3,339,000 7,612,920
172,000 162,500 334,500 @ Numerical Technologies, Inc. 3,336,800 3,152,500 6,489,300
----------- ----------- ------------
16,867,764 12,978,843 29,846,607
----------- ----------- ------------
DIVERSIFIED FINANCIAL SERVICES: 2.26%
128,300 95,900 224,200 @ AmeriCredit Corp. 6,697,260 5,005,980 11,703,240
115,000 88,000 203,000 Heller Financial, Inc. 3,956,000 3,027,200 6,983,200
----------- ----------- ------------
10,653,260 8,033,180 18,686,440
----------- ----------- ------------
ELECTRICAL COMPONENTS & EQUIPMENT: 2.52%
201,700 146,700 348,400 @ Advanced Energy Industries, Inc. 6,595,590 4,797,090 11,392,680
166,300 121,800 288,100 @ Capstone Turbine Corp. 5,466,281 4,003,566 9,469,847
----------- ----------- ------------
12,061,871 8,800,656 20,862,527
----------- ----------- ------------
ELECTRONICS: 2.18%
151,900 119,300 271,200 @ FEI Co. 5,377,260 4,223,220 9,600,480
142,900 106,700 249,600 @ Varian, Inc. 4,851,455 3,622,465 8,473,920
----------- ----------- ------------
10,228,715 7,845,685 18,074,400
----------- ----------- ------------
ENVIRONMENTAL CONTROL: 2.08%
83,600 66,900 150,500 @ Stericycle, Inc. 3,580,588 2,865,327 6,445,915
161,000 198,900 359,900 @ Waste Connections, Inc. 4,807,460 5,939,154 10,746,614
----------- ----------- ------------
8,388,048 8,804,481 17,192,529
----------- ----------- ------------
FOOD: 1.04%
84,400 66,200 150,600 @ Whole Foods Market, Inc. 4,833,588 3,791,274 8,624,862
----------- ----------- ------------
HEALTHCARE-PRODUCTS: 7.66%
41,400 32,300 73,700 @ Biosite Diagnostics, Inc. 2,108,502 1,645,039 3,753,541
179,000 -- 179,000 @ Cardiodynamics 957,650 -- 957,650
124,800 97,400 222,200 @ Cytyc Corp. 2,720,640 2,123,320 4,843,960
81,800 64,600 146,400 @,@@ ESC Medical Systems Ltd. 2,229,050 1,760,350 3,989,400
205,900 152,000 357,900 @ Henry Schein, Inc. 7,772,725 5,738,000 13,510,725
142,900 103,300 246,200 @ Inverness Medical Technology, Inc. 5,187,270 3,749,790 8,937,060
114,100 81,500 195,600 @ Kensey Nash Corp. 1,483,300 1,059,500 2,542,800
50,400 39,800 90,200 @ Med-Design Corp. 1,163,736 918,982 2,082,718
84,600 66,200 150,800 @ Minimed, Inc. 3,956,742 3,096,174 7,052,916
85,500 63,900 149,400 @ Resmed, Inc. 4,668,300 3,488,940 8,157,240
60,400 44,000 104,400 @ Varian Medical Systems, Inc. 4,379,000 3,190,000 7,569,000
----------- ----------- ------------
36,626,915 26,770,095 63,397,010
----------- ----------- ------------
HEALTHCARE-SERVICES: 2.83%
93,800 74,200 168,000 @ American Healthways, Inc. 2,435,048 1,926,232 4,361,280
182,300 143,900 326,200 @ Amsurg Corp. 4,138,210 3,266,530 7,404,740
85,600 44,600 130,200 @ Rightchoice Managed Care, Inc. 3,338,400 1,739,400 5,077,800
113,400 86,700 200,100 @ Specialty Laboratories 3,734,262 2,855,031 6,589,293
----------- ----------- ------------
13,645,920 9,787,193 23,433,113
----------- ----------- ------------
INTERNET: 0.56%
179,500 141,700 321,200 @ Network Associates, Inc. 2,606,340 2,057,484 4,663,824
----------- ----------- ------------
MACHINERY-DIVERSIFIED: 2.67%
150,700 117,400 268,100 @ Brooks Automation, Inc. 7,415,947 5,777,254 13,193,201
144,700 114,500 259,200 @ Global Power Equipment Group, Inc. 4,992,150 3,950,250 8,942,400
----------- ----------- ------------
12,408,097 9,727,504 22,135,601
----------- ----------- ------------
See Notes to Unaudited Financial Statements
4
PILGRIM PILGRIM PILGRIM PILGRIM
SMALLCAP SMALLCAP SMALLCAP SMALLCAP
OPPORTUNITIES GROWTH PRO FORMA OPPORTUNITIES GROWTH PRO FORMA
SHARES SHARES SHARES VALUE VALUE VALUE
------ ------ ------ ----- ----- -----
MEDIA: 1.34%
180,800 142,200 323,000 @ Cumulus Media, Inc. 2,164,176 1,702,134 3,866,310
130,100 102,600 232,700 @ Emmis Communications Corp. 4,023,993 3,173,418 7,197,411
----------- ----------- ------------
6,188,169 4,875,552 11,063,721
----------- ----------- ------------
METAL FABRICATE/HARDWARE: 1.53%
120,400 94,400 214,800 @ The Shaw Group, Inc. 7,077,112 5,548,832 12,625,944
----------- ----------- ------------
NETWORKING PRODUCTS: 0.95%
166,800 131,100 297,900 @ Tellium, Inc. 4,416,864 3,471,528 7,888,392
----------- ----------- ------------
OIL & GAS: 13.84%
141,000 110,600 251,600 @ Dril-Quip, Inc. 4,441,500 3,483,900 7,925,400
107,400 88,100 195,500 @ Evergreen Resources, Inc. 4,833,000 3,964,500 8,797,500
114,900 90,500 205,400 @ Grant Prideco, Inc. 2,587,548 2,038,060 4,625,608
131,400 103,700 235,100 @ Hydril Co. 3,909,150 3,085,075 6,994,225
446,600 -- 446,600 @ Key Energy Services, Inc. 6,118,420 -- 6,118,420
131,200 125,600 256,800 @ Marine Drilling Co., Inc. 3,411,200 3,265,600 6,676,800
190,000 69,500 259,500 @ National-Oilwell, Inc. 6,555,000 2,397,750 8,952,750
299,300 272,350 571,650 @ Pride Intl., Inc. 7,970,359 7,252,681 15,223,040
220,400 172,600 393,000 @ Seitel, Inc. 3,857,000 3,020,500 6,877,500
194,500 149,400 343,900 @ Spinnaker Exploration Co. 7,912,260 6,077,592 13,989,852
139,200 110,000 249,200 @ Veritas DGC, Inc. 4,873,392 3,851,100 8,724,492
92,100 156,600 248,700 @ Westport Resources Corp. 2,675,505 1,975,400 4,650,905
199,900 68,000 267,900 @ W-H Energy Services, Inc. 6,016,990 4,713,660 10,730,650
80,950 63,200 144,150 XTO Energy, Inc. 2,388,025 1,864,400 4,252,425
----------- ----------- ------------
67,549,349 46,990,218 114,539,567
----------- ----------- ------------
PHARMACEUTICALS: 4.68%
159,800 125,100 284,900 @ Abgenix, Inc. 6,369,628 4,986,486 11,356,114
78,000 60,900 138,900 @ Alkermes, Inc. 2,361,060 1,843,443 4,204,503
167,400 122,100 289,500 @ Cubist Pharmaceuticals, Inc. 4,670,460 3,406,590 8,077,050
24,000 18,800 42,800 @ CV Therapeutics, Inc. 1,128,720 884,164 2,012,884
104,100 81,500 185,600 @ Imclone Systems, Inc. 5,168,565 4,046,475 9,215,040
-- 76,000 76,000 @ King Pharmaceuticals, Inc. -- 3,844,080 3,844,080
----------- ----------- ------------
19,698,433 19,011,238 38,709,671
----------- ----------- ------------
RETAIL: 13.05%
231,800 181,500 413,300 @ Abercrombie and Fitch Co. 9,557,114 7,483,245 17,040,359
85,350 87,000 172,350 @ American Eagle Outfitters, Inc. 3,136,613 3,197,250 6,333,863
154,200 120,900 275,100 @ AnnTaylor Stores Corp. 5,261,304 4,125,108 9,386,412
91,800 72,700 164,500 @ Bebe Stores, Inc. 2,466,666 1,953,449 4,420,115
15,300 12,200 27,500 @ BUCA, Inc. 333,540 265,960 599,500
180,600 134,900 315,500 @ Charlotte Russe Holding, Inc. 4,970,112 3,712,448 8,682,560
72,000 56,400 128,400 @ Childrens Place 2,062,800 1,615,860 3,678,660
-- 49,200 49,200 @ Factory 2-U Stores, Inc. -- 1,524,708 1,524,708
80,416 63,700 144,116 @ HOT Topic, Inc. 2,320,002 1,837,745 4,157,747
80,600 63,000 143,600 @ Krispy Kreme Doughnuts, Inc. 5,892,666 4,605,930 10,498,596
161,300 114,400 275,700 @ P.F. Chang's China Bistro, Inc. 6,242,310 4,427,280 10,669,590
91,000 66,400 157,400 @ TJX Cos., Inc. 3,044,860 2,221,744 5,266,604
82,000 64,700 146,700 @ Tweeter Home Entertainment Group, Inc. 2,214,000 1,746,900 3,960,900
184,400 140,500 324,900 @ Wet Seal, Inc. 6,463,220 4,924,525 11,387,745
177,100 131,900 309,000 @ Williams-Sonoma, Inc. 5,964,728 4,442,392 10,407,120
----------- ----------- ------------
59,929,935 48,084,544 108,014,479
----------- ----------- ------------
SEMICONDUCTORS: 12.83%
230,500 180,000 410,500 @,@@ ASM Intl. NV 5,100,965 3,983,400 9,084,365
135,600 106,600 242,200 @ ATMI, Inc. 3,551,025 2,791,588 6,342,613
175,400 136,500 311,900 @ Cirrus Logic, Inc. 3,472,920 2,702,700 6,175,620
150,700 117,900 268,600 @ Elantec Semiconductor, Inc. 4,822,400 3,772,800 8,595,200
90,000 -- 90,000 @ Entegris, Inc. 1,098,000 -- 1,098,000
18,400 79,000 97,400 @ Intersil Corp. 599,656 2,574,610 3,174,266
270,900 211,400 482,300 @ Lam Research Corp. 7,482,258 5,838,868 13,321,126
219,900 172,200 392,100 @ LTX Corp. 5,334,774 4,177,572 9,512,346
199,200 155,600 354,800 @ Microsemi Corp. 11,454,000 8,947,000 20,401,000
8,500 -- 8,500 @ Novellus Systems, Inc. 407,150 -- 407,150
220,500 164,900 385,400 @,@@ O2Micro Intl. Ltd. 2,229,255 1,667,139 3,896,394
100,300 78,600 178,900 @ Rudolph Technologies, Inc. 4,419,218 3,463,116 7,882,334
193,100 151,500 344,600 @ Simplex Solutions, Inc. 4,595,780 3,605,700 8,201,480
98,900 76,900 175,800 @ Veeco Instruments, Inc. 4,560,279 3,545,859 8,106,138
----------- ----------- ------------
59,127,680 47,070,352 106,198,032
----------- ----------- ------------
SOFTWARE: 6.30%
127,600 94,200 221,800 @ Eclipsys Corp. 2,774,024 2,047,908 4,821,932
154,000 115,100 269,100 @ HNC Software 4,322,780 3,230,857 7,553,637
214,700 167,700 382,400 @ Manugistics Group, Inc. 7,709,877 6,022,107 13,731,984
120,000 93,600 213,600 @ NetIQ Corp. 2,916,000 2,274,480 5,190,480
241,400 178,000 419,400 @ Peregrine Systems, Inc. 6,684,366 4,928,820 11,613,186
-- 4,400 4,400 @ Quest Software, Inc. -- 137,104 137,104
196,200 153,600 349,800 @ Serena Software, Inc. 5,132,592 4,018,176 9,150,768
----------- ----------- ------------
29,539,639 22,659,452 52,199,091
----------- ----------- ------------
TELECOMMUNICATIONS: 5.91%
168,100 132,700 300,800 @ Advanced Fibre Communications, Inc. 3,113,212 2,457,604 5,570,816
284,800 222,400 507,200 @ Avici Systems, Inc. 2,885,024 2,252,912 5,137,936
172,000 134,300 306,300 @ Digital Lightwave, Inc. 8,011,760 6,255,693 14,267,453
139,200 83,500 222,700 @ Finisar Corp. 2,094,960 1,256,675 3,351,635
70,900 42,400 113,300 @ Ixia 957,150 572,400 1,529,550
268,500 210,100 478,600 @ New Focus, Inc. 2,682,314 2,098,899 4,781,213
130,800 102,900 233,700 @ Powerwave Technologies, Inc. 1,778,880 1,399,440 3,178,320
138,000 107,800 245,800 @ RF Micro Devices, Inc. 3,599,040 2,811,424 6,410,464
101,700 79,600 181,300 @ Sonus Networks, Inc. 2,619,792 2,050,496 4,670,288
----------- ----------- ------------
27,742,132 21,155,543 48,897,675
----------- ----------- ------------
Total Common Stock
(Cost $403,944,044, $308,359,494,
$712,303,538) 463,728,199 364,432,818 828,161,017
----------- ----------- ------------
See Notes to Unaudited Financial Statements
5
SHORT TERM INVESTMENTS: 0.19%
PRINCIPAL AMOUNT VALUE
- ---------------- -----
REPURCHASE AGREEMENT: 0.19%
$ -- $1,592,000 $1,592,000 State Street Bank Repurchase Agreement
4.000%, due 06/01/01, (Collateralized by
$1,225,000 U.S. Treasury Bonds, 8.875%,
Due 08/15/17, Market Value $1,629,202) $ -- $ 1,592,000 $ 1,592,000
Total Short-Term Investments
(Cost $0, $1,592,000, $1,592,000) -- 1,592,000 1,592,000
------------ ------------ ------------
TOTAL INVESTMENTS IN SECURITIES
(COST $403,944,044 $309,951,494,
$713,895,538) 100.23% 463,728,199 366,024,818 $829,753,017
OTHER ASSETS AND LIABILITIES-NET -0.23% 685,719 (2,594,437) (1,908,718)
------ ----------- ----------- ------------
NET ASSETS 100.00% 464,413,918 363,430,381 $827,844,299
======= =========== =========== ============
- ----------
@ Non-income producing security
@@ Foreign Issuer
See Notes to Unaudited Financial Statements
5
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF COMBINATION
On November 2, 2001, the Boards of Pilgrim SmallCap Opportunities Fund
("SmallCap Opportunities Fund") and Pilgrim SmallCap Growth Fund ("SmallCap
Growth Fund") (collectively the "Funds"), approved an Agreement and Plan of
Reorganization (the "Plan") whereby, subject to approval by the shareholders of
SmallCap Growth Fund, SmallCap Opportunities Fund will acquire all the assets of
SmallCap Growth Fund subject to the liabilities of such Fund, in exchange for a
number of shares equal to the pro rata net assets of shares of the SmallCap
Opportunities Fund (the "Merger").
The Merger will be accounted for as a tax-free merger of investment
companies. The unaudited pro forma combined financial statements are presented
for the information of the reader and may not necessarily be representative of
what the actual combined financial statements would have been had the
reorganization occurred at May 31, 2001. The unaudited pro forma portfolio of
investments, and unaudited pro forma statement of assets and liabilities reflect
the financial position of SmallCap Opportunities Fund and SmallCap Growth Fund
at May 31, 2001. The unaudited pro forma statement of operations reflects the
results of operations of SmallCap Opportunities Fund and SmallCap Growth Fund
for the year ended May 31, 2001. These statements have been derived from the
Funds' respective books and records utilized in calculating daily net asset
value at the dates indicated above for SmallCap Opportunities Fund and SmallCap
Growth Fund under accounting principles generally accepted in the United States
of America. The historical cost of investment securities will be carried forward
to the surviving entity and results of operations of SmallCap Opportunities Fund
for pre-combination periods will not be restated.
The unaudited pro forma portfolio of investments, and unaudited pro forma
statement of assets and liabilities and statement of operations should be read
in conjunction with the historical financial statements of the Funds
incorporated by reference in the Statements of Additional Information.
NOTE 2 - SECURITY VALUATION
Investments in equity securities traded on a national securities exchange
or included on the NASDAQ National Market System are valued at the last reported
sale price. Securities traded on an exchange or NASDAQ for which there has been
no sale and securities traded in the over-the-counter-market are valued at the
mean between the last reported bid and ask prices. U.S. Government obligations
are valued by using market quotations or independent pricing services which use
prices provided by market-makers or estimates of market values obtained from
yield data relating to instruments or securities with similar characteristics.
All investments quoted in foreign currencies will be valued daily in U.S.
Dollars on the basis of the foreign currency exchange rates prevailing at the
time such valuation is determined by each Fund's Custodian. Securities for which
market quotations are not readily available are valued at their respective fair
values as determined in good faith and in accordance with policies set by the
Board of Directors. Investments in securities maturing in less than 60 days are
valued at cost, which, when combined with accrued interest, approximates market
value.
NOTE 3 - CAPITAL SHARES
The unaudited pro forma net asset value per share assumes additional shares
of common stock issued in connection with the proposed acquisition of SmallCap
Growth Fund by SmallCap Opportunities Fund as of May 31, 2001. The number of
additional shares issued was calculated by dividing the net asset value of each
Class of SmallCap Growth Fund by the respective Class net asset value per share
of SmallCap Opportunities Fund.
NOTE 4 - UNAUDITED PRO FORMA ADJUSTMENTS
The accompanying unaudited pro forma financial statements reflect changes
in fund shares as if the merger had taken place on May 31, 2001. SmallCap Growth
Fund expenses were adjusted assuming SmallCap Opportunities Fund's fee structure
was in effect for the year ended May 31, 2001.
6
NOTE 5 - MERGER COSTS
Merger costs are estimated at approximately $125,000 and are not included
in the unaudited pro forma statement of operations since these costs are not
reccurring. These costs represent the estimated expense of both Funds carrying
out their obligations under the Plan and consist of management's estimate of
legal fees, accounting fees, printing costs and mailing charges related to the
Merger. ING Pilgrim Investments LLC, Investment Adviser to the Funds, will bear
half of the cost of the Reorganization. The Funds will bear the other half of
the expenses relating to the proposed Reorganization.
NOTE 6 - FEDERAL INCOME TAXES
It is the policy of the Funds to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute substantially all of their net investment income and any net
realized gains to their shareholders. Therefore, a federal income tax or excise
tax provision is not required. In addition, by distributing during each calendar
year substantially all of its net investment income and net realized capital
gains, each Fund intends not to be subject to any federal excise tax.
The Fund intends to offset any net capital gains with any available capital
loss carryforward until each carryforward has been fully utilized or expires.
The amount of capital loss carryforward, which may offset SmallCap Opportunities
Fund's capital gains in any given year may be limited as a result of previous
reorganizations. In addition, no capital gain distribution shall be made until
the capital loss carryforward has been fully utilized or expires.
7
PILGRIM SMALLCAP GROWTH FUND
PROXY FOR A SPECIAL MEETING OF SHAREHOLDERS ON APRIL 4, 2002
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
The undersigned hereby appoint(s) and JAMES M. HENNESSY AND KIMBERLY A.
ANDERSON or any one or more of them, proxies, with full power of substitution,
to vote all shares of Pilgrim SmallCap Growth Fund (the "Fund"), a series of
Pilgrim Mutual Funds, which the undersigned is entitled to vote at the Special
Meeting of Shareholders of the Fund to be held at the offices of the Fund at
7337 East Doubletree Ranch Road, Scottsdale, Arizona 85258-2034 on April 4, 2002
at 8:00 a.m., local time, and at any adjournment thereof.
This proxy will be voted as instructed. If no specification is made, the
proxy will be voted "FOR" the proposals.
Please vote, date and sign this proxy and return it promptly in the
enclosed envelope.
Please indicate your vote by an "x" in the appropriate box below.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSAL:
1. To approve an Agreement and Plan of Reorganization providing for the
acquisition of all of the assets of Pilgrim SmallCap Growth Fund by Pilgrim
SmallCap Opportunities Fund in exchange for Class A, B, C and Q shares of
common stock of Pilgrim SmallCap Opportunities Fund and the assumption by
Pilgrim SmallCap Opportunities Fund of all of the liabilities of Pilgrim
SmallCap Growth Fund, a series of Pilgrim SmallCap Opportunities Fund.
For [ ] Against [ ] Abstain [ ]
This proxy card must be signed exactly as your name(s) appears hereon. If
as an attorney, executor, guardian or in some representative capacity or as an
officer of a corporation, please add titles as such. Joint owners must each
sign.
- ----------------------------- --------------
Signature Date
- ----------------------------- --------------
Signature (if held jointly) Date
Pilgrim Mutual Funds
7337 East Doubletree Ranch Road
Scottsdale, Arizona 85258-2034
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Section 5.4 of Registrant's Declaration of Trust provides the following:
(a) Subject to Paragraph (c) hereof, every person who is, or has been, a
Trustee, officer, employee or agent of the Trust shall be indemnified by the
Trust to the fullest extent permitted by law against all liability and against
all expenses reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or otherwise
by virtue of his being or having been a Trustee, officer, employee or agent and
against amounts paid or incurred by him in the settlement thereof in such
manner, provided, that, to the extent any claim, action, suit or proceeding
involves any act or omission of such Person with respect to one or more
particular Series or Classes of Shares of the Trust or the assets or operations
of one or more Series or Classes of Shares, such indemnification shall be
provided only from the assets (or proceeds thereof or income therefrom) of such
one or more Series or Classes of Shares and not from the assets (or proceeds
thereof or income therefrom) of any other Series or Class of Shares of the
Trust.
(b) The words "claim", "action", "suit" or "proceeding" shall apply to all
claims, actions, suits or proceedings (civil, criminal, or other including
appeals), actual or threatened; and the words "liability" and "expenses" shall
include without limitation, attorneys' fees, costs, judgments, amounts paid in
settlement, fines, penalties and other liabilities.
(c) No indemnification shall be provided hereunder to a Trustee or officer:
(i) against any liability to the Trust, a Series thereof, or the
Shareholders by reason of a final adjudication by a court or other body before
which a proceeding was brought that he engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office;
(ii) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that his
action was in the best interest of the Trust; and
(iii) in the event of a settlement or other disposition not involving
a final adjudication as provided in paragraph (b)(i) or (b)(ii) resulting in a
payment by a Trustee or officer, unless there has been a determination that such
Trustee or officer did not engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office:
(A) by the court or other body approving the settlement or other
disposition; or
(B) based upon the review of readily available facts (as opposed to
full trial-type inquiry) by (x) vote of a majority of the Disinterested
Trustees acting on the matter (provided that a majority of the
Disinterested Trustees then in office act on the matter) or (y) written
opinion of independent legal counsel.
C-1
(d) The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any other
rights to which any Trustee or officer may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee or officer and shall
inure to the benefit of the heirs, executors, administrators and assigns of such
a person. Nothing contained herein shall affect any rights to indemnification to
which personnel of the Trust other than Trustees and officers may be entitled by
contract or otherwise under law.
(e) Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding of the character described in paragraph (a) of this
Section may be advanced by the Trust prior to final disposition thereof upon
receipt of an undertaking by or on behalf of the recipient to repay such amount
if it is ultimately determined that he is not entitled to indemnification under
this Section, provided that either:
(i) such undertaking is secured by a surety bond or some other
appropriate security provided by the recipient or the Trust shall be insured
against losses arising out of any such advances; or
(ii) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees act on the matter) or an
independent legal counsel in a written opinion shall determine, based upon a
review of readily available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the recipient ultimately will be found
entitled to indemnification.
As used in this Section, a "Disinterested Trustee" is one who is not (i) an
Interested Person of the Trust (including anyone who has been exempted from
being an Interested Person by any rule, regulation or order of the Commission),
or (ii) involved in the claim, action, suit or proceeding.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to trustees,
officers and controlling persons of the Registrant by the Registrant pursuant to
the Trust Instrument or otherwise, the Registrant is aware that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and, therefore, is
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by trustees, officers or controlling persons of the Registrant in
connection with the successful defense of any act, suit or proceeding) is
asserted by such trustees, officers or controlling persons in connection with
the shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issues.
ITEM 16. EXHIBITS
(1) (A) Declaration of Trust -- previously filed as an Exhibit to Post-
Effective Amendment No. 15 to Registrant's Registration Statement on
Form N-1A on December 29, 1995 and incorporated herein by reference.
(B) Certificate of Amendment to Declaration of Trust -- previously filed
as an Exhibit to Post-Effective Amendment No. 20 to Registrant's
Registration Statement on Form N-1A on March 3, 1997 and incorporated
herein by reference.
C-2
(2) (A) Bylaws of Registrant -- previously filed as an Exhibit to the
Registrant's Post-Effective Amendment No. 15 to Registrant's
Registration Statement on Form N-1A on December 29, 1995 and
incorporated herein by reference.
(B) Amendment to Bylaws of Registrant -- previously filed as an Exhibit to
the Registrant's Post-Effective Amendment No. 29 to Registrant's
Registration Statement on Form N-1A on March 1, 2001 and incorporated
herein by reference.
(3) Not Applicable
(4) Form of Agreement and Plan of Reorganization between Pilgrim Mutual
Funds, on behalf of Pilgrim SmallCap Growth Fund, and Pilgrim SmallCap
Opportunities Fund -- filed herewith.
(5) Not Applicable
(6) Investment Management Agreement between Registrant and Pilgrim
Investments, Inc. -- previously filed as an Exhibit to Post-Effective
Amendment No. 29 to the Registrant's Registration Statement on Form
N-1A filed on March 1, 2001 and incorporated herein by reference.
(7) (A) Underwriting Agreement between Registrant and Pilgrim Securities, Inc.
-- previously filed as an Exhibit to Post-Effective Amendment No. 29
to Registrant's Registration Statement on Form N-1A filed on March 1,
2001 and incorporated herein by reference.
(B) Form of Amended and Restated Underwriting Agreement between Registrant
and Pilgrim Securities, Inc. -- previously filed as an Exhibit to
Post-Effective Amendment No. 31 to Registrant's Registration Statement
on Form N-1A filed on October 1, 20incorporated herein by reference.
(C) Form of Selling Group Agreement -- previously filed as an Exhibit to
Post-Effective Amendment No. 30 to the Registrant's Registration
Statement on Form N-1A filed on April 30, 2001 and incorporated herein
by reference.
(D) Form of Financial Institutions Selling Group Agreement -- previously
filed as an Exhibit to Post-Effective Amendment No. 30 to Registrant's
Registration Statement on Form N- 1A filed on April 30, 2001 and
incorporated herein by reference.
(8) Not Applicable
(9) (A) Custodian Agreement--previously filed as an Exhibit to Post-Effective
Amendment No. 15 to Registrant's Registration Statement on Form N-1A
on December 29, 1995 and incorporated herein by reference.
(B) Amendment to Custodian Agreement -- previously filed as an Exhibit to
Post Effective Amendment No. 22 to Registrant's Registration Statement
on Form N-1A on February 27, 1998 and incorporated herein by
reference.
(10) (A) Form of Rule 12b-1 Plan -- previously filed as an Exhibit to
Post-Effective Amendment No. 27 to Registrant's Registration Statement
on Form N-1A on January 4, 2000 and incorporated herein by reference.
C-3
(B) Form of Rule 18f-3 Plan -- previously filed as an Exhibit to
Post-Effective Amendment No. 27 to Registrant's Registration Statement
on Form N-1A on January 4, 2000 and incorporated herein by reference
(C) Form of Rule 18f-3 Plan -- previously filed as an Exhibit to
Post-Effective Amendment No. 31 to Registrant's Registration Statement
on Form N-1A on October 1, 2001 and incorporated herein by reference.
(11) Form of Opinion and Consent of Counsel -- filed herewith.
(12) Form of Opinion and Consent of Counsel supporting tax matters and
consequences -- filed herewith.
(13) (A) Other Material Contracts -- previously filed as an Exhibit to
Post-Effective Amendment No. 15 to Registrant's Registration Statement
on Form N-1A on December 29, 1995 and incorporated herein by
reference.
(B) Other Material Contracts -- previously filed as an Exhibit to Post-
Effective Amendment No. 16 to Registrant's Registration Statement on
Form N-1A on February 29, 1996 and incorporated herein by reference.
(14) Consent of KPMG LLP -- filed herewith.
(15) Not Applicable
(16) Powers of Attorney -- filed herewith.
(17) Not Applicable
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) under the Securities Act of 1933
[17 CFR 230.145(c)], the reoffering prospectus will contain the information
called for by the applicable registration form for reofferings by persons who
may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new registration statement for
the securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
C-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended (the
"1933 Act"), the Registrant has duly caused this Registration Statement on Form
N-14 to be signed on its behalf by the undersigned, thereunto duly authorized,
in the city of Scottsdale and the State of Arizona on the 12th day of December,
2001.
PILGRIM SMALLCAP OPPORTUNITIES FUND
By: /s/ Kimberly A. Anderson
----------------------------------------
Kimberly A. Anderson
Vice President and Secretary
Pursuant to the requirements of the 1933 Act, this Registration Statement
has been signed below by the following persons in the capacities and on the date
indicated.
Signature Title Date
- --------- ----- ----
Trustee and Chairman December 12, 2001
- ----------------------------
John G. Turner*
President and Chief December 12, 2001
- ---------------------------- Executive Officer
James M. Hennessy*
Senior Vice President and December 12, 2001
- ---------------------------- Principal Financial Officer
Michael J. Roland*
Trustee December 12, 2001
- ----------------------------
Paul S. Doherty*
Trustee December 12, 2001
- ----------------------------
Alan L. Gosule*
C-5
Signature Title Date
- --------- ----- ----
Trustee December 12, 2001
- ----------------------------
Walter H. May, Jr.*
Trustee December 12, 2001
- ----------------------------
Thomas J. McInerney*
Trustee December 12, 2001
- ----------------------------
Jock Patton*
Trustee December 12, 2001
- ----------------------------
David W.C. Putnam*
Trustee December 12, 2001
- ----------------------------
Blaine E. Rieke*
Trustee December 12, 2001
- ----------------------------
Richard A. Wedemeyer*
* By: /s/ Kimberly A. Anderson
--------------------------------
Kimberly A. Anderson
Attorney-in-Fact**
** Executed pursuant to powers of attorney filed herewith.
C-6
EXHIBIT INDEX
(4) Form of Agreement and Plan of Reorganization between Pilgrim Mutual Funds,
on behalf of Pilgrim SmallCap Growth Fund, and Pilgrim SmallCap
Opportunities Fund.
(11) Form of Opinion and Consent of Counsel
(12) Form of Opinion and Consent of Counsel Supporting Tax Matters and
Consequences
(14) Consent of KPMG LLP
(16) Powers of Attorney