As filed with the Securities and Exchange Commission on May 5, 1999
Registration No. ___________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. [ ] Post-Effective Amendment No.___
FOUNDERS FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
2930 East Third Avenue
Denver, Colorado 80206
(Address of Principal Executive Offices)
P.O. Box 173655, Denver, Colorado 80217-3655
(Mailing Address)
(303) 394-4404
(Registrant's Area Code and Telephone Number)
Kenneth R. Christoffersen, Esq.
2930 East Third Avenue
Denver, Colorado 80206
(Name and Address of Agent for Service)
Copies to:
Clifford J. Alexander, Esq.
Thomas M. Leahey, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W., 2nd Floor
Washington, D.C. 20036-1800
Telephone: (202) 778-9000
Approximate Date of Proposed Public Offering: as soon as practicable
after this Registration Statement becomes effective under the Securities Act of
1933.
Title of securities being registered: Common stock, par value $0.01 per
share.
No filing fee is required because of reliance on Section 24(f) of the
Investment Company Act of 1940, as amended.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE ON JUNE 4, 1999,
PURSUANT TO RULE 488.
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FOUNDERS FUNDS, INC.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following papers and documents:
Cover Sheet
Contents of Registration Statement
Letter to Shareholders
Notice of Special Meeting
Part A - Prospectus/Proxy Statement
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
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FOUNDERS FRONTIER FUND
(a series of Founders Funds, Inc.)
June 4, 1999
Dear Founders Frontier Fund Shareholder:
The following proxy materials describe a proposal that Founders
Frontier Fund ("Frontier Fund") reorganize and become part of Founders Discovery
Fund ("Discovery Fund"). If the proposal is approved and implemented, you will
automatically become a shareholder of Discovery Fund.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THIS
PROPOSAL. The Board believes that combining the two Funds will benefit you by
providing you with a portfolio that has an investment objective that is
substantially identical to that of Frontier Fund, the same portfolio manager,
and a larger combined asset base that could produce certain economies of scale
resulting in a lower expense ratio. The proxy materials provide more information
about the proposed reorganization and the two Funds.
We encourage you to read the full text of the proxy materials. To help
you more fully understand its contents, we have prepared a few brief Questions
and Answers ("Q&A") regarding this proposal. The Q&A is on the reverse side of
this letter.
YOUR VOTE IS IMPORTANT NO MATTER HOW MANY SHARES YOU OWN. VOTING YOUR
SHARES PROMPTLY WILL PERMIT FRONTIER FUND TO AVOID COSTLY FOLLOW-UP MAIL AND
TELEPHONE SOLICITATION. AFTER REVIEWING THE ATTACHED MATERIALS, PLEASE COMPLETE,
DATE, AND SIGN YOUR PROXY CARD AND MAIL IT IN THE ENCLOSED RETURN ENVELOPE
TODAY. AS AN ALTERNATIVE TO USING THE PAPER PROXY CARD TO VOTE, YOU MAY VOTE BY
TELEPHONE, BY FACSIMILE, THROUGH THE INTERNET, OR IN PERSON.
Very truly yours,
Jay A. Precourt
Chairman
Founders Funds, Inc.
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Q. WHY AM I BEING ASKED TO VOTE ON THIS PROPOSAL?
A. In order to combine Frontier Fund with Discovery Fund, state law
requires your approval. As a Frontier Fund owner, you are being asked to approve
this proposal.
Q. WHAT ARE THE BENEFITS TO ME AS A SHAREHOLDER?
A. The reorganization will result in a single Founders small-cap fund
with a larger combined asset base. The Board believes that this combination will
produce certain economies of scale, which could result in a lower expense ratio.
In addition, the Board believes that combining the Funds will promote more
efficient portfolio management, since it would result in a single portfolio of
small-capitalization stocks, rather than two smaller portfolios of such
securities.
Q. HOW WILL THE PROPOSAL AFFECT ME AS A FUND SHAREHOLDER?
A. On the date of the reorganization, you will be issued shares of
Discovery Fund having an aggregate net asset value equal to the aggregate net
asset value of your Frontier Fund shares on that date. You will not realize any
taxable gain or loss as a result of the reorganization, and the aggregate cost
basis of your Discovery Fund shares will be the same as it was for your Frontier
Fund shares. Your holding period for the Discovery Fund shares you receive will
include the holding period for your Frontier Fund shares, provided you held them
as a capital asset. Because Frontier Fund's investment objective and policies
are substantially similar to those of Discovery Fund, an investment in Frontier
Fund is subject to many of the same specific risks as an investment in Discovery
Fund.
Q. HOW DO THE FUND DIRECTORS SUGGEST THAT I VOTE?
A. After careful consideration, the directors unanimously recommend
that you vote "FOR" this proposal.
Q. WHOM DO I CALL FOR MORE INFORMATION?
A. If you have any questions regarding the proxy materials or the
voting process, please call Shareholder Communications Corporation at
1-800-949-8596 between 9 a.m. and 11 p.m., Eastern time, Monday through Friday.
They will be pleased to answer any questions that you may have.
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FOUNDERS FRONTIER FUND
(A SERIES OF FOUNDERS FUNDS, INC.)
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 3, 1999
Notice is hereby given that a Special Meeting of Shareholders
("Meeting") of Founders Frontier Fund ("Frontier Fund"), a series of Founders
Funds, Inc. ("Founders Funds"), will be held at the office of Founders Funds,
2930 East Third Avenue, Denver, Colorado, on August 3, 1999, at 3:00 p.m.,
Mountain time, for the following purposes:
(1) To approve a Plan of Reorganization ("Plan") providing for (a) the
acquisition of all the assets of Frontier Fund by Founders Discovery Fund
("Discovery Fund"), another series of Founders Funds, in exchange solely for
shares of Discovery Fund and the assumption by Discovery Fund of all of the
liabilities of Frontier Fund, (b) the distribution of those shares to the
shareholders of Frontier Fund, and (c) the subsequent termination of Frontier
Fund; and
(2) To transact other business that properly comes before the Meeting
or any adjournment thereof.
The Board of Directors of Founders Funds has fixed the close of
business on May 28, 1999 as the record date for the determination of the
shareholders of Frontier Fund entitled to notice of and to vote at the Meeting
or any adjournment thereof.
By order of the Board of Directors,
Margaret W. Chambers
Secretary
June 4, 1999
Denver, Colorado
- --------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT NO MATTER HOW MANY SHARES YOU OWN.
IT IS IMPORTANT THAT YOUR SHARES BE VOTED PROMPTLY SO THAT THEY MAY BE
REPRESENTED AT THE MEETING. IF YOU DO NOT EXPECT TO ATTEND THE MEETING IN
PERSON, PLEASE SIGN AND RETURN WITHOUT DELAY THE ENCLOSED PROXY CARD IN THE
POSTAGE PAID ENVELOPE PROVIDED OR VOTE USING ONE OF THE ALTERNATIVE METHODS
DESCRIBED ON THE ENCLOSED INSERT. YOUR PROMPT ATTENTION TO THE ENCLOSED PROXY
MATERIALS WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
- --------------------------------------------------------------------------------
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FOUNDERS DISCOVERY FUND
A SERIES OF FOUNDERS FUNDS, INC.
----------------------------------
FOUNDERS FRONTIER FUND
A SERIES OF FOUNDERS FUNDS, INC.
----------------------------------
2930 EAST THIRD AVENUE
DENVER, COLORADO 80206
1-800-525-2440
PROSPECTUS/PROXY STATEMENT DATED JUNE 4, 1999
This Prospectus/Proxy Statement ("Proxy Statement") is being furnished
to shareholders of Founders Frontier Fund ("Frontier Fund"), a series of
Founders Funds, Inc. ("Founders Funds"), in connection with the solicitation of
proxies by the Board of Directors of Founders Funds ("Board") for use at a
special meeting of shareholders to be held on August 3, 1999, at 3:00 p.m.,
Mountain time, and at any adjournment thereof ("Meeting"). This Proxy Statement
will first be mailed to shareholders on or about June 4, 1999.
As more fully described in this Proxy Statement, the main purpose of
the meeting is to vote on a proposed reorganization. In the reorganization,
Founders Discovery Fund ("Discovery Fund"), another series of Founders Funds,
would acquire all the assets of Frontier Fund in exchange solely for shares of
Discovery Fund and the assumption by Discovery Fund of all of the liabilities of
Frontier Fund. Those Discovery Fund shares would then be distributed to the
shareholders of Frontier Fund, so that each shareholder of Frontier Fund would
receive a number of full and fractional Discovery Fund shares having an
aggregate value that, on the effective date of the reorganization, is equal to
the aggregate net asset value of the shareholder's Frontier Fund shares. As soon
as practicable following the distribution of shares, Frontier Fund will be
terminated.
Discovery Fund is a diversified series of Founders Funds, which is an
open-end management investment company. Discovery Fund's investment objective is
to seek capital appreciation.
This Proxy Statement, which should be retained for future reference,
sets forth concisely information about the reorganization and Discovery Fund
that you should know before voting on the reorganization. A Statement of
Additional Information, dated June 4, 1999, relating to the reorganization and
including historical financial statements, has been filed with the Securities
and Exchange Commission ("SEC") and is incorporated herein by this reference
(that is, the Statement of Additional Information is legally a part of this
Proxy Statement). A Prospectus and a Statement of Additional Information for
Discovery Fund and Frontier Fund, each dated May 1, 1999, and Discovery Fund and
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Frontier Fund's Annual Report to Shareholders for the fiscal year ended December
31, 1998, have been filed with the SEC and are incorporated herein by this
reference. Copies of that Prospectus and the Annual Report to Shareholders
accompany this Proxy Statement. Copies of the other referenced documents may be
obtained without charge, by writing to Founders Funds, Inc., P.O. Box 173655,
Denver, Colorado 80217-3655, or by calling toll-free 1-800-525-2440.
The SEC maintains a website (http://www.sec.gov) that contains the
Statement of Additional Information and other material incorporated by
reference, together with other information regarding Discovery Fund and Frontier
Fund.
THE SEC HAS NOT APPROVED OR DISAPPROVED THE SHARES OF FOUNDERS DISCOVERY FUND
NOR DETERMINED WHETHER THIS PROXY STATEMENT IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
VOTING INFORMATION.............................................................1
THE REORGANIZATION.............................................................3
Summary..................................................................3
Comparison of Principal Risk Factors ....................................9
The Proposed Transaction................................................11
Other Business................................................................16
MISCELLANEOUS.................................................................16
Available Information...................................................16
Legal Matters...........................................................16
Experts.................................................................16
APPENDIX A: PLAN OF REORGANIZATION ..........................................A-1
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VOTING INFORMATION
A majority of Frontier Fund's shares outstanding on May 28, 1999
("Record Date"), represented in person or by proxy, shall constitute a quorum
and must be present for the transaction of business at the Meeting. If a quorum
is not present at the Meeting or a quorum is present but sufficient votes to
approve the proposal are not received, any officer entitled to preside at, or
act as a secretary of, the Meeting shall have the power to adjourn the Meeting
until a quorum is present or represented.
Shares held by shareholders present in person or represented by proxy
at the Meeting will be counted both for the purpose of determining the presence
of a quorum and for calculating the votes cast on the issue before the Meeting.
An abstention by a shareholder, either by proxy or by vote in person at the
Meeting, has the same effect as a negative vote. Shares held by a broker or
other fiduciary as record owner for the account of the beneficial owner are
counted toward the required quorum and in calculating the votes cast at the
Meeting if the beneficial owner has executed and timely delivered the necessary
instructions for the broker or fiduciary to vote the shares, or if the broker or
fiduciary has and exercises discretionary voting power.
Without notice other than announcement at the Meeting, the presiding
officer may seek one or more adjournments of the Meeting to solicit additional
shareholders, if necessary, to obtain a quorum for the Meeting, or to obtain the
required shareholder vote to approve the proposal. An adjournment would require
the affirmative vote of the holders of a majority of the shares present at the
Meeting (or an adjournment thereof) in person or by proxy and entitled to vote.
If adjournment is proposed in order to obtain the required shareholder vote on
the proposal, the persons named as proxies will vote in favor of adjournment
those shares which they are entitled to vote in favor of the proposal and will
vote against adjournment those shares which they are required to vote against
the proposal.
The individuals named as proxies on the enclosed proxy card will vote
in accordance with your directions as indicated on the proxy card, if your proxy
card is received properly dated and executed by you or by your duly appointed
agent or attorney-in-fact. If you sign, date, and return the proxy card, but
give no voting instructions, your shares will be voted IN FAVOR of the proposal
and the duly appointed proxies may, in their discretion, vote upon such other
matters as may come before the Meeting. The proxy card may be revoked by giving
another proxy or by letter or telegram revoking the initial proxy. To be
effective, revocation must be received by Founders Funds prior to the Meeting
and must indicate your name and account number. If you attend the Meeting in
person you may, if you wish, vote by ballot at the Meeting, thereby canceling
any proxy previously given.
Shares that are registered in your name, as well as shares held in
"street name" through a broker, may be voted via the Internet or by telephone.
To vote using either of these methods, you will need the 12-digit "control"
number(s) that appears on your proxy card(s). To vote via the Internet, please
access www.proxyvote.com on the World Wide Web. To vote by telephone, please
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call the toll-free number listed on the enclosed proxy card(s). In addition,
shares that are registered in your name may be voted by faxing your completed
proxy card to 1-800-733-1885.
The Internet voting procedures are designed to authenticate your
identity, to allow you to give your voting instructions, and to confirm that
your instructions have been recorded properly. If you vote online, you should
understand that there may be costs associated with electronic access, such as
usage charges from Internet access providers and telephone companies, which you
must bear.
As of the Record Date, Frontier Fund had _____________ shares of common
stock outstanding. The cost of the solicitation of proxies will be allocated PRO
RATA between Discovery Fund and Frontier Fund (each a "Fund" and, collectively,
the "Funds") based on the net assets of each Fund as of the closing of the
reorganization described below (or as of the time the reorganization is
abandoned if it is not consummated). Solicitation will be made primarily by mail
but also may be made by telephone or oral communications by representatives of
Founders Asset Management LLC ("Founders"), the investment adviser of each Fund,
who will not receive any compensation for these activities from either Fund, or
by Shareholder Communications Corporation ("SCC"), professional proxy
solicitors, who will be paid fees and expenses of up to approximately $_____ for
soliciting services. If votes are recorded by telephone, SCC will use procedures
designed to authenticate shareholders' identities, to allow shareholders to
authorize the voting of their shares in accordance with their instructions, and
to confirm that a shareholder's instructions have been properly recorded.
Founders does not know of any person who, as of the Record Date, owned
beneficially 5% or more of the shares of either Fund. Directors and officers of
Founders Funds own in the aggregate less than 1% of the shares of each Fund.
VOTE REQUIRED. Approval of the Plan of Reorganization discussed below
requires the affirmative vote of a majority of the outstanding voting securities
of Frontier Fund. Each outstanding full share of Frontier Fund is entitled to
one vote, and each outstanding fractional share thereof is entitled to a
proportionate fractional share of one vote.
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THE REORGANIZATION
SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy Statement, the Prospectus and Statement of Additional Information
of the Funds (which are incorporated herein by reference), and the Plan (as
defined below) (which is attached as Appendix A to this Proxy Statement) and is
qualified in its entirety by reference thereto.
THE PROPOSED REORGANIZATION
At a meeting held on March 12, 1999, the Board considered and approved
a Plan of Reorganization ("Plan") providing for the following series of
transactions (collectively, the "Reorganization"). The Plan provides for the
acquisition of all the assets of Frontier Fund by Discovery Fund, in exchange
solely for shares of common stock of Discovery Fund and the assumption by
Discovery Fund of all the liabilities of Frontier Fund. Frontier Fund then will
distribute those shares of Discovery Fund to Frontier Fund's shareholders, so
that each Frontier Fund shareholder will receive the number of full and
fractional Discovery Fund shares that is equal in aggregate value to the value
of the shareholder's holdings in Frontier Fund as of the day the Reorganization
is completed. Frontier Fund will be terminated as soon as practicable
thereafter.
As discussed more fully below, the Board believes that the
Reorganization will benefit Frontier Fund's shareholders. Discovery Fund has an
investment objective that is substantially similar to the investment objective
of Frontier Fund and has similar investment strategies. It is anticipated that
the Reorganization, which will result in a single Fund with a larger combined
asset base, could produce certain economies of scale resulting in a lower
expense ratio.
The Reorganization will occur as of the close of business on August 13,
1999, or at a later date when the Reorganization is approved and all
contingencies have been met ("Closing Date").
For the reasons set forth below under "The Proposed Transaction -
Reasons for the Reorganization," the Board, including its directors who are not
"interested persons," as that term is defined in the Investment Company Act of
1940, as amended ("1940 Act") ("Independent Directors"), has determined that the
Reorganization is in the best interests of Frontier Fund, that the terms of the
Reorganization are fair and reasonable and that the interests of Frontier Fund's
shareholders will not be diluted as a result of the Reorganization. Accordingly,
the Board recommends approval of the transaction. In addition, the Board,
including its Independent Directors, has determined that the Reorganization is
in the best interests of Discovery Fund, that the terms of the Reorganization
are fair and reasonable and that the interests of Discovery Fund's shareholders
will not be diluted as a result of the Reorganization.
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COMPARATIVE FEES
Founders does not charge any fees to buy, sell or exchange shares of
either Fund (although a $6 fee will be assessed for wire redemptions). The only
Fund costs a shareholder pays are annual Fund operating expenses that are
deducted from Fund assets. The fees and expenses incurred for the fiscal year
ended December 31, 1998 by each Fund, and PRO FORMA fees for Discovery Fund
after giving effect to the Reorganization, are shown below.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets) (as
a percentage of average daily net assets)
COMBINED FUND
DISCOVERY FUND FRONTIER FUND (PRO FORMA)
-------------
(UNAUDITED)
Management Fees 1.00% 1.00% 0.92%
12b-1 Fees(1) 0.25% 0.25% 0.25%
Other Expenses 0.32% 0.40% 0.33%
----- ----- -----
Total Fund Operating Expenses 1.57% 1.65% 1.50%
(1) Long-term shareholders may, over time, indirectly pay more in 12b-1 fees
than the economic equivalent of the maximum front-end sales charges permitted by
the National Association of Securities Dealers, Inc.
EXAMPLE OF EFFECT ON FUND EXPENSES
The example below is intended to help you compare the cost of investing
in Frontier Fund with the cost of investing in Discovery Fund, as well as the
cost of investing in Discovery Fund assuming the Reorganization has been
completed.
The example assumes that you invest $10,000 in the specified Fund for
the time periods indicated and redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% annual return,
that all dividends and other distributions are reinvested and that the Fund's
operating expenses remain the same. Although your actual costs and returns may
be higher or lower, based on these assumptions, your costs would be:
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
Discovery Fund $161 $499 $861 $1,878
Frontier Fund $169 $524 $903 $1,967
Combined Fund $153 $474 $818 $1,791
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FORM OF ORGANIZATION
Each Fund is a separate series of Founders Funds, a no-load, open-end,
diversified management investment company that was organized as a Maryland
corporation on June 19, 1987. Founders Funds' Articles of Incorporation
authorize the directors to issue up to 3 billion shares, par value $0.01 per
share. Of the authorized shares of Founders Funds, 100 million have been
allocated to each Fund. Neither Fund is required to (nor does it) hold annual
shareholder meetings.
INVESTMENT ADVISER AND OTHER SERVICE PROVIDERS
Founders serves as the investment adviser to both Funds. In this
capacity, Founders supervises all aspects of both Funds' operations and
administration. Founders is a 90%-owned subsidiary of Mellon Bank, N.A., which
is a wholly owned subsidiary of Mellon Bank Corporation, a publicly owned
multi-bank holding company that provides a comprehensive range of financial
products and services in domestic and selected international markets. The
affairs of the Funds, including the services provided by Founders, are subject
to the supervision and general oversight of the Board.
Robert T. Ammann, Vice President of Investments, has been the portfolio
manager for Discovery Fund since April 1997 and has managed Frontier Fund since
February 1, 1999. Mr. Ammann joined Founders in 1993 as a research analyst and
became a senior research analyst in 1996.
For its services in managing each Fund's assets, Founders is paid an
investment advisory fee by each Fund according to the same fee schedule, which
is listed below.
On Average Daily Net Assets But Not Exceeding Annual Fee
- --------------------------- ----------------- ----------
in Excess of
------------
$ 0 $250,000,000 1.00%
250,000,000 500,000,000 0.80%
500,000,000 ----- 0.70%
For the fiscal year ended December 31, 1998, each Fund paid an investment
management fee of 1.00% of its respective average net assets. Following the
Reorganization, the initial management fee for the combined Fund is expected to
be 0.92% of its average net assets.
The Funds have entered into shareholder services agreements with
Founders, pursuant to which Founders provides certain shareholder-related and
transfer agent services to the Funds. Out of this fee, Founders pays the fees
charged by Investors Fiduciary Trust Company, the Funds' transfer agent
("IFTC"). IFTC, located at 801 Pennsylvania, Kansas City, Missouri 64105, also
serves as the Funds' dividend disbursing agent, redemption agent, and custodian.
Founders also performs portfolio accounting for the Funds, which
includes, among other duties, calculating net asset value ("NAV"), monitoring
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compliance with regulatory requirements, and reporting. In addition, Founders
provides office space and facilities for the Funds and pays the salaries, fees
and expenses of all Founders officers and other employees connected with the
operation of Founders Funds.
Premier Mutual Fund Services, Inc. ("Premier"), located at 60 State
Street, Boston, Massachusetts 02109, is the distributor for both Funds.
Premier's ultimate parent is Boston Institutional Group, Inc. All of the Funds'
officers are affiliated with Premier or its affiliates.
Each Fund's shares are subject to a distribution plan whereby the Fund
pays for distribution and related services at an annual rate that may be less
than, but that may not exceed, 0.25% of its average daily net assets. These fees
may be used to pay directly, or to reimburse Premier for paying, expenses in
connection with distribution of the Funds' shares, services provided to
shareholders, and related activities. Payments by one Fund under its
distribution plan may not be used to finance distribution of any shares of the
other Fund (or any other fund advised by Founders).
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of the Funds are set forth
below. Each Fund's investment objective may be changed only if approved by a
vote of its shareholders. Discovery Fund has an investment objective generally
similar to that of Frontier Fund in that each Fund seeks capital appreciation by
investing in small companies. Discovery Fund may invest up to 30% of its total
assets in foreign securities, while Frontier Fund has the flexibility to be
completely invested in U.S. or foreign securities. Both Funds may use options,
futures, forward contracts and a variety of other financial instruments for risk
management and certain investment purposes. There can be no assurance that
either Fund will achieve its investment objective.
DISCOVERY FUND. Discovery Fund has an investment objective of capital
appreciation. It normally invests at least 65% of its total assets in common
stocks of small, rapidly growing U.S. companies with market capitalizations or
annual revenues between $10 million and $1.5 billion (although the upper limit
was $500 million prior to May 1, 1999). The Fund also may invest in larger
companies if, in Founders' opinion, they represent better prospects for capital
appreciation. Although Discovery Fund normally invests in common stocks of
U.S.-based companies, it may invest up to 30% of its total assets in foreign
securities.
FRONTIER FUND. Frontier Fund's investment objective also is capital
appreciation. It pursues its objective by normally investing at least 65% of its
total assets in common stocks of U.S. and foreign companies with market
capitalizations or annual revenues of $200 million to $1.5 billion. While
Frontier Fund normally will be at least 50% invested in U.S. companies and have
no more than 25% of its total assets invested in any one foreign country, it
also has the flexibility to be completely invested in U.S. or foreign
securities, depending on investment opportunities. The Fund also may invest in
larger companies if, in Founders' opinion, they represent better prospects for
capital appreciation.
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OTHER POLICIES OF BOTH FUNDS. Both Funds may invest up to 15% of the
market value of their net assets, measured at the time of purchase, in illiquid
securities, including securities that are not readily marketable. Each Fund may
also invest in securities that are subject to restrictions on resale pursuant to
Rule 144A under the Securities Act of 1933, as amended ("Rule 144A securities").
When market or economic conditions are unfavorable, each Fund may assume a
defensive position by temporarily investing up to 100% of its assets in
high-quality money market instruments, such as U.S. government obligations,
commercial paper, bank obligations, or repurchase agreements, seeking to protect
its assets until conditions stabilize. Both Funds may also enter into repurchase
agreements that mature in more than seven days and may be considered illiquid.
OPERATIONS OF DISCOVERY FUND FOLLOWING THE REORGANIZATION
As indicated above, the investment objectives and policies of the two
Funds are substantially similar. Based on its review of the investment
portfolios of each Fund, Founders Funds believes that all the assets held by
Frontier Fund will be consistent with the investment policies of Discovery Fund
and thus can be transferred to and held by Discovery Fund if the Reorganization
is approved. If, however, Frontier Fund has any assets that may not be held by
Discovery Fund, those assets will be sold prior to the Reorganization. The
proceeds of such sales will be held in temporary investments or reinvested in
assets that qualify to be held by Discovery Fund. The possible need for Frontier
Fund to dispose of assets prior to the Reorganization could result in its
selling securities at a disadvantageous time and could result in its realizing
losses that would not otherwise have been realized. Alternatively, these sales
could result in Frontier Fund's realizing gains that would not otherwise have
been realized, the net proceeds of which would be included in a distribution to
its shareholders prior to the Reorganization.
As discussed above, Founders serves as investment adviser to both Funds
and will maintain its oversight function after the Reorganization. In addition,
the directors and officers of Founders Funds, who currently act for both Funds,
and their common distributor, administrator and other outside agents will
continue to serve in their current capacities.
PURCHASES, REDEMPTIONS AND EXCHANGE RIGHTS
PURCHASES. Shares of each Fund may be purchased by wire, telephone,
mail or direct payroll purchase or through the Funds' website or in person. The
shares of each Fund are sold on a continuous basis at the NAV per share next
determined after a purchase request is received in good order. The NAV per share
for each Fund is computed separately and is determined once each day that the
New York Stock Exchange is open ("Business Day"), as of the close of regular
trading on that exchange. For a more complete discussion of share purchases, see
"How to Buy and Sell Shares - Calculating Share Price" in the Funds' Prospectus.
REDEMPTIONS. Shares of each Fund may be redeemed by telephone, mail,
exchange, periodic withdrawal plan or wire or in person. Redemptions are made at
the NAV per share next determined after a request in proper form is received at
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the Fund's office or by certain agents of the Funds or their distributor.
Normally, payment of redemption proceeds will be mailed within three business
days following receipt of the required documents.
Although Founders Funds' Articles of Incorporation authorize a
redemption charge, it has no intention currently to impose this charge. Although
Founders Funds reserves the right to redeem shares of both Funds by delivery of
readily marketable securities, it has obligated itself during any 90-day period
to redeem shares for any one shareholder solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the Fund at the beginning of that
period. In the event of a redemption in kind, the investor will incur brokerage
costs in converting the securities into cash. For a more complete discussion of
share redemption procedures, see "Purchases and Redemptions - Redemptions" in
the Funds' Statement of Additional Information.
Frontier Fund shares will no longer be available for purchase beginning
on the Business Day following the Closing Date. Redemptions of Frontier Fund's
shares may be effected through the Closing Date.
EXCHANGE RIGHTS. Shares of each Fund are exchangeable for shares of
other funds advised by Founders on the basis of their respective NAVs per share
at the time of the exchange. After the Reorganization, shares of Discovery Fund
will continue to be exchangeable for shares of other funds advised by Founders.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each Fund earns investment income in the form of dividends and interest
on its investments. Dividends are automatically reinvested in additional shares
of a Fund at the NAV on the ex-dividend date unless you have requested
otherwise.
Each Fund also realizes capital gains and losses when it sells
securities or derivative instruments for more or less than it paid. If total
gains on these sales exceed total losses (including losses carried forward from
previous years), a Fund has capital gain net income. Any net realized capital
gains, after utilization of capital loss carryforwards, are distributed to
shareholders each December. Capital gain distributions are automatically
reinvested in shares of the distributing Fund at the NAV on the ex-distribution
date unless otherwise requested. Dividends and other distributions are paid to
holders of shares on the record date of the distribution regardless of how long
a Fund's shares have been held by the shareholder. Each Fund intends to
distribute substantially all investment company taxable income and net realized
capital gains.
On or before the Closing Date, Frontier Fund will declare as a
distribution substantially all of its net investment income and realized net
capital gain, if any, and distribute that amount plus any previously declared
but unpaid distributions, in order to continue to maintain its tax status as a
regulated investment company. To the extent Frontier Fund sells securities prior
to the Closing Date, it may recognize net gains or losses. Any net recognized
gains would increase the amount of any distribution made to shareholders of
Frontier Fund prior to the Closing Date.
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FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
Founders Funds has received an opinion of its special counsel,
Kirkpatrick & Lockhart LLP, to the effect that the Reorganization will
constitute a tax-free reorganization within the meaning of section 368(a)(1)(C)
of the Internal Revenue Code of 1986, as amended ("Code"). Accordingly, neither
Fund will recognize any gain or loss as a result of the Reorganization, nor will
the Shareholders of either Fund. See "The Proposed Transaction - Federal Income
Tax Considerations," below.
COMPARISON OF PRINCIPAL RISK FACTORS
An investment in each Fund is subject to specific risks arising from
the types of securities in which it invests as well as to general risks arising
from investing in any mutual fund. The principal specific risks associated with
investing in the Funds include the following.
SECURITIES OF SMALLER COMPANIES. Each Fund normally invests a
significant portion of its assets in the securities of small companies, which
the Funds define as those with market capitalizations or annual revenues of $1.5
billion or less.
Small companies (particularly those trading "over-the-counter") may be
in the early stages of development; have limited product lines, markets or
financial resources; and/or lack management depth. These companies may be more
impacted by intense competition from larger companies, and the trading market
for their securities may be less liquid and more volatile. However, the sales
and earnings growth rates of small companies often exceed those of larger
companies, which may be reflected in a greater potential for share price
appreciation. As a result, investments in small companies involve greater risk
than larger, more established companies, and the NAV of each Fund may fluctuate
more widely than other funds or popular market averages.
FOREIGN SECURITIES. Discovery Fund may invest up to 30% of its total
assets in foreign securities. By comparison, Frontier Fund may invest all of its
assets in securities of foreign issuers, although it will normally invest at
least 50% of its assets in U.S. companies. Investments in foreign securities are
influenced not only by the returns on the foreign investments themselves, but
also by currency fluctuations. In addition, there may be less governmental
supervision of foreign stock exchanges, security brokers, and issuers of
securities. Moreover, there is generally less publicly available information,
reports and ratings about foreign companies and other foreign issuers than that
which is available about companies and issuers in the United States. Foreign
issuers also are generally subject to fewer uniform accounting, auditing and
financial reporting standards, practices and requirements as compared to those
applicable to U.S. issuers. Foreign markets have substantially less volume than
U.S. markets and are not generally as liquid as, and may be more volatile than,
those in the United States. Brokerage commissions and other transaction costs
are generally higher than in the United States, and settlement periods are
longer. With respect to certain foreign countries, investments may be subject to
the possibility of adverse changes in investment or exchange control
regulations, expropriation or confiscatory taxation, limitations on the removal
of funds or other assets of a Fund, political or social instability, or
diplomatic developments that could affect U.S. investments in those countries.
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Each Fund also may invest without limit in American Depositary Receipts
and American Depositary Shares (collectively, "ADRs"). ADRs are subject to some
of the same risks as direct investments in foreign securities, including the
risk that material information about the issuer may not be disclosed in the
United States and the risk that currency fluctuations may adversely affect the
value of the ADR.
FOREIGN CURRENCY TRANSACTIONS. Each Fund may use forward foreign
currency contracts ("forward contracts") in connection with the purchase or sale
of a specific security and as a hedge against fluctuations in foreign exchange
rates during the time when the Fund holds foreign securities. A forward contract
is an agreement between contracting parties to exchange an amount of currency at
some future time at an agreed upon rate. While each Fund may trade forward
contracts to reduce certain risks, trading in these instruments itself entails
other risks. An incorrect forecast of currency prices may result in poorer
overall performance by using the contracts than by not using them. In addition,
some forward contracts may not have a broad and liquid market, in which case a
Fund may not be able to close them at a favorable price.
ILLIQUID AND RULE 144A SECURITIES. Each Fund may invest up to 15% of
its net assets in illiquid securities, including restricted securities and other
investments that are not readily marketable. Restricted securities are
securities that are subject to restrictions on their resale because they have
not been registered under the Securities Act of 1933, as amended ("1933 Act").
These limitations on resale and marketability may have the effect of preventing
a Fund from disposing of such a security at the time desired or at a reasonable
price. In addition, to resell a restricted security, a Fund might have to bear
the expense and incur the delays associated with effecting registration. Each
Fund may also invest in Rule 144A securities, which are securities that can be
resold to institutional investors in accordance with certain parameters
specified in Rule 144A under the 1933 Act. However, an insufficient number of
qualified institutional buyers interested in purchasing a Rule 144A security
held by a Fund could adversely affect the marketability of such security, and
the Fund might be unable to dispose of the security promptly or at a reasonable
price.
FIXED-INCOME SECURITIES. Each Fund may purchase convertible securities
and preferred stocks that are rated below investment grade either at the time of
purchase or as a result of a reduction in rating after purchase, but such
securities may not be rated lower than B. Each Fund may invest in bonds,
debentures and corporate obligations (other than convertible bonds and preferred
stocks) only if they are rated investment grade. The Funds also may invest in
unrated convertible securities and preferred stocks, if Founders believes they
are equivalent in quality to the rated securities the Fund may buy. Neither Fund
will invest more than 5% of its total assets in fixed-income securities (other
than preferred stock) rated below investment grade.
FUTURES CONTRACTS AND OPTIONS. To hedge its portfolio, each Fund may
enter into futures contracts and forward contracts and may purchase and/or sell
(write) options on securities, securities indices, futures contracts, and
foreign currencies. These are sometimes referred to as "derivative" instruments.
All of these practices entail risks and can be highly volatile. If interest or
exchange rates or financial indices move in an unexpected manner, a Fund may not
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achieve the desired benefits of these instruments or may realize losses and thus
be in a worse position. In addition, the markets for these instruments may not
be liquid. For a more detailed discussion of these instruments and their risks,
see the Funds' Statement of Additional Information.
PORTFOLIO TURNOVER. Each Fund's investment portfolio is actively
traded. The securities in a Fund's portfolio may be sold without regard to the
time they have been held when investment considerations warrant that action. In
addition, each Fund may engage in short-term trading. As a result, a Fund's
portfolio turnover rate may be higher than that of other mutual funds with the
same investment objective. This turnover may result in greater brokerage
commissions and acceleration of recognition of capital gains, which are taxable
when distributed to shareholders.
YEAR 2000. The Funds could be adversely affected if the computer
systems used by Founders and the Funds' other service providers do not properly
process and calculate date-related information on or after January 1, 2000.
Founders is working to avoid Year 2000-related problems in its systems and to
obtain assurances from other service providers that they are taking similar
steps. In addition, issuers of securities in which the Funds invest may be
adversely affected by Year 2000-related problems. This could have an impact on
the value of the Funds' investments and the Funds' share prices.
COMPARISON BETWEEN THE FUNDS. Because Frontier Fund's investment
objective and policies are substantially similar to those of Discovery Fund, an
investment in Frontier Fund is subject to many of the same specific risks as an
investment in Discovery Fund. To the extent that Frontier Fund invests to a
greater degree than Discovery Fund in foreign securities, Frontier Fund will
incur a higher degree of the investment risks associated with those investments.
Although Frontier Fund's investment portfolio may be traded without regard to
the time investments are held, its portfolio turnover rate has generally been
lower than that of Discovery Fund over the past five years. If this historical
pattern continues, Discovery Fund may be expected to have higher brokerage fees
and be more likely to experience accelerated recognition of capital gains. An
investment in Discovery Fund also may involve greater risks because the Fund may
invest in smaller companies than those in which Frontier Fund may invest.
THE PROPOSED TRANSACTION
REORGANIZATION PLAN
The terms and conditions under which the proposed transaction will be
consummated are set forth in the Plan. Significant provisions of the Plan are
summarized below; however, this summary is qualified in its entirety by
reference to the Plan, which is attached as Appendix A to this Proxy Statement.
The Plan provides for (a) the acquisition by Discovery Fund on the
Closing Date of all the assets of Frontier Fund in exchange solely for Discovery
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Fund shares and the assumption by Discovery Fund of all of Frontier Fund's
liabilities and (b) the distribution of those Discovery Fund shares to the
shareholders of Frontier Fund.
The assets of Frontier Fund to be acquired by Discovery Fund include
all cash, cash equivalents, securities, commodities and future interests,
dividend and interest receivables, claims and rights of action owned by Frontier
Fund, and any deferred or prepaid expenses shown as assets on Frontier Fund's
books. Discovery Fund will assume from Frontier Fund all liabilities, debts,
obligations, expenses, costs, charges and reserves of Frontier Fund as of the
Valuation Time (defined below); however, Frontier Fund will endeavor to
discharge all of its known liabilities and obligations and duties before the
Closing Date. Discovery Fund will deliver its shares to Frontier Fund, which
will distribute the shares to Frontier Fund's shareholders.
The value of Frontier Fund's net assets to be acquired by Discovery
Fund and the NAV per share of the Discovery Fund shares to be exchanged for
those assets will be determined as of the close of trading on the floor of the
New York Stock Exchange on the Closing Date ("Valuation Time"), using the
valuation procedures set forth in Founders Funds' Articles of Incorporation and
in the Funds' then-current Prospectus and Statement of Additional Information.
Frontier Fund's net value shall be the value of its assets to be acquired by
Discovery Fund, less the amount of Frontier Fund's liabilities, as of the
Valuation Time.
As soon after consummation of the Reorganization as is conveniently
possible, Frontier Fund will distribute the Discovery Fund shares it receives
PRO RATA to its shareholders of record as of the Valuation Time, so that each
Frontier Fund shareholder will receive a number of full and fractional Discovery
Fund shares equal in aggregate value to the shareholder's holdings in Frontier
Fund. Frontier Fund will be terminated as soon as reasonably practicable after
the Reorganization. The shares will be distributed by opening accounts on the
books of Discovery Fund in the names of the Frontier Fund shareholders and by
transferring to those accounts the shares previously credited to the account of
Frontier Fund on those books. Fractional shares in Discovery Fund will be
rounded to the third decimal place.
Because Discovery Fund shares will be issued at NAV in exchange for the
net assets of Frontier Fund, the aggregate value of Discovery Fund shares issued
to Frontier Fund shareholders will equal the aggregate value of Frontier Fund
shares. The NAV per share of Discovery Fund will be unchanged by the
transaction. Thus, the Reorganization will not result in a dilution of any
shareholder's interest.
Any transfer taxes payable upon issuance of Discovery Fund shares in a
name other than that of the registered Frontier Fund shareholder will be paid by
the person to whom those shares are to be issued as a condition of such
transfer. Any reporting responsibility of Frontier Fund to a public authority
will continue to be its responsibility until it is dissolved.
The expenses of the Reorganization, including professional fees and the
cost of soliciting proxies for the Meeting, consisting principally of printing
and mailing expenses, together with the cost of any supplementary solicitation,
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will be allocated PRO RATA between the Funds based on their respective net
assets as of the Closing Date (or, if the Reorganization is not consummated, as
of the date the Plan is terminated or the Reorganization is abandoned).
The consummation of the Reorganization is subject to a number of
conditions set forth in the Plan, some of which may be waived by either Fund. In
addition, the Plan may be amended in any manner determined by the Board, except
that no amendment may be made subsequent to the Meeting that has a material
adverse effect on the interests of Frontier Fund's shareholders.
REASONS FOR THE REORGANIZATION
The Board, including a majority of its Independent Directors, has
determined that the Reorganization is in the best interests of each Fund, that
the terms of the Reorganization are fair and reasonable, and that the interests
of each Fund's shareholders will not be diluted as a result of the
Reorganization.
In approving the Reorganization, the Board, including a majority of its
Independent Directors, on behalf of each Fund, considered a number of factors,
including the following:
o the compatibility of the Funds' investment objectives, policies
and restrictions;
o the effect of the Reorganization on the Funds' expected
investment performance;
o the effect of the Reorganization on the expense ratio of each
Fund relative to its current expense ratio;
o the costs to be incurred by each Fund as a result of the
Reorganization;
o the tax consequences of the Reorganization; and
o the potential benefits of the Reorganization to Founders and
other persons.
The Reorganization was recommended to the Board on behalf of each Fund
by Founders at a meeting of the Board held on March 12, 1999. In recommending
the Reorganization, Founders advised the Board that because combining the two
Funds would result in a single fund with a larger combined asset base, the
result may be a lower expense ratio. Further, the Board was advised that the
Reorganization would promote more efficient portfolio management because it
would create a single larger portfolio of securities of small capitalization
companies rather than two smaller portfolios of such securities.
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DESCRIPTION OF SECURITIES TO BE ISSUED
Both Funds are series of Founders Funds. Founders Funds is registered
with the SEC as an open-end management investment company. It has an authorized
capitalization of three billion shares of common stock (par value $0.01 per
share). Shares of each Fund entitle their holders to one vote per full share and
fractional votes for fractional shares held.
Neither Fund holds annual meetings of shareholders, although the
directors will call a meeting of shareholders for action by shareholder vote as
may be required by the 1940 Act or Founders Funds' Articles of Incorporation.
The rights of shareholders of each Fund with respect to shareholder
meetings, inspection of shareholder lists and distributions on liquidation of a
Fund are identical.
FEDERAL INCOME TAX CONSIDERATIONS
The exchange of Frontier Fund's assets for Discovery Fund shares and
Discovery Fund's assumption of Frontier Fund's liabilities is intended to
qualify for federal income tax purposes as a tax-free reorganization under
section 368(a)(1)(C) of the Code. Founders Funds has received an opinion of its
special counsel, Kirkpatrick & Lockhart LLP, substantially to the effect that:
o Discovery Fund's acquisition of Frontier Fund's assets in
exchange solely for Discovery Fund shares and Discovery Fund's
assumption of Frontier Fund's liabilities, followed by Frontier
Fund's distribution of those shares PRO RATA to its shareholders
constructively in exchange for their Frontier Fund shares, will
constitute a "reorganization" within the meaning of section
368(a)(1)(C) of the Code, and each Fund will be "a party to a
reorganization" within the meaning of section 368(b) of the
Code;
o A Frontier Fund shareholder will recognize no gain or loss on
the constructive exchange of all its Frontier Fund shares solely
for Discovery Fund shares pursuant to the Reorganization;
o A Frontier Fund shareholder's aggregate basis for the Discovery
Fund shares to be received by it in the Reorganization will be
the same as the aggregate basis for its Frontier Fund shares to
be constructively surrendered in exchange for those Discovery
Fund shares, and its holding period for those Discovery Fund
shares will include its holding period for those Frontier Fund
shares, provided they are held as capital assets by the
shareholder on the Closing Date;
o Frontier Fund will recognize no gain or loss on the transfer to
Discovery Fund of its assets in exchange solely for Discovery
Fund shares and Discovery Fund's assumption of Frontier Fund's
liabilities or on the subsequent distribution of those shares to
Frontier Fund's shareholders in constructive exchange for their
Frontier Fund shares;
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o Discovery Fund will recognize no gain or loss on its receipt of
the transferred assets in exchange solely for Discovery Fund
shares and its assumption of Frontier Fund's liabilities; and
o Discovery Fund's basis for the transferred assets will be the
same as the basis thereof in Frontier Fund's hands immediately
before the Reorganization, and Discovery Fund's holding period
for those assets will include Frontier Fund's holding period
therefor.
The tax opinion states that no opinion is expressed as to the effect of
the Reorganization on the Funds or any shareholder with respect to any asset as
to which any unrealized gain or loss is required to be recognized for federal
income tax purposes at the end of a taxable year (or on the termination or
transfer thereof) under a mark-to-market system of accounting.
Shareholders of Frontier Fund should consult their tax advisers
regarding the effect, if any, of the Reorganization in light of their individual
circumstances. Because the foregoing discussion relates only to federal income
tax consequences of the Reorganization, those shareholders also should consult
their tax advisers about state and local tax consequences, if any, of the
Reorganization.
CAPITALIZATION
The following table shows the capitalization of each Fund as of
December 31, 1998, and on a pro forma combined basis (unaudited) as of December
31, 1998, giving effect to the Reorganization:
COMBINED FUND
DISCOVERY (PRO FORMA)
FUND FRONTIER FUND (UNAUDITED)
---- ------------- -----------
Net Assets.................... $241,123,717 $167,422,894 $408,546,611
Net Asset Value Per Share..... $24.37 $25.50 $24.37
Shares Outstanding............ 9,893,590 6,564,890 16,763,631
REQUIRED VOTE. Approval of the Reorganization Plan requires the
affirmative vote of a majority of the outstanding voting securities of Frontier
Fund.
THE BOARD UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE
"FOR" THIS PROPOSAL
-------------------------------------------
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OTHER BUSINESS
The Board knows of no other business to be brought before the Meeting.
If, however, any other matters properly come before the Meeting, it is the
intention that proxies that do not contain specific instructions to the contrary
will be voted on such matters in accordance with the judgment of the persons
designated in the proxies.
MISCELLANEOUS
AVAILABLE INFORMATION
Each Fund is subject to the information requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance with those requirements
files reports, proxy material and other information with the SEC. These reports,
proxy material and other information can be inspected and copied at the Public
Reference Room maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549, the Midwest Regional office of the SEC, Northwest Atrium Center, 500 West
Madison Street, Suite 400, Chicago, Illinois 60611, and the Northeast Regional
Office of the SEC, Seven World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can also be obtained from the Public Reference
Branch, Office of Consumer Affairs and Information Services, Securities and
Exchange Commission, Washington, D.C. 20459 at prescribed rates.
NOTICE TO BANKS, BROKER-DEALERS, AND VOTING TRUSTEES AND THEIR NOMINEES
Please advise Frontier Fund, 2930 East Third Avenue, Denver, Colorado
80206, whether other persons are beneficial owners of shares for which proxies
are being solicited, and, if so, the number of copies of this Proxy Statement
needed to supply copies to the beneficial owners of the respective shares.
LEGAL MATTERS
Certain legal matters in connection with the issuance of Discovery Fund
shares as part of the Reorganization will be passed upon by Discovery Fund's
special counsel, Kirkpatrick & Lockhart LLP.
EXPERTS
The audited financial statements of the Funds, incorporated herein by
reference and incorporated by reference or included in the Statement of
Additional Information, have been audited by PricewaterhouseCoopers LLP,
independent accountants for the Funds, whose reports thereon are included in the
Funds' Annual Report to Shareholders for the fiscal year ended December 31,
1998. The financial statements audited by PricewaterhouseCoopers LLP have been
incorporated herein by reference in reliance on their reports given on their
authority as experts in auditing and accounting matters.
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PLAN OF REORGANIZATION
THIS PLAN OF REORGANIZATION (the "Plan") is made by FOUNDERS FUNDS,
INC., a Maryland corporation, with a principal place of business at 2930 East
Third Avenue, Denver, Colorado 80206 (the "Company"), on behalf of Founders
Frontier Fund (the "Acquired Fund") and Founders Discovery Fund (the "Acquiring
Fund"), each a duly established and designated segregated portfolio of assets
("series") of the Company, and is effective as of the date of its adoption by
the Company's board of directors. (The Acquired Fund and the Acquiring Fund are
sometimes herein referred to individually as a "Fund" and collectively as the
"Funds.")
WHEREAS, the Company wishes to effect a reorganization described in
section 368(a)(1)(C) of the United States Internal Revenue Code of 1986, as
amended (the "Code"), which will consist of the transfer of all of the assets of
the Acquired Fund to the Acquiring Fund in exchange solely for shares of common
stock, par value $.01 per share, of the Acquiring Fund (the "Acquiring Fund
Shares") and the assumption by the Acquiring Fund of all the liabilities of the
Acquired Fund and the distribution of the Acquiring Fund Shares to the
shareholders of the Acquired Fund in termination of the Acquired Fund as
provided herein (collectively, the "Reorganization"), all upon the terms and
conditions set forth in this Plan;
WHEREAS, the Company intends this Plan to be a "plan of reorganization"
within the meaning of the regulations under the Code;
WHEREAS, the Company is a registered, open-end management investment
company, and at the time of the Reorganization contemplated herein the Acquired
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Fund will own securities that are of the character in which the Acquiring Fund
is permitted to invest; and
WHEREAS, the Board of Directors of the Company (the "Board") has
determined that the Reorganization is in the best interests of each Fund and its
shareholders and that the interests of the existing shareholders of each Fund
would not be diluted as a result of the Reorganization. NOW, THEREFORE, in
consideration of the premises, conditions and covenants hereinafter set forth,
the Company shall effect this Plan in the following manner:
1. THE REORGANIZATION.
1.1. Subject to the requisite approval of the shareholders of the
Acquired Fund and to the other terms and conditions contained herein:
(a) The Acquired Fund shall assign, transfer and convey to the
Acquiring Fund at the Closing (as provided for in paragraph 3.1) all of the
Assets (as defined in paragraph 1.2).
(b) In exchange therefor, the Acquiring Fund shall at the
Closing (i) issue and deliver to the Acquired Fund the number of full and
fractional (to the third decimal place) Acquiring Fund Shares determined by
dividing the aggregate net asset value of the Acquired Fund (computed as set
forth in paragraph 2.1) by the net asset value (computed as set forth in
paragraph 2.2) of one Acquiring Fund Share and (ii) assume the Liabilities (as
defined in paragraph 1.3). In lieu of delivering certificates for the Acquiring
Fund Shares, the Acquiring Fund shall cause its transfer agent to credit the
Acquiring Fund Shares to the Acquired Fund's account on the books of the
Acquiring Fund and shall deliver a confirmation thereof to the Acquired Fund.
1.2. (a) The assets of the Acquired Fund to be acquired by the
Acquiring Fund (the "Assets") shall consist of all property, including without
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limitation all cash, cash equivalents, securities, commodities and futures
interests, dividend and interest receivables, claims and rights of action that
are owned by the Acquired Fund, and any deferred or prepaid expenses shown as
assets on the books of the Acquired Fund, on the Closing Date (as defined in
paragraph 3.1). The Assets shall be invested at all times through the Closing in
a manner that ensures compliance with paragraph 4.1(k).
(b) The Acquired Fund has provided the Acquiring Fund with a
list of all of its property as of the date of adoption of this Plan. The
Acquired Fund reserves the right to sell any of these assets. The Acquiring Fund
will, within a reasonable time prior to the Closing Date, furnish the Acquired
Fund with a list of any assets on such list that do not conform to the Acquiring
Fund's investment objective, policies and restrictions or that the Acquiring
Fund otherwise does not desire to hold. The Acquired Fund will dispose of such
assets prior to the Closing Date to the extent practicable and to the extent the
Acquired Fund would not be affected adversely by such a disposition. In
addition, if it is determined that the portfolios of the Funds, when aggregated,
would contain investments exceeding certain percentage limitations imposed upon
the Acquiring Fund with respect to such investments, the Acquired Fund, if
requested to do so by the Acquiring Fund, will dispose of and/or reinvest a
sufficient amount of such investments as may be necessary to avoid violating
such limitations as of the Closing Date.
1.3. The Acquired Fund will endeavor to discharge all of its known
liabilities and obligations prior to the Closing Date. At the Closing, the
Acquiring Fund shall assume all liabilities, debts, obligations, expenses,
costs, charges and reserves of the Acquired Fund as of the Valuation Time (as
defined in paragraph 2.1) (collectively, the "Liabilities"). Without limiting
the generality of the foregoing, the Liabilities shall include the obligation to
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indemnify the directors and officers of the Company with respect to the Acquired
Fund to the extent provided in the Company's Articles of Incorporation dated
June 19, 1987, as amended (the "Articles of Incorporation"), and By-Laws, as
amended (the "By-Laws").
1.4. Investors Fiduciary Trust Company, 801 Pennsylvania, Kansas
City, Missouri 64105 ("IFTC"), the Acquiring Fund's custodian (the "Custodian"),
shall deliver at the Closing a certificate of an authorized officer stating that
(a) the Assets held by the custodian will be transferred to the Acquiring Fund
at the Valuation Time and (b) all necessary taxes in conjunction 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.
1.5. The Acquired Fund will pay or transfer or cause to be paid or
transferred to the Acquiring Fund any dividends, interest, distributions, rights
or other assets received by the Acquired Fund on or after the Closing Date as
distributions on or with respect to any of the Assets. Any such dividends,
interest, distributions, rights, or other assets so paid or transferred, or
received directly by the Acquired Fund, shall be allocated by the Acquired Fund
to the account of the Acquiring Fund, and shall be deemed included in the Assets
and shall not be separately valued.
1.6. As soon after the Closing as is conveniently possible, the
Company will distribute PRO RATA to the Acquired Fund's shareholders of record
determined as of the Valuation Time (the "Acquired Fund Shareholders") the
Acquiring Fund Shares received by the Acquired Fund pursuant to paragraph 1.1.
Such distribution will be accomplished by transferring the Acquiring Fund Shares
then credited to the account of the Acquired Fund on the books of the Acquiring
Fund to open accounts on such books in the names of the Acquired Fund
Shareholders and representing the respective PRO RATA number of full and
fractional Acquiring Fund Shares to which each such Acquired Fund Shareholder is
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entitled. For these purposes, an Acquired Fund Shareholder shall be entitled to
receive that number of full and fractional (to the third decimal place)
Acquiring Fund Shares equal to the net asset value of shares of common stock of
the Acquired Fund, par value $.01 per share (the "Acquired Fund Shares"), held
by the shareholder as of the Valuation Time (determined in accordance with
paragraph 2.1) divided by the net asset value of one Acquiring Fund Share as of
the Valuation Time (determined in accordance with paragraph 2.2). All issued and
outstanding Acquired Fund Shares will be canceled on the books of the Acquired
Fund simultaneously with the distribution provided for above. Ownership of
Acquiring Fund Shares will be shown on the books of the Acquiring Fund's
transfer agent.
1.7. Any transfer taxes payable upon issuance of the Acquiring Fund
Shares in a name other than the registered holder of the Acquired Fund Shares on
the books of the Acquired Fund shall, as a condition of such issuance and
transfer, be paid by the person to whom such Acquiring Fund Shares are to be
issued and transferred.
1.8. Any reporting responsibility of the Acquired Fund is and shall
remain the responsibility of the Acquired Fund up to and including the Closing
Date and such later date on which the Acquired Fund is terminated.
2. VALUATION.
2.1. The value of the Assets and the amount of the Liabilities, and
the net asset value of an Acquired Fund Share, shall each be computed as of the
close of trading on the floor of the New York Stock Exchange ("NYSE") on the
Closing Date (such time and date being hereinafter called the "Valuation Time"),
using the valuation procedures set forth in the Articles of Incorporation and
the Acquired Fund's then-current prospectus or statement of additional
information.
2.2. The net asset value of an Acquiring Fund Share shall be
computed as of the Valuation Time, using the valuation procedures set forth in
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the Articles of Incorporation and the Acquiring Fund's then-current prospectus
or statement of additional information. 2.3. All computations and calculations
of value shall be made by Founders Asset Management LLC, the fund accounting and
administrative services agent of the Funds (the "Accounting Agent"), in
accordance with its regular practices as such.
3. CLOSING AND CLOSING DATE.
3.1. The Reorganization, together with all related acts necessary to
consummate the Reorganization (the "Closing"), shall take place on the first day
on which the NYSE is open for business that occurs not less than seven (7)
calendar days after the approval of this Plan by the shareholders of the
Acquired Fund, or such other date as the Company may decide (the "Closing
Date"). All acts taking place at the Closing shall be deemed to take place
simultaneously as of the Funds' close of business on the Closing Date, unless
otherwise provided. The Closing shall be held at 4:30 p.m., New York time, at
the offices of the Accounting Agent, 2930 East Third Avenue, Denver, Colorado,
or at such other time on the Closing Date and/or place as the Company may
decide.
3.2. The Company's fund accounting and pricing agent shall deliver
at the Closing a certificate of an authorized officer verifying that the
information (including adjusted basis and holding period, by lot) concerning the
Assets, including all portfolio securities, transferred by the Acquired Fund to
the Acquiring Fund, as reflected on the Acquiring Fund's books immediately
following the Closing, does or will conform to such information on the Acquired
Fund's books immediately before the Closing.
3.3. If at the Valuation Time (a) the NYSE or another primary
trading market or markets for portfolio securities of either Fund shall be
closed to trading or trading thereon shall be restricted or (b) trading or the
A-6
<PAGE>
reporting of trading in such market or markets shall be disrupted so that
accurate appraisal of the value of the net assets of either Fund is
impracticable, the Closing Date shall be postponed until the first business day
after the day when trading shall have been fully resumed and reporting shall
have been restored.
3.4. The Acquired Fund shall cause IFTC, as its transfer agent
("Transfer Agent"), 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
Acquired Fund Shares owned by each such shareholder immediately prior to the
Closing. The Acquiring Fund shall cause the Transfer Agent to deliver to the
Secretary of the Company a confirmation, or other evidence satisfactory to the
Company, that the Acquiring Fund Shares to be credited on the Closing Date have
been credited to the Acquired Fund's account on the books of the Acquiring Fund.
4. Conditions.
4.1. The obligation of the Company to implement this Plan on behalf
of the Acquiring Fund is subject to the satisfaction of each of the following
conditions in this paragraph 4.1 either at the time stated therein, or if no
time is so stated, at or before (and continuing to) the Closing:
(a) The current prospectus and statement of additional
information of the Acquired Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the Investment Company Act of 1940, as amended (the "1940 Act"), and
the rules and regulations of the Securities and Exchange Commission (the "SEC")
thereunder and do not 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 misleading.
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<PAGE>
(b) The Acquired Fund is not, and the performance of this Plan
will not result, in any material violation of the Articles of Incorporation or
the By-Laws or of any agreement, indenture, instrument, contract, lease or other
undertaking with respect to the Acquired Fund to which the Company is a party or
by which it is bound.
(c) The Acquired Fund has no material contracts or other
commitments outstanding (other than this Plan) that will be terminated with
liability to it on or prior to the Closing Date.
(d) Except as otherwise disclosed in writing to and accepted by
the Acquiring Fund, no litigation or administrative proceeding or investigation
of or before any court or governmental body is currently pending or to its
knowledge threatened against the Company with respect to the Acquired Fund or
any of the properties or assets thereof that, if adversely determined, would
materially and adversely affect its financial condition or the conduct of its
business. The Company knows of no facts that might form the basis for the
institution of such litigation, proceeding or investigation and is not a party
to or subject to the provisions of any order, decree or judgment of any court or
governmental body that materially and adversely affects the Acquired Fund's
business or its ability to consummate the transactions contemplated herein.
(e) The statements of assets and liabilities of the Acquired
Fund for the fiscal years ended December 31, 1996, 1997 and 1998 have been
audited by PricewaterhouseCoopers LLP, independent accountants (or its
predecessor); such statements are in accordance with generally accepted
accounting principles, consistently applied, and such statements fairly reflect
the financial condition of the Acquired Fund as of such dates; and there are no
known contingent liabilities of the Acquired Fund as of such dates not disclosed
therein.
A-8
<PAGE>
(f) Since December 31, 1998, there has not been any material
adverse change in the Acquired Fund's financial condition, assets, liabilities
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquired Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed in
writing to and accepted by the Acquiring Fund; provided that, for the purposes
of this subparagraph (f), a decline in net asset value per Acquired Fund Share
shall not constitute a material adverse change.
(g) At the Closing Date, all federal and other tax returns and
reports of the Acquired Fund required by law to have been filed by such date
shall have been filed, and all federal and other taxes shown as due on such
returns and reports shall have been paid, or provision shall have been made for
the payment thereof; and to the best of the Company's knowledge, no such return
is currently under audit and no assessment has been asserted with respect to any
such return.
(h) The Acquired Fund is a "fund" as defined in section
851(g)(2) of the Code; for each taxable year of its operation ended prior to the
Closing Date, the Acquired Fund met all the requirements of Subchapter M of the
Code ("Subchapter M") for qualification and treatment as a "regulated investment
company"; it will continue to meet all such requirements for its taxable year
that includes the Closing Date; and it has no earnings and profits accumulated
in any taxable year to which the provisions of Subchapter M did not apply.
(i) The Liabilities were incurred by the Acquired Fund in the
ordinary course of its business.
(j) The Acquired Fund is not under the jurisdiction of a court
in a proceeding under Title 11 of the United States Code or similar case within
the meaning of section 368(a)(3)(A) of the Code.
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<PAGE>
(k) Not more than twenty-five percent (25%) of the value of the
Acquired Fund's total assets (excluding cash, cash items, and U.S. government
securities) is invested in the stock and securities of any one issuer, and not
more than fifty percent (50%) of the value of such assets is invested in the
stock and securities of five or fewer issuers.
(l) The Acquired Fund will be terminated as soon as reasonably
practicable after the Reorganization, but in all events within six (6) months
after the Closing Date.
(m) All issued and outstanding Acquired Fund Shares are, and at
the time of Closing will be, duly and validly issued and outstanding, fully paid
and non-assessable. All of the issued and outstanding Acquired Fund Shares, at
the time of Closing, will be held by the persons and in the amounts set forth in
the records of the Transfer Agent as provided in paragraph 3.4. The Acquired
Fund does not have outstanding any options, warrants or other rights to
subscribe for or purchase any Acquired Fund Shares, nor is there outstanding any
security convertible into Acquired Fund Shares, except as contemplated herein.
(n) 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 the Assets; and upon delivery and payment for the
Assets, the Acquiring Fund will acquire good and marketable title thereto.
(o) The performance of this Plan will have been duly authorized
prior to the Closing Date by all necessary action on the part of the Board; and,
subject to the approval of the Acquired Fund Shareholders, no further corporate
action is required for consummation of this Plan.
(p) With respect to facts relating to the Acquired Fund, the
prospectus/proxy statement and statement of additional information (the "Proxy
Statement") included in the Registration Statement (as defined in paragraph 5.5)
and the information incorporated by reference into the Registration Statement
(in each case other than information that has been furnished by the Acquiring
Fund) will, on the effective date of the Registration Statement and on the
Closing Date, 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.
4.2. The obligation of the Company to implement this Plan on behalf of
the Acquired Fund is subject to the satisfaction of each of the following
conditions in this paragraph 4.2 either at the time stated therein, or if no
time is so stated, at or before (and continuing to) the Closing:
(a) The current prospectus and statement of additional information
of the Acquiring Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations of
the SEC thereunder and do not 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 misleading.
(b) The Acquiring Fund is not, and the performance of this Plan
will not result, in any material violation of the Articles of Incorporation or
the By-Laws or of any agreement, indenture, instrument, contract, lease or other
undertaking with respect to the Acquiring Fund to which the Company is a party
or by which it is bound.
(c) Except as otherwise disclosed in writing to and accepted by
the Acquired Fund, no litigation or administrative proceeding or investigation
of or before any court or governmental body is currently pending or to its
knowledge threatened against the Company with respect to the Acquiring Fund or
A-11
<PAGE>
any of the properties or assets thereof that, if adversely determined, would
materially and adversely affect its financial condition or the conduct of its
business. The Company knows of no facts that might form the basis for the
institution of such litigation, proceeding or investigation and is not a party
to or subject to the provisions of any order, decree or judgment of any court or
governmental body that materially and adversely affects the Acquiring Fund's
business or its ability to consummate the transactions contemplated herein.
(d) The statements of assets and liabilities of the Acquiring Fund
for the fiscal years ended December 31, 1996, 1997 and 1998 have been audited by
PricewaterhouseCoopers LLP, independent accountants (or its predecessors); such
statements are in accordance with generally accepted accounting principles,
consistently applied, and such statements fairly reflect the financial condition
of the Acquiring Fund as of such date; and there are no known contingent
liabilities of the Acquiring Fund as of such date not reflected therein.
(e) Since December 31, 1998, 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; provided that, for the purposes of
this subparagraph (e), a decline in net asset value per Acquiring Fund Share
shall not constitute a material adverse change.
(f) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law to have been filed by such date
shall have been filed, and all federal and other taxes 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 Company's knowledge, no such return
is currently under audit and no assessment has been asserted with respect to any
such return.
A-12
<PAGE>
(g) The Acquiring Fund is a "fund" as defined in section 851(g)(2)
of the Code; for each taxable year of its operation ended prior to the Closing
Date, the Acquiring Fund met all the requirements of Subchapter M for
qualification and treatment as a regulated investment company; it will continue
to meet all such requirements for its taxable year that includes the Closing
Date; and it has no earnings and profits accumulated in any taxable year to
which the provisions of Subchapter M did not apply.
(h) No consideration other than the Acquiring Fund Shares (and the
Acquiring Fund's assumption of the Liabilities) will be issued in exchange for
the Assets in the Reorganization.
(i) The Acquiring Fund has no plan or intention to issue
additional Acquiring Fund Shares following the Reorganization except for shares
issued in the ordinary course of its business as a series of an open-end
investment company; nor does the Acquiring Fund have any plan or intention to
redeem or otherwise reacquire any Acquiring Fund Shares issued to the Acquired
Fund Shareholders pursuant to the Reorganization, other than through redemptions
arising in the ordinary course of that business.
(j) After the Reorganization, the Acquiring Fund (i) will continue
the "historic business" (within the meaning of section 1.368-1(d)(2) of the
Income Tax Regulations under the Code) that the Acquired Fund conducted before
the Reorganization and (ii) will use a significant portion of the Acquired
Fund's "historic business assets" (within the meaning of section 1.368-1(d)(3)
of those regulations) in that business.
(k) There is no plan or intention for the Acquiring Fund to be
dissolved or merged into another corporation or business trust or any "fund"
thereof (within the meaning of section 851(g)(2) of the Code) following the
Reorganization.
A-13
<PAGE>
(l) Immediately after the Reorganization, (i) not more than
twenty-five percent (25%) of the value of the Acquiring Fund's total assets
(excluding cash, cash items, and U.S. government securities) will be invested in
the stock and securities of any one issuer and (ii) not more than fifty percent
(50%) of the value of such assets will be invested in the stock and securities
of five (5) or fewer issuers.
(m) The Acquiring Fund does not own, directly or indirectly, nor
on the Closing Date will it own, directly or indirectly, nor has it owned,
directly or indirectly, at any time during the past five (5) years, any shares
of the Acquired Fund.
(n) All issued and outstanding Acquiring Fund Shares are, and
(including the Acquiring Fund Shares issued in the Reorganization) at the time
of Closing will be, duly and validly issued and outstanding, fully paid and
non-assessable. 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 Acquiring Fund Shares,
except as contemplated herein.
(o) The performance of this Plan will have been duly authorized
prior to the Closing Date by all necessary action on the part of the Board; and,
subject to the approval of the Acquired Fund Shareholders, no further corporate
action is required for consummation of this Plan.
(p) With respect to facts relating to the Acquiring Fund, the
Proxy Statement included in the Registration Statement and the information
incorporated by reference into the Registration Statement (in each case other
than information that has been furnished by the Acquired Fund) will, on the
effective date of the Registration Statement and on the Closing Date, not
contain any untrue statement of a material fact or omit to state a material fact
A-14
<PAGE>
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.
4.3. The obligation of the Company to implement this Plan on behalf of
either Fund is subject to the satisfaction of each of the following conditions
in this paragraph 4.3 either at the time stated therein, or if no time is so
stated, at or before (and continuing to) the Closing:
(a) The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Maryland and has power to
carry on its business as it is now being conducted and to carry out this Plan.
(b) The Company is registered under the 1940 Act as an open-end
management investment company, and such registration has not been revoked or
rescinded and is in full force and effect.
(c) Each Fund is a duly established and designated series of the
Company.
(d) The aggregate fair market value of the Acquiring Fund Shares,
when received by the Acquired Fund Shareholders, will be equal to the aggregate
fair market value of their Acquired Fund Shares constructively surrendered in
exchange therefor.
(e) There is no plan or intention by Acquired Fund Shareholders
who beneficially own 5% or more of the Acquired Fund Shares, and to the
Company's knowledge the remaining Acquired Fund Shareholders have no present
plan or intention, of selling, exchanging, redeeming or otherwise disposing of a
number of the Acquiring Fund Shares to be received by them in connection with
the Reorganization that would reduce the Acquired Fund Shareholders' ownership
of issued and outstanding Acquiring Fund Shares to a number of shares having a
value, as of the Valuation Time, of less than 50% of the value of all of the
formerly outstanding Acquired Fund Shares as of that time. For purposes of this
condition, shares of either Fund held by the Acquired Fund Shareholders and
otherwise sold, redeemed or disposed of before or after the Reorganization will
be considered, except for shares that have been, or will be, redeemed by either
A-15
<PAGE>
Fund in the ordinary course of its business as a series of an open-end
investment company.
(f) The Acquired Fund Shareholders will pay their own expenses, if
any, incurred in connection with the Reorganization.
(g) The fair market value on a going concern basis of the Assets
will equal or exceed the Liabilities to be assumed by the Acquiring Fund and
those to which the Assets are subject.
(h) There is no intercompany indebtedness between the Funds that
was issued or acquired, or will be settled, at a discount.
(i) Pursuant to the Reorganization, the Acquired Fund will
transfer to the Acquiring Fund, and the Acquiring Fund will acquire, at least
ninety percent (90%) of the fair market value of the net assets, and at least
seventy percent (70%) of the fair market value of the gross assets, held by the
Acquired Fund immediately before the Reorganization. For the purposes of this
condition, any amounts used by the Acquired Fund to pay its Reorganization
expenses and redemptions and distributions made by it immediately before the
Reorganization (except for (i) distributions made to conform to its policy of
distributing all or substantially all of its income and gains to avoid the
obligation to pay federal income tax and/or the excise tax under section 4982 of
the Code and (ii) redemptions not made as part of the Reorganization) will be
included as assets thereof held immediately before the Reorganization.
(j) None of the compensation received by any Acquired Fund
Shareholder who is an employee of the Acquired Fund will be separate
consideration for, or allocable to, any of the Acquired Fund Shares held by such
Acquired Fund Shareholder-employee; none of the Acquiring Fund Shares received
A-16
<PAGE>
by any such Acquired Fund Shareholder-employee will be separate consideration
for, or allocable to, any employment agreement; and the consideration paid to
any such Acquired Fund Shareholder-employee will be for services actually
rendered and will be commensurate with amounts paid to third parties bargaining
at arm's-length for similar services.
(k) Immediately after the Reorganization, the Acquired Fund
Shareholders will not be in "control" of the Acquiring Fund within the meaning
of section 304(c) of the Code.
5. COVENANTS OF THE FUNDS.
5.1. Each Fund will operate its respective business in the
ordinary course between the date hereof and the Closing Date, it being
understood that such ordinary course of business will include payment of
customary dividends and other distributions.
5.2. The Company will call a meeting of the Acquired Fund's
shareholders to consider and act upon this Plan and to take all other action
necessary to obtain approval of the transactions contemplated herein.
5.3. Subject to the provisions of this Plan, each Fund will
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 herein.
5.4. As promptly as practicable, but in any case within sixty
(60) days after the Closing Date, the Acquired Fund shall furnish the Acquiring
Fund a statement, certified by the Company's President or a Vice President, of
the earnings and profits of the Acquired Fund for federal income tax purposes
that will be carried over to the Acquiring Fund as a result of section 381 of
the Code.
5.5. The Funds shall cooperate in providing all information
reasonably necessary for preparing and filing the registration statement of the
Company relating to the Acquiring Fund Shares on Form N-14, in compliance with
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<PAGE>
the 1933 Act, the Securities Exchange Act of 1934, as amended, and the 1940 Act
and, if applicable, state Blue Sky laws (the "Registration Statement"),
including the Proxy Statement in connection with the meeting of the Acquired
Fund's shareholders to consider approval of this Plan and the transactions
contemplated herein.
5.6. The Acquiring Fund shall 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 it may deem appropriate in
order to continue its operations after the Closing Date.
6. ADDITIONAL CONDITIONS.
The obligation of the Company to implement this Plan on behalf of
either Fund is subject to the satisfaction of each of the following conditions
in this Section 6 either at the time stated therein, or if no time is so stated,
at or before (and continuing to) the Closing.
6.1. This Plan and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding Acquired
Fund Shares in accordance with the provisions of the Articles of Incorporation
and the 1940 Act.
6.2. On the Closing Date, no action, suit or other proceeding shall
be pending 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
Plan or the transactions contemplated herein.
6.3. All consents, orders and permits of federal, state and local
regulatory authorities (including those of the SEC and of state Blue Sky and
securities authorities) deemed necessary by either Fund to permit consummation,
in all material respects, of the transactions contemplated hereby shall have
been obtained, except where failure to obtain any such consent, order or permit
would not involve a risk of a material adverse effect on the assets or
properties of either Fund.
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<PAGE>
6.4. 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 Company, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act.
6.5. The conditions to be satisfied by the Funds pursuant to Section
4 hereof shall have been satisfied, and a certificate to that effect shall have
been executed by an officer of the Company.
6.6. The Acquired Fund shall have declared a dividend and/or other
distribution that, together with all previous dividends and other distributions,
shall have the effect of distributing to the Acquired Fund's shareholders all of
the Acquired Fund's investment company taxable income for all taxable years
ended prior to the Closing Date and for its current taxable year through the
Closing Date (computed without regard to any deduction for dividends paid) and
all net capital gain realized in all such taxable years (after reduction for any
capital loss carryforward).
6.7. The Company shall have received an opinion of Kirkpatrick &
Lockhart LLP ("Counsel"), in a form reasonably satisfactory to the Company, as
to the federal income tax consequences mentioned below ("Tax Opinion"). In
rendering the Tax Opinion, Counsel may assume satisfaction of all of the
conditions set forth in Sections 4 and 6 hereof (and treat them as
representations by the Company to Counsel) and may rely as to any factual
matters, exclusively and without independent verification, on such
representations and any other representation made to Counsel by responsible
officers of the Company. The Tax Opinion shall be substantially to the effect
that, based on the facts and assumptions stated therein and conditioned on
consummation of the Reorganization in accordance with this Plan, for federal
income tax purposes:
(a) The Acquired Fund's transfer of the Assets to the Acquiring
Fund in exchange solely for the Acquiring Fund Shares and the assumption by the
Acquiring Fund of the Liabilities, followed by the Acquired Fund's distribution
of those shares to the Acquired Fund Shareholders constructively in exchange for
their Acquired Fund Shares, will constitute a "reorganization" within the
meaning of section 368(a)(1)(C) of the Code, and each Fund will be a "party to a
reorganization" within the meaning of section 368(b) of the Code;
(b) The Acquired Fund will recognize no gain or loss on the
transfer of the Assets to the Acquiring Fund in exchange solely for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of the
Liabilities or on the subsequent distribution of those Acquiring Fund Shares to
the Acquired Fund Shareholders in constructive exchange for their Acquired Fund
Shares;
(c) The Acquiring Fund will recognize no gain or loss on its
receipt of the Assets in exchange solely for the Acquiring Fund Shares and the
assumption by the Acquiring Fund of the Liabilities;
(d) The Acquiring Fund's basis for the Assets will be the same
as the Acquired Fund's basis therefor immediately before the Reorganization, and
the Acquiring Fund's holding period for the Assets will include the Acquired
Fund's holding period therefor;
(e) An Acquired Fund Shareholder will recognize no gain or loss
on the constructive exchange of all its Acquired Fund Shares solely for
Acquiring Fund Shares pursuant to the Reorganization; and
(f) An Acquired Fund Shareholder's aggregate basis for the
Acquiring Fund Shares to be received by such shareholder in the Reorganization
will be the same as the aggregate basis for such shareholder's Acquired Fund
A-20
<PAGE>
Shares to be constructively surrendered in exchange for those Acquiring Fund
Shares; and such shareholder's holding period for those Acquiring Fund Shares
will include such shareholder's holding period for those Acquired Fund Shares,
provided they are held as capital assets by such shareholder on the Closing
Date. Notwithstanding anything in this paragraph 6.7, the Tax Opinion may state
that no opinion is expressed as to the effect of the Reorganization on either
Fund or any Acquired Fund Shareholder with respect to any asset as to which any
unrealized gain or loss is required to be recognized for federal income tax
purposes at the end of a taxable year (or on the termination or transfer
thereof) under a mark-to-market system of accounting.
7. TERMINATION AND AMENDMENT OF PLAN.
7.1. This Plan and the transactions contemplated hereby may be
terminated and abandoned by resolution of the Board at any time prior to the
Closing (notwithstanding any vote of the Acquired Fund's shareholders) if
circumstances develop that in the opinion of the Board make proceeding with this
Plan inadvisable.
7.2. If this Plan is terminated and the Reorganization is abandoned
pursuant to this Section 7, this Plan shall become void and have no effect,
without any liability on the part of either Fund or of any directors, officers
or shareholders of the Company or of either Fund in respect of this Plan, except
that the Funds shall bear the aggregate expenses of the transaction contemplated
hereby in proportion to their respective net assets as of the date this Plan is
terminated or the exchange contemplated hereby is abandoned.
7.3. This Plan may be amended, modified, or supplemented at any
time, notwithstanding approval thereof by the Acquired Fund's shareholders, in
any manner determined by the Board; provided that following such approval no
such amendment shall have a material adverse effect on the Acquired Fund
Shareholders' interests.
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<PAGE>
8. WAIVER.
At any time prior to the Closing Date, any of the conditions set
forth in Sections 4 and 6 may be waived by the Board, if, in its judgment, such
waiver will not have a material adverse effect on the benefits intended under
this Plan to the shareholders of either Fund.
9. EXPENSES OF THE REORGANIZATION.
The Funds shall bear the aggregate expenses incurred in connection
with the Reorganization PRO RATA in proportion to their respective net assets as
of (a) the Closing Date if the Reorganization is consummated or (b) if the
Reorganization is not consummated, the date this Plan is terminated or the
Reorganization is abandoned; and, if the Reorganization is consummated, such
expenses will be charged against the assets of the relevant Fund at or before
the Valuation Time.
10. MISCELLANEOUS.
10.1. This Plan constitutes the entire plan with respect to the
subject matter hereof and merges and supersedes all prior discussions and
understandings of every kind and nature relating to the subject matter hereof.
10.2. This Plan shall be governed and construed in accordance with
the internal laws of the State of Maryland, without giving effect to principles
of conflict of laws; provided, however, in the case of any conflict between any
such laws and the federal securities laws, the latter shall govern.
10.3. This Plan shall bind and inure to the benefit of the Company
and its successors and assigns. Nothing herein expressed or implied is intended
or shall be construed to confer upon or give any person, firm or corporation,
other than the Company and its respective successors and assigns, any rights or
remedies under or by reason of this Plan.
A-22
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
OF
FOUNDERS FUNDS, INC.
2930 EAST THIRD AVENUE
DENVER, COLORADO 80206
1-303-394-4404
DATED JUNE 4, 1999
This Statement of Additional Information, which is not a Prospectus,
relates to the reorganization of Founders Frontier Fund (the "Acquired Fund"), a
portfolio of Founders Funds, Inc., with and into Founders Discovery Fund (the
"Acquiring Fund"), also a portfolio of Founders Funds, Inc.. This Statement of
Additional Information supplements and should be read in conjunction with the
Prospectus/Proxy Statement dated June 4, 1999 (the "Proxy Statement"). To obtain
a copy of the Proxy Statement, please write to Founders Funds, Inc., P.O. Box
173655, Denver, Colorado 80217-3655, or call toll-free 1-800-525-2440.
This Statement of Additional Information incorporates by reference the
following documents, a copy of each of which accompanies this Statement of
Additional Information:
A. The Statement of Additional Information of Founders Funds,
Inc., with respect to the Acquiring Fund and the Acquired
Fund, dated May 1, 1999, previously filed on EDGAR, Accession
number 0000038403-99-000009.
B. The Acquiring Fund's audited financial statements, and the
Acquired Fund's audited financial statements, each for the
fiscal year ended December 31, 1998, previously filed on
EDGAR, Accession number 0000038403-99-000005.
The following are pro forma financial statements of the Acquiring Fund
and the Acquired Fund as of December 31, 1998 giving effect to the proposed
reorganization described in the Proxy Statement:
<PAGE>
Statement of Investments December 31, 1998
UNAUDITED
<TABLE>
<CAPTION>
Shares Market Value
- ----------------------------------- -----------------------------------
Pro Forma Pro Forma
Discovery Frontier Combined Discovery Frontier Combined
- -------------------------------------------------------------------------------------------------------------------------
Common Stocks (Domestic)-88.0%
<C> <C> <C> <S> <C> <C> <C>
Airlines-0.3%
40,000 40,000 SkyWest, Inc. 1,305,000 1,305,000
-----------
Apparel-0.9%
100,000 100,000 Cutter & Buck, Inc.* 3,725,000 3,725,000
-----------
Biotechnology-0.3%
43,950 43,950 IDEXX Laboratories, Inc.* 1,175,663 1,175,663
-----------
Business Services-9.7%
60,000 60,000 Acxiom Corporation* 1,852,500 1,852,500
10,200 10,200 CDW Computer Centers, Inc.* 977,925 977,925
41,025 41,025 Complete Business Solutions, Inc.* 1,384,594 1,384,594
12,125 12,125 Envoy Corporation* 706,281 706,281
96,700 96,700 IMRglobal Corporation* 2,846,606 2,846,606
54,075 54,075 Insight Enterprises, Inc.* 2,751,066 2,751,066
19,325 19,325 Lason, Inc.* 1,124,473 1,124,473
40,000 40,000 Metamor Worldwide, Inc.* 990,000 990,000
73,875 73,875 The Metzler Group, Inc.* 3,592,172 3,592,172
95,000 95,000 NCO Group, Inc.* 4,275,000 4,275,000
75,000 75,000 PC Connection, Inc.* 1,331,250 1,331,250
110,000 110,000 Pre-Paid Legal Services, Inc.* 3,630,000 3,630,000
18,500 18,500 ProBusiness Services, Inc.* 841,750 841,750
82,300 82,300 Quanta Services, Inc.* 1,815,744 1,815,744
75,000 75,000 RWD Technologies, Inc.* 1,612,500 1,612,500
145,000 145,000 Realty Information Group, Inc.* 1,830,625 1,830,625
32,243 32,243 Sylvan Learning Systems, Inc.* 983,412 983,412
86,288 46,325 132,613 USWeb Corporation* 2,265,047 1,216,031 3,481,078
130,000 130,000 United Road Services, Inc.* 2,388,750 2,388,750
47,500 47,500 Whittman-Hart, Inc.* 1,315,156 1,315,156
-----------
39,730,882
-----------
Computer Equipment-0.5%
150,000 150,000 HMT Technology Corporation* 1,912,500 1,912,500
-----------
<PAGE>
Computer Software/Services-17.0%
395,000 395,000 4Front Technologies, Inc.* 4,295,625 4,295,625
100,000 100,000 ARIS Corporation* 1,175,000 1,175,000
67,500 67,500 Best Software, Inc.* 1,603,125 1,603,125
50,000 50,000 BindView Development Corporation* 1,362,500 1,362,500
125,000 125,000 Brio Technology, Inc.* 2,171,875 2,171,875
47,250 47,250 Check Point Software Technologies Limited* 2,155,781 2,155,781
15,000 15,000 CNET, Inc.* 798,750 798,750
76,300 76,300 Computer Horizons Corporation* 2,021,950 2,021,950
275,000 275,000 Computer Management Sciences, Inc.* 4,675,000 4,675,000
30,000 30,000 Concord Communications, Inc.* 1,710,000 1,710,000
80,000 80,000 Datastream Systems, Inc.* 900,000 900,000
32,575 37,125 69,700 Documentum, Inc.* 1,740,727 1,983,867 3,724,594
100,000 100,000 Exchange Applications, Inc.* 1,950,000 1,950,000
89,325 89,325 HNC Software, Inc.* 3,606,497 3,606,497
35,000 35,000 i2 Technologies, Inc.* 1,060,938 1,060,938
430,000 430,000 Information Advantage, Inc.* 3,225,000 3,225,000
30,000 30,000 Inso Corporation* 750,000 750,000
33,500 33,500 Legato Systems, Inc.* 2,206,813 2,206,813
72,850 72,850 Macromedia, Inc.* 2,445,028 2,445,028
89,200 89,200 Mastech Corporation* 2,519,900 2,519,900
30,000 30,000 Mercury Interactive Corporation* 1,893,750 1,893,750
20,000 20,000 Mobius Management Systems* 287,500 287,500
87,500 87,500 Peregrine Systems, Inc.* 4,052,344 4,052,344
66,000 66,000 Pinnacle Systems, Inc.* 2,326,500 2,326,500
50,000 50,000 Rational Software Corporation* 1,318,750 1,318,750
20,800 20,800 Sapient Corporation* 1,162,200 1,162,200
170,500 170,500 Software AG Systems, Inc.* 3,090,313 3,090,313
91,475 91,475 Sykes Enterprises, Inc.* 2,778,553 2,778,553
31,050 31,050 Transaction Systems Architects, Inc.* 1,556,381 1,556,381
50,000 50,000 TSI International Software Limited* 2,412,500 2,412,500
34,875 34,875 VERITAS Software Corporation* 2,085,961 2,085,961
45,000 45,000 Wind River Systems, Inc.* 2,109,375 2,109,375
-----------
69,432,503
-----------
Consumer Products-1.0%
71,225 71,225 Gemstar International Group Limited* 4,073,180 4,073,180
-----------
Consumer Services-2.2%
40,000 40,000 Education Management Corporation* 940,000 940,000
300,000 300,000 ResortQuest International, Inc.* 4,387,500 4,387,500
116,525 116,525 Travel Services International, Inc.* 3,481,184 3,481,184
-----------
8,808,684
-----------
<PAGE>
Electronics-3.2%
25,000 25,000 Hutchinson Technology, Inc.* 884,375 884,375
125,000 125,000 Komag, Inc.* 1,281,250 1,281,250
105,000 105,000 Macrovision Corporation* 4,383,750 4,383,750
215,000 215,000 Read-Rite Corporation* 3,171,250 3,171,250
35,125 35,125 Sanmina Corporation* 2,186,531 2,186,531
21,000 21,000 Veeco Instruments, Inc.* 1,107,750 1,107,750
-----------
13,014,906
-----------
Environmental Services-1.9%
46,395 46,395 Allied Waste Industries* 1,096,082 1,096,082
23,150 23,150 Eastern Environmental Services, Inc.* 684,372 684,372
68,450 68,450 IT Group, Inc.* 761,506 761,506
77,000 77,000 KTI, Inc.* 1,665,125 1,665,125
90,713 90,713 Safety-Kleen Corporation* 1,281,314 1,281,314
110,550 110,550 Superior Services, Inc.* 2,197,181 2,197,181
-----------
7,685,580
-----------
Food & Beverage-1.9%
65,000 65,000 Celestial Seasonings, Inc.* 1,787,500 1,787,500
165,000 165,000 Horizon Resources Corporation* 2,578,125 2,578,125
26,000 47,325 73,325 U.S. Foodservice, Inc.* 1,274,000 2,318,925 3,592,925
-----------
7,958,550
-----------
Healthcare Services-12.7%
82,000 80,000 162,000 American Oncology Resources, Inc.* 1,189,000 1,160,000 2,349,000
50,000 50,000 Andrx Corporation* 2,537,500 2,537,500
75,000 75,000 Boron, LePore & Associates, Inc.* 2,568,750 2,568,750
293,700 293,700 Capital Senior Living Corporation* 4,093,444 4,093,444
11,827 11,827 Cardinal Health, Inc. 897,374 897,374
60,675 60,675 Cerner Corporation* 1,623,056 1,623,056
200,000 200,000 ChiRex, Inc.* 4,225,000 4,225,000
48,825 48,825 Concentra Managed Care, Inc.* 512,663 512,663
216,200 216,200 Hanger Orthopedic Group, Inc.* 4,864,500 4,864,500
42,500 42,500 HCR Manor Care, Inc.* 1,248,438 1,248,438
100,625 100,625 Health Management Associates, Inc. Class A* 2,176,016 2,176,016
81,250 81,250 Kendle International, Inc.* 1,899,218 1,899,218
125,000 125,000 Laser Vision Centers, Inc.* 2,718,750 2,718,750
140,000 180,700 320,700 Orthodontic Centers of America, Inc.* 2,721,250 3,512,356 6,233,606
50,225 50,225 PAREXEL International Corporation* 1,243,069 1,243,069
115,000 85,000 200,000 Physician Reliance Network, Inc.* 1,509,375 1,115,625 2,625,000
170,000 170,000 SteriGenics International, Inc* 4,080,000 4,080,000
32,925 49,550 82,475 Sunrise Assisted Living, Inc.* 1,695,638 2,551,825 4,247,463
80,000 80,000 TLC The Laser Center, Inc.* 1,600,000 1,600,000
-----------
51,742,847
-----------
<PAGE>
Insurance-1.7%
58,550 58,550 HCC Insurance Holdings, Inc. 1,031,944 1,031,944
64,575 64,575 Reinsurance Group of America, Inc. 4,520,250 4,520,250
92,250 92,250 Scottish Annuity and Life Holdings Limited* 1,268,438 1,268,438
-----------
6,820,632
-----------
Leisure & Entertainment-4.1%
58,000 99,650 157,650 Action Performance Companies, Inc.* 2,044,500 3,512,663 5,557,163
165,000 165,000 Fairfield Communities, Inc.* 1,825,313 1,825,313
43,850 43,850 Family Golf Centers, Inc.* 866,038 866,038
145,000 145,000 Hollywood Entertainment Corporation* 3,924,063 3,924,063
189,400 189,400 Lowes Cineplex Entertainment Corporation* 1,917,675 1,917,675
20,950 20,950 Premier Parks, Inc.* 633,738 633,738
240,400 240,400 Silverleaf Resorts, Inc.* 2,238,725 2,238,725
-----------
16,962,715
-----------
Manufacturing-3.1%
280,000 280,000 American Bank Note Holographics, Inc.* 4,900,000 4,900,000
250,000 250,000 AstroPower, Inc.* 2,343,750 2,343,750
33,500 33,500 Select Comfort Corporation* 887,750 887,750
290,000 290,000 Zomax Optical Media, Inc.* 4,712,501 4,712,501
-----------
12,844,001
-----------
Medical Supplies & Equipment-0.5%
30,650 30,650 Perclose, Inc.* 1,011,450 1,011,450
20,000 20,000 ResMed, Inc.* 905,000 905,000
-----------
1,916,450
-----------
Pharmaceuticals-4.4%
30,000 30,000 IDEC Pharmaceuticals Corporation* 1,410,000 1,410,000
70,000 70,000 Jones Pharma, Inc. 2,550,625 2,550,625
242,075 242,075 King Pharmaceuticals, Inc.* 6,324,209 6,324,209
69,125 69,125 Medicis Pharmaceutical Corporation* 4,121,578 4,121,578
58,000 58,000 Watson Pharmaceuticals, Inc.* 3,646,750 3,646,750
-----------
18,053,162
-----------
Photography & Imaging-0.8%
115,000 115,000 Analytical Surveys, Inc.* 3,406,875 3,406,875
-----------
Publishing & Broadcasting-1.0%
25,000 25,000 EchoStar Communications Corporation* 1,207,813 1,207,813
43,625 43,625 Pegasus Communications Corporation* 1,085,172 1,085,172
43,400 43,400 Univision Communications, Inc.* 1,570,538 1,570,538
-----------
3,863,523
-----------
<PAGE>
Restaurants-1.5%
150,700 150,700 CKE Restaurants, Inc. 4,436,231 4,436,231
82,500 82,500 Dave & Buster's, Inc.* 1,892,344 1,892,344
-----------
6,328,575
-----------
Retail-6.0%
53,350 53,350 American Eagle Outfitters, Inc.* 3,554,444 3,554,444
213,000 213,000 DM Management Company* 4,047,000 4,047,000
41,000 41,000 Linens 'n Things, Inc.* 1,624,625 1,624,625
210,000 210,000 Media Arts Group, Inc.* 2,953,125 2,953,125
26,950 26,950 The Men's Wearhouse, Inc.* 842,188 842,188
25,000 25,000 O'Reilly Automotive, Inc.* 1,171,875 1,171,875
49,275 49,275 Rental Service Corporation* 773,002 773,002
26,425 26,425 Saks,Inc.* 834,039 834,039
181,350 181,350 Trans World Entertainment Corporation* 3,445,650 3,445,650
90,000 90,000 Tweeter Home Entertainment Group, Inc.* 2,587,500 2,587,500
39,925 39,925 United Rentals, Inc.* 1,322,516 1,322,516
30,000 30,000 Williams-Sonoma, Inc.* 1,209,375 1,209,375
-----------
24,365,339
-----------
Semiconductors & Equipment-7.0%
82,000 82,000 Advanced Energy Industries, Inc.* 2,096,125 2,096,125
160,000 160,000 American Xtal Technology, Inc.* 1,450,000 1,450,000
125,000 125,000 Applied Micro Circuits Corporation* 4,234,375 4,234,375
5,000 5,000 Broadcom Corporation* 601,875 601,875
158,125 158,125 Brooks Automation, Inc.* 2,292,813 2,292,813
25,000 25,000 Lattice Semiconductor Corporation* 1,146,875 1,146,875
34,125 34,125 Microchip Technology, Inc.* 1,258,359 1,258,359
75,000 75,000 SDL, Inc.* 2,943,750 2,943,750
58,925 58,925 SIPEX Corporation* 2,069,741 2,069,741
14,525 14,525 Uniphase Corporation* 1,007,672 1,007,672
33,450 22,000 55,450 Vitesse Semiconductor Corporation* 1,521,975 1,001,000 2,522,975
400,000 400,000 Zoran Corporation* 6,900,000 6,900,000
-----------
28,524,560
-----------
Telecommunication Services-1.6%
30,800 30,800 Dycom Industries, Inc.* 1,759,450 1,759,450
209,875 209,875 Viatel, Inc.* 4,814,008 4,814,008
-----------
6,573,458
-----------
<PAGE>
Telecommunications Equipment-4.7%
60,000 60,000 Aspect Telecommunications Corporation* 1,046,250 1,046,250
105,000 105,000 Com21, Inc.* 2,205,000 2,205,000
475,000 475,000 Digital Microwave Corporation* 3,235,938 3,235,938
320,000 320,000 REMEC, Inc.* 5,760,000 5,760,000
28,775 28,775 RF Micro Devices, Inc.* 1,321,852 1,321,852
230,000 230,000 Sawtek, Inc.* 4,025,000 4,025,000
45,050 45,050 Terayon Communication Systems Corporation* 1,649,956 1,649,956
-----------
19,243,996
-----------
Total Common Stocks (Domestic) 359,468,581
(Cost $156,370,184 and $96,154,546, respectively) -----------
Common Stocks (Foreign)-2.3%
Building Materials-0.3%
35,000 35,000 Hunter Douglas NV (NE) 1,160,015 1,160,015
-----------
Construction-0.3%
33,100 33,100 IHC Caland (NE) 1,375,713 1,375,713
-----------
Oil Services-0.2%
100,000 100,000 Stolt Comex Seaway SA Sponsored ADR (UK)* 662,500 662,500
-----------
Publishing & Broadcasting-1.5%
185,000 185,000 Cinar Corporation Class B Sponsored ADR (CA)* 4,625,000 4,625,000
136,175 136,175 Flextech PLC (UK)* 1,382,142 1,382,142
-----------
6,007,142
-----------
Total Common Stocks (Foreign) 9,205,370
(Cost $2,291,228 and $3,509,919, respectively) -----------
<PAGE>
Principal Amount Amortized Cost
- ----------------------------------- -----------------------------------
Pro Forma Pro Forma
Discovery Frontier Combined Discovery Frontier Combined
- -------------------------------------------------------------------------------------------------------------------------
Corporate Short-Term Notes-11.8%
$8,200,000 $8,200,000 Ciesco LP 5.75% 01/04/99 8,196,071 8,196,071
$5,700,000 5,700,000 Ciesco LP 5.75% 01/04/99 5,697,269 5,697,269
5,000,000 5,000,000 Ford Motor Credit Company 4.95% 01/06/99 4,996,563 4,996,563
8,000,000 8,000,000 Ford Motor Credit Company 6.09% 01/05/99 7,994,587 7,994,587
5,300,000 5,300,000 Progress Capital Holdings, Inc. 5.15% 01/05/99 5,296,967 5,296,967
11,000,000 11,000,000 Prudential Funding Corporation 5.70% 01/06/99 10,991,291 10,991,291
5,300,000 5,300,000 Transamerica Finance Corporation 5.10% 01/04/99 5,297,748 5,297,748
-----------
48,470,496
-----------
Total Corporate Short-Term Notes 48,470,496
(Cost $32,479,697 and $15,990,799, respectively) -----------
Total Investments-102.1% 417,144,447
(Cost $191,141,109 and $115,655,264, respectively) -----------
Other Assets & Liabilities-(2.1%) (8,597,836)
-----------
Net Assets-100.0% 408,546,611
===========
<FN>
* Non-income producing.
NE - Netherlands
UK - United Kingdom
CA - Canada
</FN>
See Notes to Financial Statements
</TABLE>
<PAGE>
Statements of Assets and Liabilities
UNAUDITED
<TABLE>
<CAPTION>
December 31, 1998 Discovery Frontier Pro Forma Pro Forma
(In Thousands) Fund Fund Adjustments Combined
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets
Investment securities, at market
(cost $191,141 and $115,655, respectively) $251,862 $165,282 $417,144
Cash 681 453 1,134
Receivables:
Investment securities sold 75 3,142 3,217
Capital shares sold 3,277 723 4,000
Dividends and interest 0 12 12
Other assets 0 0 0
----------- ----------- ----------- -----------
Total Assets 255,895 169,612 425,507
----------- ----------- ----------- -----------
Liabilities
Payables:
Investment securities purchased 13,431 1,281 14,712
Capital shares redeemed 1,066 694 1,760
Advisory fee 183 132 315
Shareholder servicing fees 23 24 47
Accounting fees 4 3 7
Distribution fees 47 38 85
Other 17 17 34
----------- ----------- ----------- -----------
Total Liabilities 14,771 2,189 16,960
----------- ----------- ----------- -----------
Net Assets $241,124 $167,423 $408,547
=========== =========== =========== ===========
Capital shares:
Authorized (Par value $0.01 per share) 100,000 100,000 200,000
=========== =========== =========== ===========
Outstanding 9,894 6,565 305* 16,764
=========== =========== =========== ===========
Net Asset Value, Offering and
Redemption Price Per Share $24.37 $25.50 $24.37
=========== =========== =========== ===========
<FN>
*Adjustment to reflect the exchange of shares outstanding
from Founders Frontier Fund to Founders Discovery Fund.
</FN>
See Notes to Financial Statements
</TABLE>
<PAGE>
Statements of Operations
UNAUDITED
<TABLE>
<CAPTION>
For the year ended
December 31, 1998 Discovery Frontier Pro Forma Pro Forma
(In Thousands) Fund Fund Adjustments Combined
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment Income:
Income:
Dividends $41 $350 $391
Interest 1,356 1,148 2,504
Foreign taxes withheld (2) (30) (32)
----------- ----------- ----------- -----------
Total Investment Income 1,395 1,468 2,863
----------- ----------- ----------- -----------
Expenses:
Advisory fees 2,169 1,847 (302)* 3,714
Shareholder servicing fees 294 323 (43)# 574
Accounting fees 52 44 96
Distribution fees 543 462 1,005
Transfer agency expenses 91 99 (10)# 180
Registration fees 27 27 (22)# 32
Postage and mailing expenses 27 29 (3)# 53
Custodian fees and expenses 26 25 (7)# 44
Printing expenses 106 111 (11)# 206
Legal and audit fees 15 14 (11)# 18
Directors' fees and expenses 14 12 26
Line of Credit expenses 11 9 (7)# 13
Other expenses 41 39 80
----------- ----------- ----------- -----------
Total Expenses 3,416 3,041 (416) 6,041
Earnings Credits (43) (39) (82)
Expense Offset to Broker Commissions (3) (1) (4)
----------- ----------- ----------- -----------
Net Expenses 3,370 3,001 (416) 5,955
----------- ----------- ----------- -----------
Net Investment Income (Loss) (1,975) (1,533) 416 (3,092)
----------- ----------- ----------- -----------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency Transactions
Net Realized Gain (Loss) from Security Transactions:
Proceeds from long-term securities sold 265,336 243,409 508,745
Proceeds from long-term U.S. Government Obligations 0 0 0
Cost of securities sold 241,450 235,370 476,820
----------- ----------- ----------- -----------
Net Realized Gain (Loss) from Security Transactions 23,886 8,039 31,925
Net Realized Gain (Loss) from
Foreign Currency Transactions 0 0 0
Net Change in Unrealized Appreciation/Depreciation 10,818 2,286 13,104
----------- ----------- ----------- -----------
Net Realized and Unrealized Gain on
Investments and Foreign Currency Transactions 34,704 10,325 45,029
----------- ----------- ----------- -----------
Net Increase (Decrease) in Net
Assets Resulting from Operations $32,729 $8,792 $416 $41,937
=========== =========== =========== ===========
Purchases of long-term securities $232,192 $183,421 $415,613
=========== =========== =========== ===========
Purchases of long-term U.S. Government Obligations $0 $0 $0
=========== =========== =========== ===========
<FN>
*Reflects adjustments to Advisory fees based on
the surviving Fund's contractual fee obligation.
#Reflects elimination of duplicate services or fees.
</FN>
See Notes to Financial Statements
</TABLE>
<PAGE>
PRO FORMA NOTES TO FINANCIAL STATEMENTS
UNAUDITED
NOTE 1- BASIS OF COMBINATION. Founders Funds, Inc. is a diversified open-end
management investment company registered under the Investment Company act of
1940 and presently consists of 11 no-load Founders Funds. The Pro Forma
Statement of Assets and Liabilities, including the Statement of Investments at
December 31, 1998 and the related Statement of Operations ("Pro Forma
Statements") for the year ended December 31, 1998, reflect the accounts of
Founders Frontier Fund and Founders Discovery Fund (individually a "Fund").
The Pro Forma Statements give effect to the proposed transfer of all assets and
liabilities of Founders Frontier Fund in exchange for shares in Founders
Discovery Fund. Under generally accepted accounting principles, the historical
cost of investment securities will be carried forward to the surviving entity
and the results of operations of the Founders Frontier Fund for pre-combination
periods will not be restated. The Pro Forma Statements do not reflect the
expenses of either Fund in carrying out its obligations under the proposed Plan
of Reorganization.
The Pro Forma Statements should be read in conjunction with the historical
financial statements of each Fund which are incorporated by reference in the
Statement of Additional Information.
NOTE 2- SHARES OUTSTANDING. Shareholders of Founders Frontier Fund would become
Shareholders of Founders Discovery Fund receiving shares of Founders Discovery
Fund equal to the value of their holdings in Founders Frontier Fund.
NOTE 3- PRO FORMA OPERATIONS. The Pro Forma Statement of Operations assumes
similar rates of gross investment income for the investments of each Fund.
Accordingly, the combined gross investment income is equal to the sum of each
Fund's gross investment income. Operating expenses include the actual expenses
of each Fund and the combined Fund, with certain expenses adjusted to reflect
the expected expenses of the combined entity. The Advisory Fees have been
calculated for the combined fund based on contractual rates expected to be in
effect for the Founders Discovery Fund at the time of reorganization at the
combined level of average net assets for the twelve months ended December 31,
1998.
<PAGE>
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Indemnification provisions for officers and directors of Registrant are
set forth in Article XII of the Bylaws, and are hereby incorporated by
reference. See Item 16(2) below. Under this Article, officers and directors will
be indemnified to the fullest extent permitted to directors by the Maryland
General Corporation Law, subject only to such limitations as may be required by
the 1940 Act, and the rules thereunder. Under the 1940 Act, directors and
officers of Registrant cannot be protected against liability to Registrant or
its shareholders to which they would be subject because of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties of their office.
Registrant also maintains liability insurance policies covering its directors
and officers.
ITEM 16. EXHIBITS
(1) (a) Articles of Incorporation of Founders Funds, Inc., dated June 19,
1987.(1)
(b) Articles Supplementary to the Articles of Incorporation, filed
November 25, 1987.(1)
(c) Articles Supplementary to Articles of Incorporation, filed February
25, 1988.(1)
(d) Articles Supplementary to Articles of Incorporation, filed December
12, 1989.(1)
(e) Articles Supplementary to Articles of Incorporation, filed May 3,
1990.(1)
(f) Articles Supplementary to Articles of Incorporation, filed September
22, 1993.(1)
(g) Articles Supplementary to Articles of Incorporation, filed December
27, 1995.(1)
(h) Articles Supplementary to Articles of Incorporation, filed May 20,
1996.(2)
(i) Articles Supplementary to Articles of Incorporation, filed October
21, 1996.(2)
(j) Articles Supplementary to Articles of Incorporation, filed April 9,
1997.(3)
<PAGE>
(2) By-Laws of Founders Funds, Inc., as of November 18, 1997.(4)
(3) Not applicable.
(4) Agreement and Plan of Reorganization is filed herewith as Appendix A
to Part A (the Prospectus/Proxy Statement).
(5) Provisions defining the rights of holders of securities are
contained in Article Fifth of the Registrant's Articles of
Incorporation as amended, and Articles II, IV, VI and IX of the
Registrant's Bylaws.
(6) Investment Advisory Agreement between Founders Funds, Inc. and
Founders Asset Management LLC, dated April 1, 1998.(4)
(7) (a) Underwriting Agreement between Founders Fund, Inc. and Premier Mutual
Fund Services Inc., dated April 1, 1998.(4)
(b) Form of Distribution and Shareholder Support Agreement for Founders
Funds, Inc.(4)
(c) Form of Distribution and Shareholder Support Agreement for Founders
Funds, Inc. (For use with Recordkeeping and Other Services
Agreements).(4)
(8) Not applicable.
(9) (a) Custody Agreement between Investors Fiduciary Trust Company and
Founders Funds, Inc., dated January 3, 1994.(2)
(b) Proposed Fee Schedule, effective August 1996.(2)
(10) Founders Funds, Inc. 12b-1 Distribution Plan, dated May 29, 1998.(4)
(11) Opinion and consent of Kirkpatrick & Lockhart LLP regarding the
legality of securities being registered (filed herewith).
(12) Opinion and consent of Kirkpatrick & Lockhart LLP regarding certain
tax matters (filed herewith).
(13) (a) Shareholder Services Agreement, between Founders Funds, Inc., and
Founders Asset Management LLC, dated April 1, 1998.(4)
(b) Fund Accounting and Administrative Services Agreement, between
Founders Funds, Inc., and Founders Asset Management LLC, dated April
1, 1998.(4)
(14) Consent of PricewaterhouseCoopers LLP (filed herewith).
(15) Not applicable.
<PAGE>
(16) Copies of manually signed Powers of Attorney (filed herewith).
(17) Additional Exhibits.
(a) Form of Proxy Card (filed herewith).
(b) Proxy Instructions (filed herewith).
(27) Financial Data Schedules (filed herewith).
- ----------------
(1) Filed previously on EDGAR with Post-Effective Amendment No. 60 to the
Registration Statement on April 29, 1996 and incorporated herein by reference.
(2) Filed previously on EDGAR with Post-Effective Amendment No. 62 to the
Registration Statement on February 24, 1997 and incorporated herein by
reference.
(3) Filed previously on EDGAR with Post-Effective Amendment No. 63 to the
Registration Statement on February 27, 1998 and incorporated herein by
reference.
(4) Filed previously on EDGAR with Post-Effective Amendment No. 64 to the
Registration Statement on February 22, 1999 and incorporated herein by
reference.
ITEM 17. UNDERTAKINGS
(1) The undersigned Registrant agrees that prior to any public
re-offering of the securities registered through the use of the prospectus which
is a part of this Registration Statement by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c) of the Securities Act of
1933, the re-offering prospectus will contain the information called for by the
applicable registration form for re-offering 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.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, as amended, this
Registration Statement has been signed on behalf of the Registrant, in the
County Suffolk, and the State of Massachusetts, on this 5th day of May 1999.
Attest: Founders Funds, Inc.
/s/ Margaret W. Chambers By: /s/ Marie E. Connolly
- --------------------------- -------------------------
Margaret W. Chambers Marie E. Connolly
Secretary President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Marie E. Connolly President and Treasurer May 5, 1999
- ---------------------------
Marie E. Connolly
/s/ Jay A. Precourt* Chairman and Director May 5, 1999
- ---------------------------
Jay A. Precourt
/s/ Alan S. Danson* Director May 5, 1999
- ---------------------------
Alan S. Danson
/s/ Joan D. Manley* Director May 5, 1999
- ---------------------------
Joan D. Manley
/s/ Trygve E. Myhren* Director May 5, 1999
- ---------------------------
Trygve E. Myhren
/s/ Eugene H. Vaughan, Jr.* Vice Chairman and Director May 5, 1999
- ---------------------------
Eugene H. Vaughan, Jr.
<PAGE>
/s/ Robert P. Mastrovita* Director May 5, 1999
- ---------------------------
Robert P. Mastrovita
/s/ George W. Phillips* Director May 5, 1999
- ---------------------------
George W. Phillips
/s/ Kenneth R. Christoffersen May 5, 1999
- -----------------------------
* Kenneth R. Christoffersen
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
EXHIBITS
(11) Opinion and consent of Kirkpatrick & Lockhart LLP regarding the legality
of securities being registered.
(12) Opinion and consent of Kirkpatrick & Lockhart LLP regarding certain tax
matters.
(14) Consent of PricewaterhouseCoopers LLP.
(16) Copies of manually signed Powers of Attorney.
(17) Additional Exhibits.
(a) Form of Proxy Card.
(b) Proxy Instructions.
(27) Financial Data Schedules.
EXHIBIT 11
KIRKPATRICK & LOCKHART LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, D.C. 20036-1800
TELEPHONE (202) 778-9000
FACSIMILE (202) 778-9100
www.kl.com
May 5, 1999
Founders Funds, Inc.
2930 East Third Avenue
Denver, Colorado 80206
Ladies and Gentlemen:
We have acted as counsel for Founders Funds, Inc., a corporation
organized under the laws of the State of Maryland ("Company"), with respect to
the Plan of Reorganization made as of March 12, 1999 ("Plan") by the Company on
behalf of Founders Discovery Fund ("Discovery Fund") and Founders Frontier Fund
("Frontier Fund"). Pursuant to the Plan, Discovery Fund would acquire the assets
of Frontier Fund in exchange for shares of common stock ($0.01 par value per
share) of Discovery Fund ("Shares") and Discovery Fund's assumption of Frontier
Fund's liabilities. Such Shares will be distributed to the shareholders of
Frontier Fund in liquidation of Frontier Fund, as provided for and upon the
terms and conditions set forth in the Plan. In connection with the Plan, the
Company will file a Registration Statement on Form N-14 for the purpose of
registering the Shares under the Securities Act of 1933, as amended ("1933
Act"), to be issued pursuant to the Plan.
In connection with our services as counsel for the Company, we have
examined, among other things, such federal and state laws and originals or
copies of the Company's Articles of Incorporation and By-Laws, the form of Plan,
and such other documents, certificates and corporate records as we have
considered necessary or appropriate for purposes of this opinion. We have
assumed the genuineness of all signatures (whether original or facsimile), the
authenticity of all documents submitted to us, the conformity to original
documents of all documents presented to us as copies thereof, and the
authenticity of the original documents from which any such copies were made,
which assumptions we have not independently verified. As to various matters of
fact material to this opinion, we have relied upon statements and certificates
of officers of the Company. Except as otherwise specified herein, capitalized
terms used herein have the meaning assigned them in the Plan.
<PAGE>
Based upon and as limited by the foregoing, we are of the opinion that,
as of the date hereof the Shares being registered by the Form N-14 may be issued
in accordance with the Plan and the Company's Articles of Incorporation and
By-Laws, subject to compliance with the 1933 Act, the Investment Company Act of
1940, as amended, and applicable state laws regulating the distribution of
securities, and when so issued, those Shares will be legally issued, fully paid
and non-assessable.
We hereby consent to this opinion accompanying the Form N-14 that the
Company plans to file with the Securities and Exchange Commission and to the
reference to our firm under the caption "Miscellaneous--Legal Matters" in the
Prospectus/Proxy Statement filed as part of the Form N-14.
This opinion is furnished to the Company specifically in connection
with the Plan and is solely for the Company's information and benefit. It may
not be relied on by the Company in any other connection, and it may not be
relied upon by any other person for any purpose. It may not be assigned, quoted
or used, in whole or in part, without our specific prior written consent.
Very truly yours,
/s/ Kirkpatrick & Lockhart LLP
Kirkpatrick & Lockhart LLP
EXHIBIT 12
KIRKPATRICK & LOCKHART LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, D.C. 20036-1800
TELEPHONE (202) 778-9000
FACSIMILE (202) 778-9100
www.kl.com
May 3, 1999
Founders Funds, Inc.
2930 East third Avenue
Denver, Colorado 80206
Re: Reorganization to Combine Two Series of the Same
Investment Company
Ladies and Gentleman:
Founders Funds, Inc., a Maryland corporation ("Corporation"), on behalf
of Founders Frontier Fund ("Target") and Founders Discovery Fund ("Acquiring
Fund"),(1) each a segregated portfolio of assets ("series") of the Corporation,
has requested our opinion as to certain federal income tax consequences of the
proposed acquisition of Target by Acquiring Fund pursuant to a Plan of
Reorganization approved by the Corporation's board of directors ("Board") at a
meeting duly held on March 12, 1999 ("Plan"). Specifically, the Corporation has
requested our opinion --
1. that Acquiring Fund's acquisition all of Target's assets in
exchange solely for voting shares of common stock of Acquiring Fund
("Acquiring Fund Shares") and Acquiring Fund's assumption of Target's
liabilities, followed by Target's distribution of those shares PRO RATA
to its shareholders of record determined as of the Valuation Time (as
herein defined) ("Shareholders") constructively in exchange for the
Shareholders' shares of common stock of Target ("Target Shares") (such
transactions sometimes being referred to herein collectively as the
"Reorganization"), will qualify as a reorganization within the meaning
of section 368(a)(1)(C),(2) and each Fund will be "a party to a
reorganization" within the meaning of section 368(b),
- --------------------
(1) Target and Acquiring Fund are sometimes referred to herein individually as a
"Fund" and collectively as the "Funds."
(2) All "section" references are to the Internal Revenue Code of 1986, as
amended ("Code"), and all "Treas. Reg. Section" references are to the
regulations under the Code ("Regulations").
<PAGE>
2. that neither the Funds nor the Shareholders will recognize
gain or loss on the Reorganization, and
3. regarding the basis and holding period after the
Reorganization of the transferred assets and the Acquiring Fund Shares
issued pursuant thereto.
In rendering this opinion, we have examined (1) the proposed
Prospectus/Proxy Statement to be furnished in connection with the solicitation
of proxies by the Board for use at a special meeting of Targets' shareholders to
be held on August 3, 1999, and at any adjournment of that meeting ("Proxy
Statement"), included in the registration statement on Form N-14 filed by the
Corporation with the Securities and Exchange Commission ("SEC") on the date
hereof, (2) the Plan, (3) the Funds' currently effective prospectus and
statement of additional information ("SAI"), and (4) other documents we have
deemed necessary or appropriate for the purposes hereof. As to various matters
of fact material to this opinion, we have relied, exclusively and without
independent verification, on statements of responsible officers of the
Corporation.
FACTS
-----
The Corporation is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland and is registered with
the SEC as open-end management investment company under the Investment Company
Act of 1940, as amended ("1940 Act"). Each Fund is a duly established and
designated series thereof.
The Reorganization, together with related acts necessary to consummate
the same ("Closing"), will take place on August 11, 1999, or at a later date
when the Reorganization is approved and all contingencies have been met
("Closing Date"). All acts taking place at the Closing shall be deemed to take
place simultaneously as of the Funds' close of business on the Closing Date.
The Funds' investment objectives and policies, which are substantially
similar, are described in the Proxy Statement and the prospectus and SAI. The
Funds also have the same investment adviser, Founders Asset Management LLC.
In considering the Reorganization, the Board made an extensive inquiry
into a number of factors (which are described in the Proxy Statement, together
with a discussion of the reasons for the Reorganization). Pursuant thereto, the
Board approved the Plan, subject to approval of Target's shareholders. In doing
so, the Board determined that the Reorganization is in each Fund's best
interests, that the terms of the Reorganization are fair and reasonable, and
that the interests of each Fund's shareholders will not be diluted as a result
of the Reorganization.
The Plan, which specifies that it is intended to be a "plan of
reorganization" within the meaning of the Regulations, provides in relevant part
for the following:
1. The acquisition by Acquiring Fund of all property, including
all cash, cash equivalents, securities, commodities and futures
interests, dividend and interest receivables, claims and rights of
<PAGE>
action that are owned by Target, and any deferred or prepaid expenses
shown as assets on Target's books, on the Closing Date (collectively
"Assets") -- which are to be invested at all times through the closing
in a manner that ensures compliance with Condition 4 set forth below --
in exchange solely for the following:
(a) the number of full and fractional (to the third
decimal place) Acquiring Fund Shares determined by dividing
the aggregate net asset value of Target (computed as set forth
in paragraph 2.1 of the Plan) by the net asset value of an
Acquiring Fund Share (computed as set forth in paragraph 2.2
of the Plan), and
(b) Acquiring Fund's assumption of all of Target's
liabilities, debts, obligations, expenses, costs, charges, and
reserves as of the Valuation Time (I.E., the close of trading
on the floor of the New York Stock Exchange on the Closing
Date) (collectively "Liabilities"),
2. The constructive distribution of such Acquiring Fund Shares to
the Shareholders, (3) and
3. The subsequent termination of Target.
The distribution described in 2. will be accomplished by transferring
the Acquiring Fund Shares then credited to Target's account on Acquiring Fund's
share transfer books to open accounts on those books in the Shareholders' names
and representing the respective PRO RATA number of full and fractional (to the
third decimal place) Acquiring Fund Shares to which each Shareholder is
entitled. All issued and outstanding Target Shares will be canceled on Target's
books simultaneously with that distribution.
CONDITIONS
----------
The following conditions ("Conditions"), included in sections 4 and 6
of the Plan, will be satisfied either at the time stated therein or, if no time
is so stated, at or before (and continuing to) the Closing:
1. Each Fund is a "fund" as defined in section 851(g)(2); for
each taxable year of its operation ended prior to the Closing Date, it
met all the requirements of Subchapter M of the Code for qualification
and treatment as a regulated investment company ("RIC"); it will
continue to meet all such requirements for its taxable year that
includes the Closing Date; and it has no earnings and profits
accumulated in any taxable year in which the provisions of Subchapter M
did not apply to it;
- --------------------
(3) The Plan provides that, at the time of the Reorganization, the Target Shares
will in effect be constructively exchanged for Acquiring Fund Shares,
certificates for which will not be issued. Accordingly, Shareholders will not be
required to and will not make physical delivery of their Target Shares, nor will
they receive certificates for Acquiring Fund Shares, pursuant to the
Reorganization. Target Shares nevertheless will be treated as having been
exchanged for Acquiring Fund Shares, and the tax consequences to the
Shareholders will be unaffected by the absence of Acquiring Fund Share
certificates. SEE discussion at V. under "Analysis," below.
<PAGE>
2. The Liabilities were incurred by Target in the ordinary course
of its business;
3. Target is not under the jurisdiction of a court in a
proceeding under Title 11 of the United States Code or similar case
within the meaning of section 368(a)(3)(A);
4. Not more than 25% of the value of Target's total assets
(excluding cash, cash items, and U.S. government securities) is
invested in the stock and securities of any one issuer, and not more
than 50% of the value of such assets is invested in the stock and
securities of five or fewer issuers;
5. Target will be terminated as soon as reasonably practicable
after the Reorganization, but in all events within six months after the
Closing Date;
6. No consideration other than Acquiring Fund Shares (and
Acquiring Fund's assumption of the Liabilities) will be issued in
exchange for the Assets in the Reorganization;
7. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares
issued in the ordinary course of its business as a series of an
open-end investment company; nor does Acquiring Fund have any plan or
intention to redeem or otherwise reacquire any Acquiring Fund Shares
issued to the Shareholders pursuant to the Reorganization, other than
through redemptions arising in the ordinary course of that business;
8. After the Reorganization, Acquiring Fund (a) will continue the
"historic business" (within the meaning of Treas. Reg. Section
1.368-1(d)(2)) that Target conducted before the Reorganization and (b)
will use a significant portion of Target's "historic business assets"
(within the meaning of Treas. Reg. Section 1.368-1(d)(3)) in that
business;
9. There is no plan or intention for Acquiring Fund to be
dissolved or merged into another corporation or a business trust or any
"fund" thereof (within the meaning of section 851(g)(2)) following the
Reorganization;
10. Immediately after the Reorganization, (a) not more than 25%
of the value of Acquiring Fund's total assets (excluding cash, cash
items, and U.S. government securities) will be invested in the stock
and securities of any one issuer and (b) not more than 50% of the value
of such assets will be invested in the stock and securities of five or
fewer issuers;
11. Acquiring Fund does not own, directly or indirectly, nor on
the Closing Date will it own, directly or indirectly, nor has it owned,
directly or indirectly, at any time during the past five years, any
shares of Target;
12. The Corporation is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Maryland
and has power to carry on its business as now being conducted and to
carry out the Plan;
<PAGE>
13. The Corporation is registered under the 1940 Act as an
open-end management investment company, and such registration has not
been revoked or rescinded and is in full force and effect;
14. Each Fund is a duly established and designated series of the
Corporation;
15. The aggregate fair market value of the Acquiring Fund Shares,
when received by the Shareholders, will be approximately equal to the
aggregate fair market value of their Target Shares constructively
surrendered in exchange therefor;
16. There is no plan or intention by Shareholders who
beneficially own 5% or more of the Target Shares, and to the
Corporation's knowledge the remaining Shareholders have no present plan
or intention, of selling, exchanging, redeeming, or otherwise disposing
of a number of the Acquiring Fund Shares to be received by them in
connection with the Reorganization that would reduce the Shareholders'
ownership of issued and outstanding Acquiring Fund Shares to a number
of shares having a value, as of the Valuation Time, of less than 50% of
the value of all of the formerly outstanding Target Shares as of that
time. For these purposes, shares of either Fund held by the
Shareholders and otherwise sold, redeemed, or disposed of before or
after the Reorganization will be considered, except for shares that
have been, or will be, redeemed by either Fund in the ordinary course
of its business as a series of an open-end investment company;
17. The Shareholders will pay their own expenses, if any,
incurred in connection with the Reorganization;
18. The fair market value on a going concern basis of the Assets
will equal or exceed the Liabilities to be assumed by Acquiring Fund
and those to which the Assets are subject;
19. There is no intercompany indebtedness between the Funds that
was issued or acquired, or will be settled, at a discount;
20. Pursuant to the Reorganization, Target will transfer to
Acquiring Fund, and Acquiring Fund will acquire, at least 90% of the
fair market value of the net assets, and at least 70% of the fair
market value of the gross assets, held by Target immediately before the
Reorganization. For these purposes, any amounts used by Target to pay
its Reorganization expenses and to make redemptions and distributions
immediately before the Reorganization (except for (a) distributions
made to conform to its policy of distributing all or substantially all
of its income and gains to avoid the obligation to pay federal income
tax and/or the excise tax under section 4982 and (b) redemptions not
made as part of the Reorganization) will be included as assets thereof
held immediately before the Reorganization;
21. None of the compensation received by any Shareholder who is
an employee of Target will be separate consideration for, or allocable
to, any of the Target Shares held by such Shareholder; none of the
<PAGE>
Acquiring Fund Shares received by any such Shareholder-employee will be
separate consideration for, or allocable to, any employment agreement;
and the consideration paid to any such Shareholder-employee will be for
services actually rendered and will be commensurate with amounts paid
to third parties bargaining at arm's-length for similar services;
22. Immediately after the Reorganization, the Shareholders will
not be in "control" of Acquiring Fund within the meaning of section
304(c); and
23. Target will declare a dividend and/or other distribution
that, together with all previous dividends and other distributions,
will have the effect of distributing to its shareholders all of its
investment company taxable income for all taxable years ended before
the Closing Date and for its current taxable year through the Closing
Date (computed without regard to any deduction for dividends paid) and
all net capital gain realized in all such taxable years (after
reduction for any capital loss carryforward).
OPINION
-------
Based solely on the facts set forth above, and (1) assuming
satisfaction of all the Conditions (which shall be treated as representations by
the Corporation to us pursuant to paragraph 6.7 of the Plan) at the time of
Closing, as contemplated by such paragraph, and (2) conditioned on the
Reorganization being consummated in accordance with the Plan, our opinion (as
explained more fully in the next section of this letter) is as follows:
1. Acquiring Fund's acquisition of the Assets in exchange
solely for Acquiring Fund Shares and Acquiring Fund's assumption of the
Liabilities, followed by Target's distribution of those shares PRO RATA
to the Shareholders constructively in exchange for their Target Shares,
will qualify as a reorganization within the meaning of section
368(a)(1)(C), and each Fund will be "a party to a reorganization"
within the meaning of section 368(b) of the Code;
2. Target will recognize no gain or loss on the transfer of
the Assets to Acquiring Fund in exchange solely for Acquiring Fund
Shares and Acquiring Fund's assumption of the Liabilities or on the
subsequent distribution of those shares to the Shareholders in
constructive exchange for their Target Shares;
3. Acquiring Fund will recognize no gain or loss on its
receipt of the Assets in exchange solely for Acquiring Fund Shares and
its assumption of the Liabilities;
4. Acquiring Fund's basis for the Assets will be the same as
Target's basis therefor immediately before the Reorganization, and
Acquiring Fund's holding period for the Assets will include Target's
holding period therefor;
5. A Shareholder will recognize no gain or loss on
constructive exchange of all its Target Shares solely for Acquiring
Fund Shares pursuant to the Reorganization; and
<PAGE>
6. A Shareholder's aggregate basis for the Acquiring Fund
Shares to be received by it in the Reorganization will be the same as
the aggregate basis for its Target Shares to be constructively
surrendered in exchange for those Acquiring Fund Shares, and its
holding period for those Acquiring Fund Shares will include its holding
period for those Target Shares, provided they are held as capital
assets by the Shareholder on the Closing Date.
The foregoing opinion (1) is based on, and is conditioned on the
continued applicability of, the provisions of the Code and the Regulations,
judicial decisions, and rulings and other pronouncements of the Internal Revenue
Service ("Service") in existence on the date hereof and (2) is applicable only
to the extent each Fund is solvent. We express no opinion about the tax
treatment of the transactions described herein if either Fund is insolvent.
ANALYSIS
--------
I. THE REORGANIZATION WILL QUALIFY AS A REORGANIZATION UNDER SECTION
368(A)(1)(C), AND EACH FUND WILL BE A PARTY TO A REORGANIZATION.
---------------------------------------------------------------
A. EACH FUND IS A SEPARATE CORPORATION.
-----------------------------------
A reorganization under section 368(a)(1)(C) (a "C reorganization")
involves the acquisition by one corporation, in exchange solely for all or a
part of its voting stock, of substantially all of the properties of another
corporation. For a transaction to qualify under that section, therefore, both
entities involved therein must be corporations. Although the Corporation is a
corporation, it is not participating as such in the Reorganization, but rather
separate series thereof (the Funds) are the participants. Ordinarily, a
transaction involving segregated pools of assets such as the Funds could not
qualify as a reorganization, because the pools would not be separate taxable
entities that constitute corporations. Under section 851(g), however, each Fund
is treated as a separate corporation for all purposes of the Code save the
definitional requirement of section 851(a) (which is satisfied by the
Corporation). Thus, we believe that each Fund will be a separate corporation,
and each Fund's shares will be treated as shares of corporate stock, for
purposes of section 368(a)(1)(C).
B. TRANSFER OF "SUBSTANTIALLY ALL" OF TARGET'S PROPERTIES.
------------------------------------------------------
For an acquisition to qualify as a C reorganization, the acquiring
corporation must acquire "substantially all of the properties" of the transferor
corporation in exchange solely for all or part of the acquiring corporation's
stock. For purposes of issuing private letter rulings, the Service considers the
transfer of at least 90% of the fair market value of the transferor's net
assets, and at least 70% of the fair market value of its gross assets, held
immediately before the reorganization to satisfy the "substantially all"
requirement. Rev. Proc. 77-37, 1977-2 C.B. 568. The Reorganization will involve
such a transfer. Accordingly, we believe that the Reorganization will involve
the transfer to Acquiring Fund of substantially all of Target's properties.
C. QUALIFYING CONSIDERATION.
------------------------
For an acquisition to qualify as a C reorganization, the acquiring
corporation must acquire at least 80% (by fair market value) of the transferor's
<PAGE>
property solely for voting stock. Section 368(a)(2)(B)(iii). The assumption of
liabilities by the acquiring corporation or its acquisition of property subject
to liabilities normally are disregarded (section 368(a)(1)(C)), but the amount
of any such liabilities will be treated as money paid for the transferor's
property if the acquiring corporation exchanges any money or property (other
than its voting stock) therefor. Section 368(a)(2)(B). Because Acquiring Fund
will exchange only Acquiring Fund Shares, and no money or other property, for
the Assets, we believe that the Reorganization will satisfy the
solely-for-voting-stock requirement to qualify as a C reorganization.
D. BUSINESS PURPOSE.
----------------
All reorganizations must meet the judicially imposed requirements of
the "business purpose doctrine," which was established in GREGORY v. HELVERING,
293 U.S. 465 (1935), and is now set forth in Treas. Reg. Sections 1.368-1(b),
- -1(c), and -2(g) (the last of which provides that, to qualify as a
reorganization, a transaction must be "undertaken for reasons germane to the
continuance of the business of a corporation a party to the reorganization").
Under that doctrine, a transaction must have a BONA FIDE business purpose (and
not a purpose to avoid federal income tax) to qualify as a valid reorganization.
The substantial business purposes of the Reorganization are described in the
Proxy Statement. Accordingly, we believe that the Reorganization is being
undertaken for BONA FIDE business purposes (and not a purpose to avoid federal
income tax) and therefore meets the requirements of the business purpose
doctrine.
E. DISTRIBUTION BY TARGET.
----------------------
Section 368(a)(2)(G)(i) provides that a transaction will not qualify as
a C reorganization unless the corporation whose properties are acquired
distributes the stock it receives and its other property in pursuance of the
plan of reorganization. Under the Plan -- which we believe constitutes a "plan
of reorganization" within the meaning of Treas. Reg. Section 1.368-2(g) --
Target will distribute all the Acquiring Fund Shares it receives to its
Shareholders in constructive exchange for their Target Shares; as soon as is
reasonably practicable thereafter, Target will be terminated. Accordingly, we
believe that the requirements of section 368(a)(2)(G)(i) will be satisfied.
F. Requirements of Continuity.
--------------------------
Treasury Regulation section 1.368-1(b) sets forth two prerequisites to
a valid reorganization: (1) a continuity of the business enterprise through the
issuing corporation -- defined in the Regulation as "the acquiring corporation
(as that term is used in section 368(a))," with an exception not relevant here
- -- under the modified corporate form as described in Treas. Reg. Section
1.368-1(d) ("continuity of business") and (2) a continuity of interest as
described in Treas. Reg. Section 1.368-1(e) ("continuity of interest").
1. Continuity of Business.
----------------------
The Reorganization must meet the "continuity of business enterprise"
requirement of Treas. Reg. Section 1.368-1(d)(1). That Regulation requires that
the acquiring corporation either (i) continue the target corporation's historic
business ("business continuity") or (ii) use a significant portion of the target
corporation's historic business assets in a business ("asset continuity").
<PAGE>
While there is no authority that deals directly with the requirement of
continuity of business in the context of a transaction such as the
Reorganization, Rev. Rul. 87-76, 1987-2 C.B. 84, deals with a somewhat similar
situation. In that ruling, P was a RIC that invested exclusively in municipal
bonds. P acquired the assets of T in exchange for P common stock in a
transaction that was intended to qualify as a C reorganization. Prior to the
exchange, T sold its entire portfolio of corporate stocks and bonds and
purchased a portfolio of municipal bonds. The Service held that this transaction
did not qualify as a reorganization for the following reasons: (1) because T had
sold its historic assets prior to the exchange, there was no asset continuity;
and (2) the failure of P to engage in the business of investing in corporate
stocks and bonds after the exchange caused the transaction to lack business
continuity as well.
The Funds' investment objectives and policies are substantially
similar, and they have the same investment adviser. Moreover, after the
Reorganization Acquiring Fund will continue the historic business (within the
meaning of Treas. Reg. Section 1.368-1(d)(2)) that Target conducted before the
Reorganization. Accordingly, there will be business continuity.
Acquiring Fund not only will continue Target's historic business, but
it also will use a significant portion of Target's historic business assets
(within the meaning of Treas. Reg. Section 1.368-1(d)(3)) in that business.
Accordingly, there will be asset continuity as well.
For all the foregoing reasons, we believe that the Reorganization will
meet the continuity of business requirement.
2. CONTINUITY OF INTEREST.
----------------------
Treasury Regulation section 1.368-1(e)(1)(i) provides that
"[c]ontinuity of interest requires that in substance a substantial part of the
value of the proprietary interests in the target corporation be preserved in the
reorganization. A proprietary interest in the target corporation is preserved
if, in a potential reorganization, it is exchanged for a proprietary interest in
the issuing corporation . . . ." That Regulation goes on to provide that
"[h]owever, a proprietary interest in the target corporation is not preserved
if, in connection with the potential reorganization, . . . stock of the issuing
corporation furnished in exchange for a proprietary interest in the target
corporation in the potential reorganization is redeemed. All facts and
circumstances must be considered in determining whether, in substance, a
proprietary interest in the target corporation is preserved."
For purposes of issuing private letter rulings, the Service considers
the continuity of interest requirement satisfied if ownership in an acquiring
corporation on the part of a transferor corporation's former shareholders is
equal in value to at least 50% of the value of all the formerly outstanding
shares of the transferor corporation. Rev. Proc. 77-37, SUPRA; BUT SEE Rev. Rul.
56-345, 1956-2 C.B. 206 (continuity of interest was held to exist in a
reorganization of two RICs where immediately after the reorganization 26% of the
shares were redeemed in order to allow investment in a third RIC); SEE ALSO REEF
CORP. v. COMMISSIONER, 368 F.2d 125 (5th Cir. 1966), CERT. DENIED, 386 U.S. 1018
(1967) (a redemption of 48% of a transferor corporation's stock was not a
<PAGE>
sufficient shift in proprietary interest to disqualify a transaction as a
reorganization under section 368(a)(2)(F) ("F Reorganization"), even though only
52% of the transferor's shareholders would hold all the transferee's stock);
AETNA CASUALTY AND SURETY CO. v. U.S., 568 F.2d 811, 822-23 (2d Cir. 1976)
(redemption of a 38.39% minority interest did not prevent a transaction from
qualifying as an F Reorganization); Rev. Rul. 61-156, 1961-2 C.B. 62 (a
transaction qualified as an F Reorganization even though the transferor's
shareholders acquired only 45% of the transferee's stock, while the remaining
55% of that stock was issued to new shareholders in a public underwriting
immediately after the transfer). Although shares of both Target and Acquiring
Fund held by Target Shareholders that are disposed of before or after the
Reorganization will be considered in determining satisfaction of the 50%
standard, the Service has recently issued private letter rulings that excepted
from that determination "shares which are required to be redeemed at the demand
of shareholders by . . . Target or by Acquiring in the ordinary course of their
businesses as open-end investment companies (or series thereof) pursuant to
Section 22(e) of the 1940 Act." Priv. Ltr. Ruls. 9823018 (Mar. 5, 1998) and
9822053 (Mar. 3, 1998).(4)
No minimum holding period for shares of an acquiring corporation is
imposed under the Code on the acquired corporation's shareholders. Rev. Rul.
66-23, 1966-1 C.B. 67, provides generally that "unrestricted rights of ownership
for a period of time sufficient to warrant the conclusion that such ownership is
definite and substantial" will suffice and that "ordinarily, the Service will
treat five years of unrestricted . . . ownership as a sufficient period" for
continuity of interest purposes. A preconceived plan or arrangement by or among
an acquired corporation's shareholders to dispose of more than 50% of an
acquiring corporation's shares could be problematic. Shareholders with no such
preconceived plan or arrangement, however, are basically free to sell any part
of the shares received by them in the reorganization without fear of breaking
continuity of interest, because the subsequent sale will be treated as an
independent transaction from the reorganization.
There is no plan or intention by Shareholders who beneficially own 5%
or more of the Target Shares, and to the Corporation's knowledge the remaining
Shareholders have no present plan or intention, of selling, exchanging,
redeeming, or otherwise disposing of a number of the Acquiring Fund Shares to be
received by them in connection with the Reorganization that would reduce the
Shareholders' ownership of issued and outstanding Acquiring Fund Shares to a
number of shares having a value, as of the Valuation Time, of less than 50% of
the value of all of the formerly outstanding Target Shares as of that time. For
these purposes, shares of either Fund held by the Shareholders and otherwise
sold, redeemed, or disposed of before or after the Reorganization will be
considered, except for shares that have been, or will be, redeemed by either
Fund in the ordinary course of its business as a series of an open-end
investment company. Although Acquiring Fund's shares will be offered for sale to
the public on an ongoing basis after the Reorganization, sales of those shares
will arise out of a public offering separate and unrelated to the Reorganization
and not as a result thereof. SEE REEF CORP. v. COMMISSIONER, 368 F.2d at 134;
Rev. Rul. 61-156, SUPRA. Similarly, Shareholders may redeem Acquiring Fund
Shares pursuant to their rights as shareholders of a series of an open-end
investment company (SEE Priv. Ltr. Ruls. 9823018 and 9822053, SUPRA, and 8816064
(Jan. 28, 1988)); those redemptions will result from the exercise of those
- --------------------
(4)Although, under section 6110(j)(3), a private letter ruling may not be cited
as precedent, tax practitioners look to such rulings as generally indicative of
the Service's views on the proper interpretation of the Code and the
Regulations. CF. ROWAN COMPANIES, INC. v. COMMISSIONER, 452 U.S. 247 (1981).
<PAGE>
rights in the course of Acquiring Fund's business as an open-end series and not
from the C Reorganization as such.
Accordingly, we believe that the Reorganization will meet the
continuity of interest requirement of Treas. Reg. Section 1.368-1(b).
G. SATISFACTION OF SECTION 368(A)(2)(F).
------------------------------------
Under section 368(a)(2)(F), if two or more parties to a transaction
described in section 368(a)(1) (with an exception not relevant here) were
"investment companies" immediately before the transaction, then the transaction
shall not be considered a reorganization with respect to any such investment
company and its shareholders. But that section does not apply to a participating
investment company if, among other things, it is a RIC or --
(1) not more than 25% of the value of its total assets is invested in
the stock and securities of any one issuer and
(2) not more than 50% of the value of its total assets is invested in
the stock and securities of five or fewer issuers.
In determining total assets for these purposes, cash and cash items (including
receivables) and U.S. government securities are excluded. Section
368(a)(2)(F)(iv). Each Fund will meet the requirements for qualification and
treatment as a RIC for its respective current taxable year and will satisfy the
foregoing percentage tests. Accordingly, we believe that section 368(a)(2)(F)
will not cause the Reorganization to fail to qualify as a C reorganization with
respect to either Fund.
For all the foregoing reasons, we believe that the Reorganization will
qualify as a reorganization within the meaning of section 368(a)(1)(C).
H. EACH FUND WILL BE A PARTY TO A REORGANIZATION.
---------------------------------------------
Section 368(b)(2) and Treas. Reg. Section 1.368-2(f) provide that if
one corporation transfers substantially all of its properties to a second
corporation in exchange for all or a part of the voting stock of the second
corporation, then both corporations are parties to a reorganization. Target is
transferring all its properties to Acquiring Fund in exchange for Acquiring Fund
Shares. Accordingly, we believe that each Fund will be "a party to a
reorganization."
II. TARGET WILL RECOGNIZE NO GAIN OR LOSS.
-------------------------------------
Under sections 361(a) and (c), no gain or loss shall be recognized to a
corporation that is a party to a reorganization if, pursuant to the plan of
reorganization, (1) it exchanges property solely for stock or securities in
another corporate party to the reorganization and (2) distributes that stock or
securities to its shareholders. (Such a distribution is required by section
368(a)(2)(G)(i) for a reorganization to qualify as a C reorganization.) Section
361(c)(4) provides that sections 311 and 336 (which require recognition of gain
on certain distributions of appreciated property) shall not apply to such a
distribution.
<PAGE>
Section 357(a) provides in pertinent part that, except as provided in
section 357(b), if a taxpayer receives property that would be permitted to be
received under section 361 without recognition of gain if it were the sole
consideration and, as part of the consideration, another party to the exchange
assumes a liability of the taxpayer or acquires from the taxpayer property
subject to a liability, then that assumption or acquisition shall not be treated
as money or other property and shall not prevent the exchange from being within
section 361. Section 357(b) applies where the principal purpose of the
assumption or acquisition was a tax avoidance purpose or not a BONA FIDE
business purpose.
As noted above, it is our opinion that the Reorganization will qualify
as a C reorganization, each Fund will be a party to a reorganization, and the
Plan constitutes a plan of reorganization. Target will exchange the Assets
solely for Acquiring Fund Shares and Acquiring Fund's assumption of the
Liabilities and then will be terminated pursuant to the Plan, distributing those
shares to its shareholders in constructive exchange for their Target Shares. As
also noted above, it is our opinion that the Reorganization is being undertaken
for BONA FIDE business purposes (and not a purpose to avoid federal income tax);
we also do not believe that the principal purpose of Acquiring Fund's assumption
of the Liabilities is avoidance of federal income tax on the proposed
transaction. Accordingly, we believe that Target will recognize no gain or loss
on the Reorganization.(5)
III. ACQUIRING FUND WILL RECOGNIZE NO GAIN OR LOSS.
---------------------------------------------
Section 1032(a) provides that no gain or loss shall be recognized to a
corporation on the receipt by it of money or other property in exchange for its
stock. Acquiring Fund will issue Acquiring Fund Shares to Target in exchange for
the Assets, which consist of money and securities. Accordingly, we believe that
Acquiring Fund will recognize no gain or loss on the Reorganization.
IV. ACQUIRING FUND'S BASIS FOR THE ASSETS WILL BE A CARRYOVER BASIS, AND
ITS HOLDING PERIOD WILL INCLUDE TARGET'S HOLDING PERIOD.
-------------------------------------------------------
Section 362(b) provides, in pertinent part, that the basis of property
acquired by a corporation in connection with a reorganization to which section
368 applies shall be the same as it would be in the hands of the transferor,
increased by the amount of gain recognized to the transferor on the transfer (a
"carryover basis"). As noted above, it is our opinion that the Reorganization
will qualify as such a reorganization and that Target will recognize no gain on
the Reorganization. Accordingly, we believe that Acquiring Fund's basis for the
Assets will be the same as Target's basis therefor immediately before the
Reorganization.
Section 1223(2) provides in general that the period for which a
taxpayer has held acquired property that has a carryover basis shall include the
period for which the property was held by the transferor. As noted above, it is
- --------------------
(5) Notwithstanding anything herein to the contrary, we express no opinion as to
the effect of the Reorganization on either Fund or any Shareholder with respect
to any Asset as to which any unrealized gain or loss is required to be
recognized for federal income tax purposes at the end of a taxable year (or on
the termination or transfer thereof) under a mark-to-market system of
accounting.
<PAGE>
our opinion that Acquiring Fund's basis for the Assets will be a carryover
basis. Accordingly, we believe that Acquiring Fund's holding period for the
Assets will include Target's holding period therefor.
V. A SHAREHOLDER WILL RECOGNIZE NO GAIN OR LOSS.
--------------------------------------------
Under section 354(a)(1), no gain or loss shall be recognized if stock
in a corporation that is a party to a reorganization is exchanged pursuant to a
plan of reorganization solely for stock in that corporation or another corporate
party to the reorganization. Pursuant to the Plan, the Shareholders will receive
solely Acquiring Fund Shares for their Target Shares. As noted above, it is our
opinion that the Reorganization will qualify as a C reorganization, each Fund
will be a party to a reorganization, and the Plan constitutes a plan of
reorganization. Although section 354(a)(1) requires that the transferor
corporation's shareholders exchange their shares therein for shares of the
acquiring corporation, the courts and the Service have recognized that the Code
does not require taxpayers to perform useless gestures to come within the
statutory provisions. SEE, E.G., EASTERN COLOR PRINTING CO., 63 T.C. 27, 36
(1974); DAVANT v. COMMISSIONER, 366 F.2d 874 (5th Cir. 1966). Therefore,
although Shareholders will not actually surrender Target Share certificates in
exchange for Acquiring Fund Shares, their Target Shares will be canceled on the
issuance of Acquiring Fund Shares to them (all of which will be reflected on
Acquiring Fund's books) and will be treated as having been exchanged therefor.
SEE Rev. Rul. 81-3, 1981-1 C.B. 125; Rev. Rul. 79-257, 1979-2 C.B. 136.
Accordingly, we believe that a Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund Shares
pursuant to the Reorganization.
VI. A SHAREHOLDER'S BASIS FOR ACQUIRING FUND SHARES WILL BE A SUBSTITUTED
BASIS, AND ITS HOLDING PERIOD THEREFOR WILL INCLUDE ITS HOLDING PERIOD
FOR ITS TARGET SHARES.
---------------------
Section 358(a)(1) provides, in pertinent part, that in the case of an
exchange to which section 354 applies, the basis of the property permitted to be
received thereunder without the recognition of gain or loss shall be the same as
the basis of the property exchanged therefor, decreased by, among other things,
the fair market value of any other property and the amount of any money received
in the exchange and increased by the amount of any gain recognized on the
exchange by the shareholder ( a "substituted basis"). As noted above, it is our
opinion that the Reorganization will qualify as a C reorganization and, under
section 354, a Shareholder will recognize no gain or loss on the constructive
exchange of all its Target Shares solely for Acquiring Fund Shares in the
Reorganization. No property will be distributed to the Shareholders other than
Acquiring Fund Shares, and no money will be distributed to them pursuant to the
Reorganization. Accordingly, we believe that a Shareholder's basis for the
Acquiring Fund Shares it receives in the Reorganization will be the same as the
basis for its Target Shares to be constructively surrendered in exchange for
those Acquiring Fund Shares.
Section 1223(1) provides in general that the period for which a
taxpayer has held property received in an exchange that has a substituted basis
shall include the period for which the taxpayer held the property exchanged
therefor if the latter property was a capital asset (as defined in section 1221)
at the time of the exchange. As noted above, it is our opinion that a
<PAGE>
Shareholder will have a substituted basis for the Acquiring Fund Shares it
receives in the Reorganization. Accordingly, we believe that a Shareholder's
holding period for the Acquiring Fund Shares it receives in the Reorganization
will include its holding period for the Target Shares constructively surrendered
in exchange therefor, provided those Target Shares were capital assets on the
Closing Date.
We hereby consent to the references to our firm under (1) the caption
"Federal Income Tax Consequences of the Reorganization" in the section of the
Proxy Statement entitled "The Reorganization -- Summary" and (2) the caption
"Federal Income Tax Considerations" in the section of the Proxy Statement
entitled "The Proposed Transaction."
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By: /s/ Theodore L. Press
------------------------------
Theodore L. Press
PRICEWATERHOUSECOOPERS LLP
950 Seventeenth Street
Suite 2500
Denver CO 80202
Telephone (303) 893 8100
EXHIBIT 14
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus/Proxy
Statement and Statement of Additional Information constituting parts of this
registration statement on Form N-14 (the "Registration Statement") of our report
dated February 8, 1999 relating to the financial statements and financial
highlights appearing in the December 31, 1998 Annual Report to Shareholders of
Founders Discovery Fund and Founders Frontier Fund, which is also incorporated
by reference into the Statement of Additional Information.
We also consent to the incorporation by reference of our report into the
Prospectus and Statement of Additional Information of Founders Discovery Fund
and Founders Frontier Fund, both dated May 1, 1999, which constitute parts of
this Registration Statement. We also consent to the references to us under the
headings "Independent Accountants" and "Financial Statements" in the Statement
of Additional Information and to the reference to us under the heading
"Financial Highlights" in the Prospectus of Founders Discovery Fund and Founders
Frontier Fund, both dated May 1, 1999.
We also consent to the references to us in the Plan of Reorganization and under
the heading "Experts" in the Prospectus/Proxy Statement constituting parts of
this Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Denver, Colorado
May 3, 1999
EXHIBIT 16
POWER OF ATTORNEY
The person executing this Power of Attorney hereby appoints Kenneth R.
Christoffersen, David L. Ray, Richard W. Sabo, and Edward F. O'Keefe, or any one
of them, as his attorney-in-fact with full power of substitution, to execute and
to file a Registration Statement on Form N-14 for the hereinafter described
entity relating to the proposed Plan of Reorganization under which the assets of
Founders Frontier Fund would be transferred to, and its liabilities would be
assumed by, Founders Discovery Fund, and any amendment to such Registration
Statement, as such attorney-in-fact, or any one of them, may deem appropriate:
Registrant Registration Number (1)
Founders Funds, Inc. 1933 Act: 2-17531
1940 Act: 811-1018
(1) References are to the Securities Act of 1933, as amended ("1933 Act")
and to the Investment Company Act of 1940, as amended ("1940 Act")
This Power of Attorney, which shall not be affected by the disability
of the undersigned, is executed and effective as of the 15th day of April, 1999.
/s/ Joan D. Manley
------------------------
Joan D. Manley
STATE OF COLORADO )
)ss.
COUNTY OF SUMMIT )
SUBSCRIBED, SWORN TO AND ACKNOWLEDGED before me by Joan D. Manley,
director of the above-referenced Registrant, this 15th day of April, 1999.
[SEAL] /s/ Joan Jardon
--------------------------
Notary Public
My commission expires: September 4, 2002.
<PAGE>
POWER OF ATTORNEY
The person executing this Power of Attorney hereby appoints Kenneth R.
Christoffersen, David L. Ray, Richard W. Sabo, and Edward F. O'Keefe, or any one
of them, as his attorney-in-fact with full power of substitution, to execute and
to file a Registration Statement on Form N-14 for the hereinafter described
entity relating to the proposed Plan of Reorganization under which the assets of
Founders Frontier Fund would be transferred to, and its liabilities would be
assumed by, Founders Discovery Fund, and any amendment to such Registration
Statement, as such attorney-in-fact, or any one of them, may deem appropriate:
Registrant Registration Number (1)
---------- -----------------------
Founders Funds, Inc. 1933 Act: 2-17531
1940 Act: 811-1018
(1) References are to the Securities Act of 1933, as amended ("1933 Act")
and to the Investment Company Act of 1940, as amended ("1940 Act")
This Power of Attorney, which shall not be affected by the disability
of the undersigned, is executed and effective as of the 15th day of April, 1999.
/s/ Alan S. Danson
---------------------------
Alan S. Danson
STATE OF COLORADO )
)ss.
COUNTY OF EAGLE )
SUBSCRIBED, SWORN TO AND ACKNOWLEDGED before me by Alan S. Danson,
director of the above-referenced Registrant, this 15th day of April, 1999.
[SEAL] /s/ Nancy W. Pettit
---------------------------
Notary Public
My commission expires: August 11, 2000.
<PAGE>
POWER OF ATTORNEY
The person executing this Power of Attorney hereby appoints Kenneth R.
Christoffersen, David L. Ray, Richard W. Sabo, and Edward F. O'Keefe, or any one
of them, as his attorney-in-fact with full power of substitution, to execute and
to file a Registration Statement on Form N-14 for the hereinafter described
entity relating to the proposed Plan of Reorganization under which the assets of
Founders Frontier Fund would be transferred to, and its liabilities would be
assumed by, Founders Discovery Fund, and any amendment to such Registration
Statement, as such attorney-in-fact, or any one of them, may deem appropriate:
Registrant Registration Number (1)
---------- -----------------------
Founders Funds, Inc. 1933 Act: 2-17531
1940 Act: 811-1018
(1) References are to the Securities Act of 1933, as amended ("1933 Act")
and to the Investment Company Act of 1940, as amended ("1940 Act")
This Power of Attorney, which shall not be affected by the disability
of the undersigned, is executed and effective as of the 12th day of April, 1999.
/s/ Robert P. Mastrovita
-------------------------------
Robert P. Mastrovita
STATE OF MASSACHUSETTS )
)ss.
COUNTY OF PLYMOUTH )
SUBSCRIBED, SWORN TO AND ACKNOWLEDGED before me by Robert P.
Mastrovita, director of the above-referenced Registrant, this 12th day of April,
1999.
[SEAL] /s/ Kathleen D. English
--------------------------------
Notary Public
My commission expires: June 22, 2001.
<PAGE>
POWER OF ATTORNEY
The person executing this Power of Attorney hereby appoints Kenneth R.
Christoffersen, David L. Ray, Richard W. Sabo, and Edward F. O'Keefe, or any one
of them, as his attorney-in-fact with full power of substitution, to execute and
to file a Registration Statement on Form N-14 for the hereinafter described
entity relating to the proposed Plan of Reorganization under which the assets of
Founders Frontier Fund would be transferred to, and its liabilities would be
assumed by, Founders Discovery Fund, and any amendment to such Registration
Statement, as such attorney-in-fact, or any one of them, may deem appropriate:
Registrant Registration Number (1)
---------- -----------------------
Founders Funds, Inc. 1933 Act: 2-17531
1940 Act: 811-1018
(1) References are to the Securities Act of 1933, as amended ("1933 Act")
and to the Investment Company Act of 1940, as amended ("1940 Act")
This Power of Attorney, which shall not be affected by the disability
of the undersigned, is executed and effective as of the 13th day of April, 1999.
/s/ Trygve E. Myhren
-------------------------
Trygve E. Myhren
STATE OF COLORADO )
)ss.
COUNTY OF DENVER )
SUBSCRIBED, SWORN TO AND ACKNOWLEDGED before me by Trygve E. Myhren,
director of the above-referenced Registrant, this 13th day of April, 1999.
[SEAL] /s/ Janet Coppler
------------------------
Notary Public
My commission expires: November 4, 2001.
<PAGE>
POWER OF ATTORNEY
The person executing this Power of Attorney hereby appoints Kenneth R.
Christoffersen, David L. Ray, Richard W. Sabo, and Edward F. O'Keefe, or any one
of them, as his attorney-in-fact with full power of substitution, to execute and
to file a Registration Statement on Form N-14 for the hereinafter described
entity relating to the proposed Plan of Reorganization under which the assets of
Founders Frontier Fund would be transferred to, and its liabilities would be
assumed by, Founders Discovery Fund, and any amendment to such Registration
Statement, as such attorney-in-fact, or any one of them, may deem appropriate:
Registrant Registration Number (1)
---------- -----------------------
Founders Funds, Inc. 1933 Act: 2-17531
1940 Act: 811-1018
(1) References are to the Securities Act of 1933, as amended ("1933 Act")
and to the Investment Company Act of 1940, as amended ("1940 Act")
This Power of Attorney, which shall not be affected by the disability
of the undersigned, is executed and effective as of the 12th day of April, 1999.
/s/ George W. Phillips
----------------------------
George W. Phillips
STATE OF MASSACHUSETTS )
)ss.
COUNTY OF ESSEX )
SUBSCRIBED, SWORN TO AND ACKNOWLEDGED before me by George W. Phillips,
director of the above-referenced Registrant, this 12th day of April, 1999.
[SEAL] /s/ Elizabeth A. Reedy
---------------------------
Notary Public
My commission expires: March 2, 2001.
<PAGE>
POWER OF ATTORNEY
The person executing this Power of Attorney hereby appoints Kenneth R.
Christoffersen, David L. Ray, Richard W. Sabo, and Edward F. O'Keefe, or any one
of them, as his attorney-in-fact with full power of substitution, to execute and
to file a Registration Statement on Form N-14 for the hereinafter described
entity relating to the proposed Plan of Reorganization under which the assets of
Founders Frontier Fund would be transferred to, and its liabilities would be
assumed by, Founders Discovery Fund, and any amendment to such Registration
Statement, as such attorney-in-fact, or any one of them, may deem appropriate:
Registrant Registration Number (1)
---------- -----------------------
Founders Funds, Inc. 1933 Act: 2-17531
1940 Act: 811-1018
(1) References are to the Securities Act of 1933, as amended ("1933 Act")
and to the Investment Company Act of 1940, as amended ("1940 Act")
This Power of Attorney, which shall not be affected by the disability
of the undersigned, is executed and effective as of the 15th day of April, 1999.
/s/ Jay A. Precourt
--------------------------
Jay A. Precourt
STATE OF COLORADO )
)ss.
COUNTY OF DENVER )
SUBSCRIBED, SWORN TO AND ACKNOWLEDGED before me by Jay A. Precourt,
director of the above-referenced Registrant, this 15th day of April, 1999.
[SEAL] /s/ Pamela A. Peros
----------------------------
Notary Public
My commission expires: May 6, 2001.
<PAGE>
POWER OF ATTORNEY
The person executing this Power of Attorney hereby appoints Kenneth R.
Christoffersen, David L. Ray, Richard W. Sabo, and Edward F. O'Keefe, or any one
of them, as his attorney-in-fact with full power of substitution, to execute and
to file a Registration Statement on Form N-14 for the hereinafter described
entity relating to the proposed Plan of Reorganization under which the assets of
Founders Frontier Fund would be transferred to, and its liabilities would be
assumed by, Founders Discovery Fund, and any amendment to such Registration
Statement, as such attorney-in-fact, or any one of them, may deem appropriate:
Registrant Registration Number (1)
---------- -----------------------
Founders Funds, Inc. 1933 Act: 2-17531
1940 Act: 811-1018
(1) References are to the Securities Act of 1933, as amended ("1933 Act")
and to the Investment Company Act of 1940, as amended ("1940 Act")
This Power of Attorney, which shall not be affected by the disability
of the undersigned, is executed and effective as of the 14th day of April, 1999.
/s/ Eugene H. Vaughan, Jr.
--------------------------
Eugene H. Vaughan, Jr.
STATE OF TEXAS )
)ss.
COUNTY OF HARRIS )
SUBSCRIBED, SWORN TO AND ACKNOWLEDGED before me by Eugene H. Vaughan,
Jr., director of the above-referenced Registrant, this 14th day of April, 1999.
[SEAL] /s/ Carolyn J. Ross
--------------------------
Notary Public
My commission expires: February 27, 2001.
EXHIBIT 17(a)
[FORM OF PROXY CARD]
FOUNDERS FUNDS, INC.
FOUNDERS FRONTIER FUND
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS
AUGUST 3, 1999
The undersigned hereby appoints Kenneth R. Christoffersen, David L. Ray, Richard
W. Sabo and Edward F. O'Keefe, and each of them, proxy for the undersigned, with
the power of substitution, to vote with the same force and effect as the
undersigned at the Special Meeting of Shareholders of Founders Funds, Inc. (the
"Company") to be held at the offices of the Company, 2930 East Third Avenue,
Denver, Colorado 80206, on Tuesday, August 3, 1999 at 3 p.m. (Mountain time) and
at any adjournment thereof, upon the matter set forth below, all in accordance
with and as more fully described in the Notice of Special Meeting and Proxy
Statement, dated June 4, 1999, receipt of which is hereby acknowledged.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS, WHICH RECOMMENDS A VOTE "FOR"
THE PROPOSAL.
In their discretion, the Proxies are authorized to vote upon such other business
as may properly come before the meeting or any adjournment thereof.
This proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" THE PROPOSAL.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY IN THE ACCOMPANYING POSTAGE-PAID
ENVELOPE AS SOON AS POSSIBLE. THANK YOU.
Please sign exactly as your name appears hereon. If shares are held in the name
of joint owners, each should sign. Attorneys-in-fact, executors, administrators,
etc. should so indicate. If shareholder is a corporation or partnership, please
sign in full corporate or partnership name by authorized person.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: [X]
KEEP THIS PORTION FOR YOUR RECORDS
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
<PAGE>
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
FOUNDERS FUNDS, INC. - FRONTIER FUND
PROPOSAL.
To approve a Plan of Reorganization providing for (a) the acquisition
of all the assets of Founders Frontier Fund by Founders Discovery Fund, another
series of Founders Funds, Inc., in exchange solely for shares of Founders
Discovery Fund and the assumption by Founders Discovery Fund of all of the
liabilities of Founders Frontier Fund, (b) the distribution of those shares to
the shareholders of Founders Frontier Fund, and (c) the subsequent termination
of Founders Frontier Fund.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
- --------------------------------- ----------------------- ----------
Signature [Please sign within box] Signature (Joint Owner) Date
[BUCKSLIP]
FOUR CONVENIENT WAYS TO VOTE YOUR PROXY
The enclosed Proxy Statement details important issues affecting your Founders
Fund investment. Help us save time and postage costs - savings we pass along to
you - by voting online, by telephone, or by fax. Each method is generally
available 24 hours a day and will ensure that your vote is confirmed and
recorded immediately. You may, of course, also vote by mail.
TO VOTE ONLINE:
1. Read the Proxy Statement and have your proxy card(s) at hand.
2. Go to web site www.proxyvote.com
3. Enter the 12-digit Control Number from your proxy card(s).
4. Follow the simple instructions.
TO VOTE BY TELEPHONE:
1. Read the Proxy Statement and have your proxy card(s) at hand.
2. Call toll-free 1-800-690-6903.
3. Enter the 12-digit Control Number from your proxy card(s).
4. Follow the simple recorded instructions.
TO VOTE BY FAX:
1. Read the Proxy Statement.
2. Simply mark, sign, and date the enclosed proxy card(s).
3. Fax your proxy card(s) to 1-800-773-1885.
TO VOTE BY MAIL:
1. Read the Proxy Statement.
2. Simply mark, sign, and date the enclosed proxy card(s).
3. Mail the proxy card(s) in the postage-paid envelope provided.
<PAGE>
There is no need to mail the proxy card if you are voting by Internet, telephone
or fax.
REMEMBER YOUR VOTE COUNTS. VOTE TODAY!
FOUNDERS FUNDS - GROWTH SPECIALISTS FROM DREYFUS.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> FOUNDERS DISCOVERY FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 191141
<INVESTMENTS-AT-VALUE> 251862
<RECEIVABLES> 3352
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<TOTAL-ASSETS> 255895
<PAYABLE-FOR-SECURITIES> 13431
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1340
<TOTAL-LIABILITIES> 14771
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 174222
<SHARES-COMMON-STOCK> 9894
<SHARES-COMMON-PRIOR> 10501
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6181
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 60721
<NET-ASSETS> 241124
<DIVIDEND-INCOME> 41
<INTEREST-INCOME> 1356
<OTHER-INCOME> (2)
<EXPENSES-NET> 3370
<NET-INVESTMENT-INCOME> (1975)
<REALIZED-GAINS-CURRENT> 23886
<APPREC-INCREASE-CURRENT> 10818
<NET-CHANGE-FROM-OPS> 32729
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 19443
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7262
<NUMBER-OF-SHARES-REDEEMED> 8614
<SHARES-REINVESTED> 744
<NET-CHANGE-IN-ASSETS> (5157)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1738
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2169
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3416
<AVERAGE-NET-ASSETS> 217020
<PER-SHARE-NAV-BEGIN> 23.45
<PER-SHARE-NII> (0.07)
<PER-SHARE-GAIN-APPREC> 3.15
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 2.16
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 24.37
<EXPENSE-RATIO> 1.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> FOUNDERS FRONTIER FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 115655
<INVESTMENTS-AT-VALUE> 165282
<RECEIVABLES> 3877
<ASSETS-OTHER> 453
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 169612
<PAYABLE-FOR-SECURITIES> 1281
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 908
<TOTAL-LIABILITIES> 2189
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 114100
<SHARES-COMMON-STOCK> 6565
<SHARES-COMMON-PRIOR> 7934
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3696
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 49627
<NET-ASSETS> 167423
<DIVIDEND-INCOME> 350
<INTEREST-INCOME> 1148
<OTHER-INCOME> (30)
<EXPENSES-NET> 3001
<NET-INVESTMENT-INCOME> (1533)
<REALIZED-GAINS-CURRENT> 8039
<APPREC-INCREASE-CURRENT> 2286
<NET-CHANGE-FROM-OPS> 8792
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 21834
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1786
<NUMBER-OF-SHARES-REDEEMED> 4086
<SHARES-REINVESTED> 913
<NET-CHANGE-IN-ASSETS> (54681)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 17488
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1847
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3041
<AVERAGE-NET-ASSETS> 184691
<PER-SHARE-NAV-BEGIN> 27.99
<PER-SHARE-NII> 0.06
<PER-SHARE-GAIN-APPREC> 1.01
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 3.56
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 25.50
<EXPENSE-RATIO> 1.62
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
