As filed with the Securities and Exchange Commission on November 28, 2000
Securities Act File No. 002-34552
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. [ ]
PILGRIM INVESTMENT FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
7337 East Doubletree Ranch Road, Scottsdale, Arizona 85258
(Address of Principal Executive Offices) (Zip Code)
(800) 992-0180
(Registrant's Area Code and Telephone Number)
James M. Hennessy
ING Pilgrim Investments, Inc.
7337 East Doubletree Ranch Road
Scottsdale, Arizona 85258
(Name and Address of Agent for Service)
With copies to:
Jeffrey S. Puretz, Esq.
Dechert
1775 Eye Street, N.W.
Washington, DC 20006
------------------------
Approximate Date of Proposed Public Offering:
As soon as practicable after this Registration Statement becomes effective.
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It is proposed that this filing will become effective on
December 28, 2000 pursuant to Rule 488 under the Securities Act of 1933.
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No filing fee is required because an indefinite number of shares have previously
been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended.
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<PAGE>
Pilgrim MidCap Value Fund and
Pilgrim LargeCap Leaders Fund
7337 East Doubletree Ranch Road
Scottsdale, Arizona 85258
(800) 992-0180
_____________, 2000
Dear Shareholder:
Your Board of Directors has called a Special Meeting of Shareholders of the
Pilgrim MidCap Value Fund ("MidCap Value Fund") and the Pilgrim LargeCap Leaders
Fund ("LargeCap Leaders Fund"), (collectively, the "Funds") each scheduled to be
held at _______ [a.m./p.m.], local time, on ___________, 2001 at 7337 East
Doubletree Ranch Road, Scottsdale, Arizona 85258.
The Board of Directors has approved a reorganization of each of these Funds
into the Pilgrim MagnaCap Fund ("MagnaCap Fund"), each of which is managed by
ING Pilgrim Investments, Inc. ("ING Pilgrim Investments") and is part of the
Pilgrim funds (each a "Reorganization," collectively, the "Reorganizations"). If
approved by shareholders, you would become a shareholder of MagnaCap Fund on the
date that the Reorganizations occur. MagnaCap Fund has investment objectives and
policies that are similar in many respects to those of MidCap Value Fund and
LargeCap Leaders Fund, and the Reorganizations are expected to result in
operating expenses that are lower for shareholders.
You are being asked to vote to approve Agreements and Plans of
Reorganization. The accompanying document describes the proposed transactions
and compares the policies and expenses of each of the funds for your evaluation.
After careful consideration, the Board of Directors of MidCap Value Fund (a
series of Pilgrim Advisory Funds, Inc.) and LargeCap Leaders Fund (a series of
Pilgrim Advisory Funds, Inc.) unanimously approved this proposal and recommended
shareholders vote "FOR" the proposal.
A Proxy Statement/Prospectus that describes the Reorganizations is
enclosed. We hope that you can attend the applicable meeting in person; however,
we urge you in any event to vote your shares by completing and returning the
enclosed proxy card in the envelope provided at your earliest convenience.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. IN ORDER
TO AVOID THE ADDED COST OF FOLLOW-UP SOLICITATIONS AND POSSIBLE ADJOURNMENTS,
PLEASE TAKE A FEW MINUTES TO READ THE PROXY STATEMENT/PROSPECTUS AND CAST YOUR
VOTE. IT IS IMPORTANT THAT YOUR VOTE BE RECEIVED NO LATER THAN __________, 2001.
The Funds are using Shareholder Communications Corporation, a professional
proxy solicitation firm, to assist shareholders in the voting process. As the
date of the meeting approaches, if we have not already heard from you, you may
receive a telephone call from Shareholder Communications Corporation reminding
you to exercise your right to vote.
We appreciate your participation and prompt response in this matter and
thank you for your continued support.
Sincerely,
Robert W. Stallings,
President
<PAGE>
Pilgrim MidCap Value Fund and
Pilgrim LargeCap Leaders Fund
7337 East Doubletree Ranch Road
Scottsdale, Arizona 85258
(800) 992-0180
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF
PILGRIM MIDCAP VALUE FUND AND
PILGRIM LARGECAP LEADERS FUND
SCHEDULED FOR ___________, 2001
To the Shareholders:
A Special Meeting of Shareholders of both the Pilgrim MidCap Value Fund and
the Pilgrim LargeCap Leaders Fund ("Special Meeting") scheduled for _________,
2001 at _______ [a.m./p.m.], local time, at 7337 East Doubletree Ranch Road,
Scottsdale, Arizona 85258.
At the Special Meeting, you will be asked to consider and approve the
following:
1. Pilgrim MidCap Value Fund only. To approve an Agreement and Plan of
Reorganization providing for the acquisition of all of the assets and
liabilities of Pilgrim MidCap Value Fund by Pilgrim MagnaCap Fund; and
2. Pilgrim LargeCap Leaders Fund only. To approve an Agreement and Plan
of Reorganization providing for the acquisition of all of the assets
and liabilities of Pilgrim LargeCap Leaders Fund by Pilgrim MagnaCap
Fund; and
3. Both Funds. To transact such other business as may properly come
before the Special Meeting or any adjournments thereof.
Shareholders of record at the close of business on ___________, 2000, are
entitled to notice of, and to vote at, the meeting. Your attention is called to
the accompanying Proxy Statement/Prospectus. Regardless of whether you plan to
attend the meeting, PLEASE COMPLETE, SIGN AND RETURN PROMPTLY THE ENCLOSED PROXY
CARD so that a quorum will be present and a maximum number of shares may be
voted. If you are present at the meeting, you may change your vote, if desired,
at that time.
By Order of the Board of Directors
James M. Hennessy,
Secretary
______________, 2000
<PAGE>
TABLE OF CONTENTS
INTRODUCTION.............................................................. 1
SUMMARY................................................................... 2
Comparison of Investment Objectives AND Strategies........................ 4
Comparison of Portfolio Characteristics................................ 5
Relative Performance................................................... 7
Expense Table.......................................................... 9
General Information.................................................... 12
ADDITIONAL INFORMATION ABOUT MAGNACAPFUND................................. 13
Investment Personnel................................................... 13
Performance of MagnaCap Fund........................................... 14
INFORMATION ABOUT THE REORGANIZATIONS..................................... 15
ADDITIONAL INFORMATION ABOUT THE FUNDS.................................... 17
Solicitation of Proxies................................................ 18
Voting Rights.......................................................... 18
Other Matters to Come Before the Meeting............................... 20
Shareholder Proposals.................................................. 20
Reports to Shareholders................................................ 20
APPENDIX A................................................................ A-1
APPENDIX B................................................................ B-1
APPENDIX B-1.............................................................. B-1-1
APPENDIX C................................................................ C-1
APPENDIX D................................................................ D-1
APPENDIX E................................................................ E-1
<PAGE>
PROXY STATEMENT/PROSPECTUS
SPECIAL MEETING OF SHAREHOLDERS SCHEDULED FOR
_________________, 2001
PILGRIM MIDCAP VALUE FUND
(a series of Pilgrim Advisory Funds, Inc.)
and the
PILGRIM LARGECAP LEADERS FUND
(a series of Pilgrim Advisory Funds, Inc.)
Relating to the reorganizations into
PILGRIM MAGNACAP FUND
(a series of Pilgrim Investment Funds, Inc.)
(EACH A FUND, COLLECTIVELY, THE "FUNDS")
INTRODUCTION
This Proxy Statement/Prospectus provides you with information about two
proposed transactions. These transactions involve the transfer of all the assets
and liabilities of Pilgrim MidCap Value Fund ("MidCap Value Fund") and Pilgrim
LargeCap Leaders Fund ("LargeCap Leaders Fund") (collectively, the "Disappearing
Funds") to Pilgrim MagnaCap Fund ("MagnaCap Fund" or "Surviving Fund") in
exchange for shares of MagnaCap Fund. Each Disappearing Fund would then
distribute to its shareholders their portion of the shares of MagnaCap Fund it
receives in the reorganizations. The result would be a liquidation of each of
the Disappearing Funds. You would receive shares of MagnaCap Fund having an
aggregate value equal to the aggregate value of the shares you held of MidCap
Value Fund and/or LargeCap Leaders Fund, as applicable, as of the close of
business on the business day of the closing of the reorganizations. You are
being asked to vote on Agreements and Plans of Reorganization through which
these transactions would be accomplished.
Because you, as a shareholder of one or both of the Disappearing Funds, are
being asked to approve transactions that will result in your holding of shares
of MagnaCap Fund, this Proxy Statement also serves as a Prospectus for MagnaCap
Fund.
This Proxy Statement/Prospectus, which you should retain for future
reference, contains important information about the MagnaCap Fund that you
should know before investing. For a more detailed discussion of the investment
objectives, policies, restrictions and risks of each of the Funds, see the
Prospectus (the "Pilgrim Prospectus") dated November 1, 2000, and the Statement
of Additional Information for Pilgrim Funds dated November 1, 2000, which may be
obtained, without charge, by calling (800) 992-0180. Each of the Funds also
provides periodic reports (and other information) to its shareholders which
highlight certain important information about the Funds, including investment
results and financial information. The annual report for MagnaCap Fund dated
June 30, 2000, is incorporated herein by reference. You may receive a copy of
the most recent annual report for any of the Funds, without charge, by calling
(800) 992-0180.
You may also obtain proxy materials, reports and other information filed by
MagnaCap Fund from the Securities and Exchange Commission's ("SEC") Public
Reference Room (1-800-SEC-0330) or from the SEC's internet website at
www.sec.gov.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES, OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
1
<PAGE>
SUMMARY
You should read this entire Proxy Statement/Prospectus carefully. For
additional information, you should consult the Pilgrim Prospectus, and the
Agreements and Plans of Reorganization, which are attached hereto as Appendix B
and B-1.
THE PROPOSED REORGANIZATIONS. On November 2, 2000, the Board of Directors
of MidCap Value Fund and LargeCap Leaders Fund each approved an Agreement and
Plan of Reorganization. Subject to shareholder approval, each Reorganization
Agreement provides for:
* the transfer of all of the assets of the Disappearing Fund to MagnaCap
Fund, in exchange for shares of MagnaCap Fund;
* the assumption by MagnaCap Fund of all of the liabilities of the
Disappearing Fund;
* the distribution of MagnaCap Fund shares to the shareholders of the
Disappearing Fund; and
* the complete liquidation of the Disappearing Fund (each a
"Reorganization," collectively, the "Reorganizations").
The Reorganizations are expected to be effective upon the opening of
business on ___________, 2001, or on a later date as the parties may agree (the
"Closing"). As a result of the Reorganizations, each shareholder of Class A,
Class B, Class C, Class M and Class Q shares of the Disappearing Funds, as
applicable, would become a shareholder of the same Class of MagnaCap Fund. Each
shareholder would hold, immediately after the Closing, shares of each Class of
MagnaCap Fund having an aggregate value equal to the aggregate value of the
shares of that same Class of MidCap Value Fund and/or LargeCap Leaders Fund, as
applicable, held by that shareholder as of the close of business on the business
day of the Closing.
The Reorganizations are two of many reorganizations that are proposed among
various Pilgrim funds. The Pilgrim fund complex has grown in recent years
through the addition of many funds. Management of the Pilgrim funds has proposed
the consolidation of a number of the Pilgrim funds that management believes have
similar or compatible investment policies. The proposed reorganizations are
designed to reduce the overlap in funds in the complex, thereby eliminating
duplication of costs and other inefficiencies arising from having similar
portfolios within the same fund group. ING Pilgrim Investments, Inc. ("ING
Pilgrim Investments") also believes that the reorganizations may benefit fund
shareholders by resulting in surviving funds with a greater asset base. This is
expected to achieve economies of scale for shareholders and may provide greater
investment opportunities for the surviving funds or the potential to take larger
portfolio positions.
Information comparing the Funds follows. A few important points to note
are:
* The Funds have investment objectives and policies that are similar in
many respects;
* MagnaCap Fund normally invests in equity securities of companies
included in the largest 500 U.S. companies, which are selected using
"disciplined criteria," and LargeCap Leaders Fund normally invests in
equity securities of large U.S. companies with market capitalizations
of over $5 billion. The MidCap Value Fund normally invests in
medium-sized companies with market capitalizations between $1 billion
and $8 billion that are selected using disciplined criteria similar to
that of MagnaCap Fund.
* The proposed Reorganizations are expected to result in a reduction in
net operating expenses for shareholders of the Disappearing Funds. For
example, the operating expenses, expressed as a percentage of net
asset value per share for Class A shares, are as follows:
2
<PAGE>
* Expenses of Pilgrim MidCap Value Fund (based on the
12 month period ended 6/30/00) (1) 1.73%
* Expenses of Pilgrim LargeCap Leaders Fund (based on the
12 month period ended 6/30/00) (1) 1.69%
* Expenses of Pilgrim MagnaCap Fund-- (based on the
12 month period ended 6/30/00) 1.29%
* Projected expenses of Pilgrim MagnaCap Fund-after
the Reorganization (PRO FORMA) 1.27%
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(1) Reflects contractual agreements effective July 26, 2000 to lower advisory
fees of each Disappearing Fund to 0.85% from 1.0% for the period that the
current advisory agreement is in effect.
Approval of each Reorganization Agreement requires the affirmative vote
of a majority of the outstanding shares of the applicable Disappearing Fund.
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF MIDCAP VALUE FUND
AND LARGECAP LEADERS FUND EACH UNANIMOUSLY APPROVED THE PROPOSED
REORGANIZATIONS. THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSED
REORGANIZATIONS.
3
<PAGE>
COMPARISON OF INVESTMENT OBJECTIVES AND STRATEGIES
<TABLE>
<CAPTION>
MIDCAP VALUE FUND LARGECAP LEADERS FUND MAGNACAP FUND
----------------- --------------------- -------------
<S> <C> <C> <C>
INVESTMENT * Long-term capital * Long term capital appreciation. * Growth of capital, with
OBJECTIVE appreciation. dividend income as a secondary
* Normally invests at least 65% consideration.
INVESTMENT * Normally invests at least 80% of its total assets in equity
STRATEGIES of its assets in equity securities of large U.S. * Normally invests at least 65%
securities of medium-sized companies believed by the of assets in equity securities
U.S. companies with a market adviser to be leaders in their of companies that are included
capitalization between $1 industries. The Fund seeks in the largest 500 U.S.
billion and $8 billion. companies with a sustainable companies, that are selected
competitive edge. using the following
* Normally invests at least 65% "disciplined criteria":
of its assets in equity * Emphasizes a value approach
securities of U.S. companies and seeks securities whose * Consistent Dividends -
using the following prices in relation to Paid or had the financial
"disciplined criteria": projected earnings are capability from its
believed to be reasonable in operations to pay a
* Consistent Dividends - comparison to the market. dividend in eight out of
Paid or had the financial the last 10 years.
capability from its * Normally invests in equity
operations to pay a securities of companies with * Substantial Dividend
dividend in its last five market capitalization of over Increases - Increased
fiscal years. $5 billion. dividends or had the
financial capability from
* Strong Balance Sheet - If * May invest to a limited degree operations to have
has rated debt, must be in companies that have a increased dividends at
rated investment grade by market capitalization between least 100% over the past
a nationally recognized $1 billion and $5 billion. 10 years.
rating agency. If debt is
not rated, long-term debt * Normally invests at least 80% * Reinvested Earnings -
to capitalization ratio in equity securities. Dividend pay out must be
must be below 25%. less than 65% of current
earnings.
* Reinvested Earnings
--Must pay out in * Strong Balance Sheet -
dividends less than 65% Long-term debt should be
of current earnings, or no more than 25% of total
less than the dividend capitalization or bonds
payout as a percentage of must be rated at least A-
current earnings of at or A-3.
least half of the
medium-sized companies in * Attractive Price -
similar industries. Current share price
should be in the lower
* Attractive Price - Ratio half of the stock's
of stock price to next price/earnings ratio
fiscal year's anticipated range for the past 10
earnings must be less years, or the ratio of
than the corresponding the share price to
ratio for at least half anticipated earnings must
of the medium-sized be an attractive value in
companies in similar relation to the average
industries. for its industry peer
group or that of the
S&P's 500 Composite Price
Index. ("S&P 500 Index").
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
* May invest up to 35% in equity
securities that have growth
potential because they
represent an attractive value.
* May invest in high quality
debt securities.
* May invest up to 5% of its
assets, measured at the time
of investment, in foreign
securities.
INVESTMENT * ING Pilgrim Investments * ING Pilgrim Investments * ING Pilgrim Investments
ADVISER
PORTFOLIO * G. David Underwood * G. David Underwood * Howard N. Kornblue, G. David
MANAGERS Underwood
</TABLE>
As you can see from the chart above, the investment objectives and
strategies of the Funds are similar.
COMPARISON OF PORTFOLIO CHARACTERISTICS
The following table compares certain characteristics of the portfolios of
the Funds as of June 30, 2000:
<TABLE>
<CAPTION>
MIDCAP VALUE FUND LARGECAP LEADERS FUND MAGNACAP FUND
----------------- --------------------- -------------
<S> <C> <C> <C>
Net Assets $31,415,470 $37,807,986 $417,667,984
Number of Holdings 56 70 77
Ratio of net income (loss) to
average net assets (Class A)(1) -0.98% -0.83% 0.24%
As a percentage of net assets:
Equity Securities (including
equities convertible into
common stock) 93.55% 97.15% 97.44%
Equity Securities that
meet "disciplined selection
criteria"(2) 93.22% 52.90% 91.50%
Short-Term Debt Investments 10.29% 5.59% 3.22%
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
MIDCAP VALUE FUND LARGECAP LEADERS FUND MAGNACAP FUND
----------------- --------------------- -------------
<S> <C> <C> <C>
Average market capitalization
of companies in portfolio $5.2 billion $95.9 billion $62.6 billion
Market capitalization range
of companies in portfolio $297 million-$65.3 billion $1.5 billion-$524.4 billion $1.0 billion-$524.4 billion
Holdings in companies with
market capitalization over
$10 billion (as a % of net
assets) 10.38% 93.04% 82.67%
Holdings in companies with
market capitalization between
$5 billion and $10 billion
(as a % of net assets) 20.41% 4.07% 7.92%
Holdings in companies with
market capitalization under
$5 billion (as a % of net
assets) 62.76% 0.04% 6.85%
Portfolio Turnover Rate(1) 122% 39% 26%
Top 5 Industries Computers - 16.39% Computers - 8.86% Telecommunication
(as a % of net assets) Fiber Optics - 12.09% Telecommunication - 7.61% Equipment - 11.17%
Media - 10.73% Diversified Financial Retail - 8.91%
Semiconductor - 10.43% Services - 7.45% Computers - 7.49%
Telecommunication Oil & Gas Products - 7.05% Insurance - 6.88%
Equipment - 6.80% Pharmaceuticals - 6.49% Banks - 5.82%
Top 10 Holdings ADC Telecommunications 5.34% Merrill Lynch & Co, Aflac, Inc. 2.75%
(as a % of net assets) Mallinckrodt, Inc 2.77% Inc. 2.13% Johnson & Johnson 2.56%
Convergys Corp. 2.56% PepsiCo, Inc. 1.78% McDonald's Corp. 2.37%
Republic Services, Inc. 2.48% Abbott Laboratories 1.76% General Electric 2.34%
American Power General Electric 1.72% Tellabs, Inc. 2.34%
Conversion 2.30% Tyco Int'l Ltd. 1.72% Baxter Int'l 2.31%
Bausch & Lomb, Inc. 2.22% Safeway, Inc. 1.66% Automatic Data
Charter One Financial, Johnson & Johnson 1.71% Processcing 2.13%
Inc. 2.20% Walgreen Co. 1.68% Intel Corp. 2.03%
Crown Castle Int'l Colgate-Palmolive 1.66% PepsiCo, Inc. 2.02%
Corp. 2.03% Pfizer 1.65% American Int'l Group 1.96%
Starwood Hotels &
Resorts 2.03%
Andrew Corp. 2.03%
</TABLE>
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(1) For the year ended June 30, 2000.
(2) These are securities in which the MidCap Value Fund and the MagnaCap Fund
each normally invests at least 65% of their assets and that meet at the
time of investment the criteria described in the chart above entitled
"Comparison of Investment Objectives and Strategies."
6
<PAGE>
RELATIVE PERFORMANCE
The following table shows, for the period January 1, 2000 to September 30,
2000, and each calendar year since 1996, the average annual total return for:
(a) Class A shares of MidCap Value Fund; (b) Class A shares of LargeCap Leaders
Fund; (c) Class A shares of MagnaCap Fund; (d) the S&P 500 Index; and (e) the
Russell MidCap Value Index. The performance of the Funds in the table does not
reflect the deduction of sales loads, and would be lower if it did. The indices
have inherent performance advantages over the Funds since the indices have no
cash in their portfolios and incur no transaction or operating expenses. An
investor cannot invest directly in an index. Total return is calculated assuming
reinvestment of all dividends and capital gain distributions at net asset value
and excluding the deduction of sales charges. The Funds' past performance is not
an indication of future performance.
CALENDAR MIDCAP LARGECAP RUSSELL
YEAR VALUE LEADERS MAGNACAP S&P 500 MIDCAP
PERIOD/ENDED FUND(1) FUND(2) FUND INDEX(3) VALUE INDEX(4)
------------ ------- ------- ---- -------- --------------
12/31/96 29.56% 21.07% 18.51% 22.96% 20.26%
12/31/97 21.87% 20.15% 27.73% 33.36% 34.37%
12/31/98 4.89% 20.08% 16.09% 27.69% 5.08%
12/31/99 -7.32% 18.94% 12.20% 21.04% -0.11%
1/1/00-9/30/00 2.38% -0.49% 1.62% -1.39% 8.90%
----------
(1) The MidCap Value Fund commenced operations on September 1, 1995. Prior to
October 1, 1999, MidCap Value Fund's investment policies were different in
that they emphasized midcap value stocks without employing the current
disciplined selection criteria. ING Pilgrim Investments has been MidCap
Value Fund's investment adviser since that Fund commenced operations;
however, prior to October 1, 1999, the Fund was managed by a sub-adviser.
(2) The LargeCap Leaders Fund commenced operations on September 1, 1995. Prior
to November 1, 1998, the Fund's investment policies were different in that
they emphasized large company value stocks without necessarily emphasizing
industry leaders. ING Pilgrim Investments has been the Fund's investment
adviser since the Fund commenced operations; however, prior to November 1,
1997, the Fund was managed by a sub-adviser.
(3) The S&P 500 Index is an unmanaged index that measures the performance of
securities of approximately 500 large-capitalization U.S. companies.
(4) The Russell MidCap Value Index is an unmanaged index that measures the
performance of companies in the Russell MidCap Index with lower
book-to-price ratios and lower forecasted growth values. The Russell MidCap
Index is an unmanaged index that measures the performance of the 800
smallest companies in the Russell 1000 Index.
COMPARISON OF INVESTMENT TECHNIQUES AND RISKS OF INVESTING IN THE FUNDS:
Because the Funds have investment objectives and policies that are similar
in many respects, many of the risks of investing in the MagnaCap Fund are
similar to the risks of investing in the MidCap Value Fund and LargeCap Leaders
Fund. A principal risk of an investment in any of the Funds is that you may lose
money on your investment. Each Fund's shares may go up or down, sometimes
rapidly and unpredictably. Market conditions, financial conditions of issuers
represented in the portfolio, investment policies, portfolio management, and
other factors affect such fluctuations.
7
<PAGE>
EQUITY SECURITIES. Each Fund is subject to risks associated with investing
primarily in equity securities, including market risks, issuer risk (including
credit risks), price volatility risks, and market trend risk. Market risk is the
risk that securities may decline in value due to factors affecting securities
markets generally or particular industries. Issuer risk is the risk that
securities may decline for reasons relating to the issuer, such as changes in
the financial condition of the issuer. Credit risk is the risk that an issuer
may not be able to meet its financial obligations when due, including payments
on outstanding debt. Market trend risk is the risk that the market may not favor
the investment approach followed by each Fund or may not favor equities at all.
While equities may offer the potential for greater long-term growth than most
debt securities, they generally have higher volatility. Additionally, MidCap
Value Fund may invest in medium-sized companies, which may be more susceptible
to price swings than larger companies, because they have fewer financial
resources, more limited product and market diversification and many are
dependent on a few key managers.
Because MagnaCap Fund and MidCap Value Fund follow disciplined investment
criteria, these Funds run the risk that the market may not favor the securities
that meet the Funds' investment criteria. Similarly, the LargeCap Leaders Fund,
which uses a value approach, runs the risk that the market may not favor the
large company value securities in which the Fund invests. Rather, the market
could favor growth-oriented stocks or small company stocks, or may not favor
equities at all.
The MidCap Value Fund and, to a lesser extent, MagnaCap and LargeCap
Leaders Funds may be affected by the risk of the inability to sell securities of
medium-size companies. Securities of medium-size companies trade in lower volume
and may be less liquid than securities of larger, more established companies.
The Funds could lose money if they cannot sell a security at the time and price
that would be most beneficial to them.
COMPARISON OF FEES AND EXPENSES
The following discussion describes and compares the fees and expenses of
the Funds. For further information on the fees and expenses of MagnaCap Fund,
see "Appendix C: Additional Information Regarding Pilgrim MagnaCap Fund."
TOTAL OPERATING EXPENSES. The operating expenses of MagnaCap Fund,
expressed as a ratio of expenses to average daily net assets ("expense ratio"),
are lower than those of the Disappearing Funds, both before and after giving
effect to the expense limitation agreements for the Disappearing Funds,
described below. For the year ended June 30, 2000, the expense ratios for
Class A, Class B, Class C, Class M and Class Q shares of MagnaCap Fund were
1.29%, 1.99%, 1.99%, 1.74% and 1.24%, respectively, which is lower than those of
the same Classes of the Disappearing Funds.
8
<PAGE>
EXPENSE LIMITATION ARRANGEMENTS. Expense limitation arrangements are in
place for the Disappearing Funds, but not for the Surviving Fund. Under the
terms of the expense limitation agreements, ING Pilgrim Investments has agreed
to limit the expenses of the Disappearing Funds, excluding interest, taxes,
brokerage and extraordinary expenses, subject to possible reimbursement to ING
Pilgrim Investments within three years. The current expense limitation
agreements for the Disappearing Funds provide that they will remain in effect
until October 31, 2001. There is no assurance that the expense limitation
agreements will be continued after that date. The expense limitations for Class
A, Class B, Class C, Class M and Class Q shares of each of the Disappearing
Funds are 1.75%, 2.50%, 2.50%, 2.25% and 1.75%.
MANAGEMENT FEE. MagnaCap Fund's management fee is based on the following
breakpoint schedule:
Average Daily Net Assets
to which Fee Applies Fee Breakpoint
-------------------- --------------
First $30 million 1.00%
$30 million to $250 million 0.75%
$250 million to $500 million 0.625%
Over $500 million 0.50%
The Disappearing Funds each have annual management fees of 0.85% of the
Fund's average daily net assets.
DISTRIBUTION AND SERVICE FEES. The distribution (12b-1) and service fees of
the Disappearing Funds are, with one exception, the same as those of MagnaCap
Fund. The 12b-1 fees for Class A Shares of MagnaCap Fund are 0.05% higher than
those of the Disappearing Funds.
EXPENSE TABLE. The current expenses of each of the Funds and estimated PRO
FORMA expenses giving effect to the proposed Reorganizations are shown in the
following table. Expenses for the Funds are based upon the operating expenses
incurred by Class A, Class B, Class C, Class M and Class Q shares of the Funds
for the fiscal year ended June 30, 2000. PRO FORMA numbers show estimated fees
of MagnaCap Fund after giving effect to the proposed Reorganizations. PRO FORMA
numbers are estimated in good faith and are hypothetical and are adjusted for
anticipated contractual changes.
9
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(UNAUDITED)
(expenses that are deducted from Fund assets, shown as a ratio of expenses to
average daily net assets) (1)
<TABLE>
<CAPTION>
DISTRIBUTION
(12b-1) AND
SHAREHOLDER TOTAL FUND
MANAGEMENT SERVICING OTHER OPERATING FEE WAIVER NET FUND
FEES FEES(2) EXPENSES EXPENSES BY ADVISER(3) EXPENSES
---- ------- -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
MidCap Value Fund 0.85% 0.25% 0.63% 1.73% -- 1.73%
LargeCap Leaders Fund 0.85% 0.25% 0.59% 1.69% -- 1.69%
MagnaCap Fund 0.71% 0.30% 0.28% 1.29% -- 1.29%
Surviving Fund after
the Reorganizations
(PRO FORMA) 0.70% 0.30% 0.27% 1.27% -- 1.27%
CLASS B
MidCap Value Fund 0.85% 1.00% 0.63% 2.48% -- 2.48%
LargeCap Leaders Fund 0.85% 1.00% 0.59% 2.44% -- 2.44%
MagnaCap Fund 0.71% 1.00% 0.28% 1.99% -- 1.99%
Surviving Fund after
the Reorganizations
(PRO FORMA) 0.70% 1.00% 0.27% 1.97% -- 1.97%
CLASS C
MidCap Value Fund 0.85% 1.00% 0.63% 2.48% -- 2.48%
LargeCap Leaders Fund 0.85% 1.00% 0.59% 2.44% -- 2.44%
MagnaCap Fund 0.71% 1.00% 0.28% 1.99% -- 1.99%
Surviving Fund after
the Reorganizations
(PRO FORMA) 0.70% 1.00% 0.27% 1.97% -- 1.97%
CLASS M
MidCap Value Fund 0.85% 0.75% 0.63% 2.23% -- 2.23%
LargeCap Leaders Fund 0.85% 0.75% 0.59% 2.19% -- 2.19%
MagnaCap Fund 0.71% 0.75% 0.28% 1.74% -- 1.74%
Surviving Fund after
the Reorganizations
(PRO FORMA) 0.70% 0.75% 0.27% 1.72% -- 1.72%
CLASS Q
MidCap Value Fund 0.85% 0.25% 0.63% 1.73% -- 1.73%
LargeCap Leaders 0.85% 0.25% 0.59% 1.69% -- 1.69%
MagnaCap Fund 0.71% 0.25% 0.28% 1.24% -- 1.24%
Surviving Fund after
the Reorganizations
(PRO FORMA) 0.70% 0.25% 0.27% 1.22% -- 1.22%
</TABLE>
10
<PAGE>
----------
(1) The Surviving Fund's and Disappearing Funds' fiscal year end is June 30.
Expenses of the Funds are based upon expenses incurred by each Fund for the
fiscal year ended June 30, 2000, with the exception of MidCap Value Fund
and LargeCap Leaders Fund, which had a 0.15% decrease in management fees
effective July 26, 2000 which is reflected in these rates. PRO FORMA
expenses are estimated and adjusted for anticipated contractual changes.
(2) As a result of distribution (Rule 12b-1) fees, a long term investor may pay
more than the economic equivalent of the maximum sales charge allowed by
the Rules of the National Association of Securities Dealers, Inc.
(3) ING Pilgrim Investments has entered into expense limitation agreements that
limit expenses (excluding interest, taxes, brokerage and extraordinary
expenses) for MidCap Value Fund and LargeCap Leaders Fund to 1.75%, 2.50%,
2.50%, 2.25% and 1.75% for Class A, Class B, Class C, Class M and Class Q
shares, respectively, subject to possible later recoupment. ING Pilgrim
Investments has agreed that the expense limitations shown in the table will
apply to MidCap Value Fund and LargeCap Leaders Fund until at least October
31, 2001. The management fees also reflect contractual agreements effective
July 26, 2000, to lower the advisory fee to 0.85% for the MidCap Value Fund
and LargeCap Leaders Fund for the period that the current advisory
agreement between the Funds and ING Pilgrim Investments is in effect. There
is no assurance that the agreements to lower fees will be continued beyond
that date.
Following the Reorganizations and in the ordinary course of business as a
mutual fund, certain holdings of the Disappearing Funds that are transferred to
MagnaCap Fund in connection with the Reorganizations may be sold. Such sales may
result in increased transaction costs for MagnaCap Fund, and the realization of
taxable gains or losses for MagnaCap Fund.
EXAMPLES. The examples are intended to help you compare the cost of investing in
each of the Funds, and in the combined Funds on a pro forma basis--assuming the
Funds have been combined. The examples assume that you invest $10,000 in each
Fund for the time periods indicated and then redeem all of your shares at the
end of those periods. The examples also assume that your investment has a 5%
return each year and that each Fund's operating expenses remain the same. The 5%
return is an assumption and is not intended to portray past or future investment
results. Based on the above assumptions, you would pay the following expenses if
you redeem your shares at the end of each period shown. Because this is an
estimate, your actual costs may be higher or lower.
<TABLE>
<CAPTION>
MIDCAP VALUE FUND LARGECAP LEADERS FUND MAGNACAP FUND
---------------------------- ----------------------------- -----------------------------
1 3 5 10 1 3 5 10 1 3 5 10
YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS
---- ----- ----- ----- ---- ----- ----- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $741 $1,089 $1,460 $2,499 $737 $1,077 $1,440 $2,458 $699 $960 $1,242 $2,042
Class B 751 1,073 1,521 2,632* 747 1,061 1,501 2,591* 702 924 1,273 2,136*
Class C 351 773 1,321 2,816 347 761 1,301 2,776 302 624 1,073 2,317
Class M 568 1,023 1,503 2,825 564 1,011 1,483 2,785 521 879 1,261 2,330
Class Q 176 545 939 2,041 172 533 918 1,998 126 393 681 1,500
PRO FORMA:
THE FUNDS COMBINED
-------------------------------
1 3 5 10
YEAR YEARS YEARS YEARS
---- ----- ----- -----
Class A $697 $955 $1,232 $2,021
Class B 700 918 1,262 2,115*
Class C 300 618 1,062 2,296
Class M 519 873 1,251 2,309
Class Q 124 387 670 1,477
</TABLE>
----------
* The ten year calculations for Class B shares assume conversion of the Class
B shares to Class A shares at the end of the eighth year following the date
of purchase.
11
<PAGE>
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
MIDCAP VALUE FUND LARGECAP LEADERS FUND MAGNACAP FUND
---------------------------- ---------------------------- ----------------------------
1 3 5 10 1 3 5 10 1 3 5 10
YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS
---- ----- ----- ----- ---- ----- ----- ----- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $741 $1,089 $1,460 $2,499 $737 $1,077 $1,440 $2,458 $699 $960 $1,242 $2,042
Class B 251 773 1,321 2,632* 247 761 1,301 2,591* 202 624 1,073 2,136*
Class C 251 773 1,321 2,816 247 761 1,301 2,776 202 624 1,073 2,317
Class M 568 1,023 1,503 2,825 564 1,011 1,483 2,785 521 879 1,261 2,330
Class Q 176 545 939 2,041 172 533 918 1,998 126 393 681 1,500
PRO FORMA:
THE FUNDS COMBINED
--------------------------------
1 3 5 10
YEAR YEARS YEARS YEARS
---- ----- ----- -----
Class A $697 $955 $1,232 $2,021
Class B 200 618 1,062 2,120*
Class C 200 618 1,062 2,296
Class M 519 873 1,251 2,309
Class Q 124 387 670 1,477
</TABLE>
----------
* The ten year calculations for Class B shares assume conversion of the Class
B shares to Class A shares at the end of the eighth year following the date
of purchase.
GENERAL INFORMATION
Class A, Class B, Class C, Class M and Class Q shares of MagnaCap Fund
issued to a shareholder in connection with the Reorganizations will be subject
to the same contingent deferred sales charge, if any, applicable to the
corresponding shares of the Disappearing Funds held by that shareholder
immediately prior to the Reorganizations.
12
<PAGE>
In addition, the period that the shareholder held shares of the
Disappearing Funds will be included in the holding period of MagnaCap Fund
shares for purposes of calculating any contingent deferred sales charge.
Similarly, Class B shares of MagnaCap Fund issued to a shareholder in connection
with the Reorganization will convert to Class A shares eight years after the
date that the Class B shares of the Disappearing Fund were purchased by the
shareholder. MagnaCap Fund, MidCap Value Fund and LargeCap Leaders Fund are each
subject to the sales load structure described in the table below.
TRANSACTION FEES ON NEW INVESTMENTS
(fees paid directly from your investment)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS M CLASS Q
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a percentage of offering
price) 5.75%(1) None None 3.50%(1) None
Maximum deferred sales charge (load) (as
a percentage of the lower of original
purchase price or redemption proceeds) None(2) 5.00%(3) 1.00%(4) None None
</TABLE>
----------
(1) Reduced for purchases of $50,000 and over. See "Class A Shares: Initial
Sales Charge Alternative" and "Class M Shares: Initial Sales Charge
Alternative" in Appendix C.
(2) A contingent deferred sales charge of no more than 1.00% may be assessed on
redemptions of Class A shares that were purchased without an initial sales
charge as part of an investment of $1 million or more. See "Class A Shares:
Initial Sales Charge Alternative" in Appendix C.
(3) Imposed upon redemptions within 6 years from purchase. The fee has
scheduled reductions after the first year. See "Class B Shares: Deferred
Sales Charge Alternative" in Appendix C and "Shareholder Guide Sales Charge
Calculation" in the Pilgrim Prospectus.
(4) Imposed upon redemptions within 1 year from purchase.
Neither MagnaCap Fund nor either of the Disappearing Funds have any
redemption fees, exchange fees or sales charges on reinvested dividends.
ADDITIONAL INFORMATION ABOUT MAGNACAP FUND
INVESTMENT PERSONNEL
MAGNACAP FUND:
Howard N. Kornblue, Senior Vice President and Senior Portfolio Manager for
ING Pilgrim Investments leads the team that manages MagnaCap Fund. Mr. Kornblue
has served as a Portfolio Manager of MagnaCap Fund since 1989.
G. David Underwood is a member of the MagnaCap Fund team. Mr. Underwood
serves as Senior Vice President and Senior Portfolio Manager for ING Pilgrim
Investments. Prior to joining Pilgrim in December 1996, Mr. Underwood was a
Director of Funds Management for First Interstate Capital Management. Mr.
Underwood's prior experience includes a 10 year association with Integra Trust
Company of Pittsburg where he served as Director of Research and Senior
Portfolio Manager.
13
<PAGE>
PERFORMANCE OF MAGNACAP FUND
The bar chart and table that follow provide an indication of the risks of
investing in MagnaCap Fund by showing (on a calendar year basis) changes in
MagnaCap Fund's annual total return from year to year and by showing (on a
calendar year basis) how MagnaCap Fund's average annual returns for one year,
five years, ten years and since inception compare to those of the S&P 500 Index.
The information in the bar chart is based on the performance of the Class A
shares of MagnaCap Fund although the bar chart does not reflect the deduction of
the sales load on Class A shares. If the bar chart included the sales load,
returns would be less than those shown. The MagnaCap Fund's past performance is
not necessarily an indication of how the Fund will perform in the future. Total
returns include reinvestment of dividends and capital gains distributions, if
any. All indices are unmanaged.
CALENDAR YEAR-BY-YEAR RETURNS (%)*
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
-3.11% 25.28% 8.02% 9.25% 4.15% 35.22% 18.51% 27.73% 16.09% 12.20%
----------
* During the periods shown in the chart, the Fund's best quarterly
performance was 18.93% for the quarter ended December 1998, and the Fund's
worst quarterly performance was -15.99% for the quarter ended September
1990. The Fund's year to date return as of September 30, 2000 was 1.62%.
The table below shows the average annual total returns of MagnaCap Fund's
actual performance averaged over various lengths of time, compared to the S&P
500 Index. The S&P 500 Index has inherent performance advantages over MagnaCap
Fund, since it has no cash in its portfolio, imposes no sales charges and incurs
no operating expenses. An investor cannot invest directly in an index. MagnaCap
Fund's performance reflected in the table assumes the deduction of the maximum
sales charge in all cases.
14
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1999(1)
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION(6)
------ ------- -------- ------------
MagnaCap Fund - Class A (2) 5.77% 20.24% 14.13% N/A
MagnaCap Fund - Class B (3)(6) 6.46% N/A N/A 18.74%
MagnaCap Fund - Class M (4)(6) 7.74% N/A N/A 18.32%
S&P 500 Index (5) 21.04% 28.54% 18.19% 26.23%
----------
(1) Class C shares and Class Q of MagnaCap Fund did not have a full year's
performance during the year ended December 31, 1999.
(2) Reflects deduction of sales charge of 5.75%.
(3) Reflects deduction of deferred sales charge of 5% and 2%, respectively, for
1 year and since inception returns.
(4) Reflects deduction of sales charge of 3.50%.
(5) The S&P 500 Index is an unmanaged index that measures the performance of
securities of approximately 500 large-capitalization U.S. companies.
(6) Class B and M commenced operations on July 17, 1995.
The table below shows the performance of MagnaCap Fund if sales charges
were not reflected.
AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1999
SINCE
1 YEAR 5 YEARS 10 YEARS INCEPTION(6)
------ ------- -------- ------------
MagnaCap Fund - Class A 12.20% 21.67% 14.80% 13.10%
MagnaCap Fund - Class B 11.46% N/A N/A 18.99%
MagnaCap Fund - Class M 11.67% N/A N/A 19.28%
For a discussion by the adviser regarding the performance of MagnaCap Fund
for the year ended June 30, 2000, see Appendix A to this Proxy
Statement/Prospectus. Additional information about MagnaCap Fund is included in
Appendix C to this Proxy Statement/Prospectus.
INFORMATION ABOUT THE REORGANIZATIONS
THE REORGANIZATION AGREEMENTS. The Reorganization Agreements provide for
the transfer of all of the assets and liabilities of the Disappearing Funds to
MagnaCap Fund in exchange for shares of MagnaCap Fund. The Disappearing Funds
will distribute the shares of the MagnaCap Fund received in the exchange to the
shareholders of the Disappearing Funds and then each of the Disappearing Funds
will be liquidated.
After the Reorganizations, each shareholder of the Disappearing Funds will
own shares in MagnaCap Fund having an aggregate value equal to the aggregate
value of each respective Class of shares in the Disappearing Funds held by that
shareholder as of the close of business on the business day of the Closing.
Shareholders of each Class of shares of the Disappearing Funds will receive
shares of the corresponding Class of MagnaCap Fund. In the interest of economy
and convenience, shares of MagnaCap Fund generally will not be represented by
physical certificates, unless requested in writing.
15
<PAGE>
Until the Closing, shareholders of the Disappearing Funds will continue to
be able to redeem their shares. Redemption requests received after the Closing
will be treated as requests received by MagnaCap Fund for the redemption of its
shares received by the shareholder in the Reorganizations.
The obligations of the Funds under the Reorganization Agreements are
subject to various conditions, including approval of the shareholders of the
Disappearing Funds. The Reorganization Agreements also require that each of the
Funds take, or cause to be taken, all action, and do or cause to be done, all
things reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated by the Reorganization Agreements. The
Reorganization Agreements may be terminated by mutual agreement of the parties
or on certain other grounds. Please refer to Appendix B to review the terms and
conditions of the Reorganization Agreements.
REASONS FOR THE REORGANIZATIONS. The Reorganizations are two of many
reorganizations that are proposed among various Pilgrim funds. The Pilgrim fund
complex has grown in recent years through the addition of many funds. Management
of the Pilgrim funds has proposed the consolidation of a number of the Pilgrim
funds that management believes have similar or compatible investment policies.
The proposed reorganizations are designed to reduce the overlap in funds in the
complex, thereby eliminating duplication of costs and other inefficiencies
arising from having similar portfolios within the same fund group. ING Pilgrim
Investments also believes that the reorganizations may benefit fund shareholders
by resulting in surviving funds with a greater asset base. This is expected to
achieve economies of scale for shareholders and may provide greater investment
opportunities for the surviving funds or the potential to take larger portfolio
positions.
The proposed Reorganizations were presented to the Board of Directors of
Pilgrim Advisory Funds, Inc. ("Pilgrim Advisory Funds") on behalf of the
Disappearing Funds for consideration and approval at a meeting held on November
2, 2000. For the reasons discussed below, the Directors, including all of the
Directors who are not "interested persons" (as defined in the Investment Company
Act of 1940) of Pilgrim Advisory Funds, determined that the interests of the
shareholders of MidCap Value Fund and LargeCap Leaders Fund will not be diluted
as a result of the proposed Reorganizations, and that the proposed
Reorganizations are in the best interests of MidCap Value Fund and LargeCap
Leaders Fund and their respective shareholders.
The Reorganizations will allow the Disappearing Funds' shareholders to
continue to participate in a professionally-managed portfolio which seeks to
achieve an objective of appreciation or growth of capital. As shareholders of
MagnaCap Fund, these shareholders will be able to exchange into other mutual
funds in the group of Pilgrim Funds and ING Funds that offer the same Class of
shares in which such shareholder is currently invested. A list of the current
Pilgrim Funds, and their available Classes, is contained in Appendix D.
BOARD CONSIDERATIONS. The Board of Directors of Pilgrim Advisory Funds, on
behalf of MidCap Value Fund and LargeCap Leaders Fund, in recommending the
proposed transaction, considered a number of factors, including the following:
(1) The plans of management to reduce overlapping funds in the Pilgrim
funds complex;
(2) expense ratios and information regarding fees and expenses of the
Disappearing Funds and MagnaCap Fund, including the expense limitation
arrangement offered by ING Pilgrim Investments for the Disappearing
Funds;
(3) estimates that show that combining the Funds is expected to result in
a lower expense ratio because of economies of scale expected to result
from an increase in the asset size of the Surviving Fund;
16
<PAGE>
(4) whether the Reorganizations would dilute the interests of the
Disappearing Funds' current shareholders;
(5) the relative investment performance and risks of MagnaCap Fund as
compared to the Disappearing Funds;
(6) the similarity of MagnaCap Fund's investment objectives, policies and
restrictions with those of the Disappearing Funds; and
(7) the tax-free nature of the Reorganizations to the Disappearing Funds
and its shareholders.
The Board of Directors also considered the future potential benefits to ING
Pilgrim Investments in that its costs to limit the expenses of the Disappearing
Funds will be eliminated if the Reorganizations are approved.
THE DIRECTORS OF PILGRIM ADVISORY FUNDS, ON BEHALF OF MIDCAP VALUE FUND,
AND THE LARGECAP LEADERS FUND EACH RECOMMEND THAT SHAREHOLDERS APPROVE THE
REORGANIZATIONS WITH MAGNACAP FUND.
TAX CONSIDERATIONS. The Reorganizations are intended to qualify for Federal
income tax purposes as tax-free reorganizations under Section 368 of the
Internal Revenue Code of 1986, as amended. Accordingly, pursuant to this
treatment, neither the Disappearing Funds nor their shareholders nor MagnaCap
Fund is expected to recognize any gain or loss for federal income tax purposes
from the transactions contemplated by the Reorganization Agreements. As a
condition to the Closing of the Reorganizations, the Funds will receive an
opinion from the law firm of Dechert to the effect that the Reorganizations will
qualify as tax-free reorganizations for Federal income tax purposes. That
opinion will be based in part upon certain assumptions and upon certain
representations made by the Funds.
Immediately prior to the Reorganizations, each Disappearing Fund will pay a
dividend or dividends which, together with all previous dividends, will have the
effect of distributing to its shareholders all of that Fund's investment company
taxable income for taxable years ending on or prior to the Reorganizations
(computed without regard to any deduction for dividends paid) and all of its net
capital gain, if any, realized in taxable years ending on or prior to the
Reorganizations (after reduction for any available capital loss carryforward).
Such dividends will be included in the taxable income of the Disappearing Funds'
shareholders.
EXPENSES OF THE REORGANIZATIONS. ING Pilgrim Investments, Adviser to
Pilgrim MidCap Value Fund, LargeCap Leaders Fund, and MagnaCap Fund will bear
half of the cost of the Reorganizations. The Funds will bear the other half of
the expenses relating to the proposed Reorganizations, including, but not
limited to, the costs of solicitation of voting instructions and any necessary
filings with the Securities and Exchange Commission. Of the Reorganization
expenses allocated to the Funds, each Fund will bear a ratable portion based on
its relative net asset values immediately before Closing.
ADDITIONAL INFORMATION ABOUT THE FUNDS
FORM OF ORGANIZATION. MagnaCap Fund is a series of Pilgrim Investment
Funds, Inc. which is a Maryland Corporation. MidCap Value Fund and LargeCap
Leaders Fund are each a series of Pilgrim Advisory Funds, Inc. which is a
Maryland Corporation. Pilgrim Investment Funds and Pilgrim Advisory Funds are
both governed by a Board of Directors. Each Board has eleven directors; the
members of both Boards are identical.
DISTRIBUTOR. ING Pilgrim Securities, Inc. (the "Distributor"), whose
address is 7337 East Doubletree Ranch Road, Scottsdale, Arizona 85258, is the
principal distributor for each of the Funds.
17
<PAGE>
DIVIDENDS AND OTHER DISTRIBUTIONS. MagnaCap Fund pays dividends from net
investment income, if any, semi-annually and net capital gains, if any, on an
annual basis. MidCap Value Fund and LargeCap Leaders Fund each pay dividends, if
any, from net investment income and net capital gains, if any, on an annual
basis. Dividends, and distributions of each of the Funds are automatically
reinvested in additional shares of the respective Class of the particular Fund,
unless the shareholder elects to receive dividends in cash.
If the Reorganization Agreement is approved by MidCap Value Fund's
shareholders, then as soon as practicable before the Closing, MidCap Value Fund
will pay its shareholders a cash distribution of substantially all undistributed
net investment income and undistributed realized net capital gains.
If the Reorganization Agreement is approved by LargeCap Leaders Fund's
shareholders, then as soon as practicable before the Closing, LargeCap Leaders
Fund will pay its shareholders a cash distribution of all undistributed net
investment income and undistributed realized net capital gains.
CAPITALIZATION. The following table shows on an unaudited basis the
capitalization of each of the Funds as of June 30, 2000, and on a PRO FORMA
basis as of June 30, 2000, giving effect to the Reorganizations:
NET ASSET VALUE SHARES
NET ASSETS PER SHARE OUTSTANDING
---------- --------- -----------
MIDCAP VALUE FUND
Class A $ 8,874,538 $14.30 620,787
Class B $ 15,840,407 $13.78 1,149,578
Class C $ 2,687,960 $13.78 195,028
Class M $ 3,873,298 $13.91 278,473
Class Q $ 139,267 $14.29 9,749
LARGECAP LEADERS FUND
Class A $ 10,023,911 $15.88 631,068
Class B $ 21,543,981 $15.30 1,407,914
Class C $ 1,363,558 $15.32 89,006
Class M $ 4,677,457 $15.52 301,320
Class Q $ 199,079 $15.88 12,534
MAGNACAP FUND
Class A $303,863,754 $15.84 19,184,981
Class B $ 87,166,507 $15.44 5,645,177
Class C $ 3,660,453 $15.44 237,011
Class M $ 13,049,521 $15.64 834,479
Class Q $ 9,927,749 $15.84 626,744
PRO FORMA - MAGNACAP FUND INCLUDING MIDCAP VALUE FUND AND LARGECAP LEADERS FUND
Class A $322,762,203 $15.84 20,376,402
Class B $124,550,895 $15.44 8,066,768
Class C $ 7,711,971 $15.44 499,480
Class M $ 21,600,276 $15.64 1,381,092
Class Q $ 10,266,095 $15.84 648,112
18
<PAGE>
GENERAL INFORMATION ABOUT THE PROXY STATEMENT
SOLICITATION OF PROXIES
Solicitation of proxies is being made primarily by the mailing of this
Notice and Proxy Statement with its enclosures on or about _______, 2001.
Shareholders of the Disappearing Funds whose shares are held by nominees, such
as brokers, can vote their proxies by contacting their respective nominee. In
addition to the solicitation of proxies by mail, employees of ING Pilgrim
Investments and its affiliates, without additional compensation, may solicit
proxies in person or by telephone, telegraph, facsimile, or oral communication.
Pilgrim Advisory Funds, on behalf of the Disappearing Funds, has retained
Shareholder Communications Corporation, a professional proxy solicitation firm,
to assist with any necessary solicitation of proxies. Shareholders of the
Disappearing Funds may receive a telephone call from the professional proxy
solicitation firm asking the shareholder to vote.
A shareholder may revoke the accompanying proxy at any time prior to its
use by filing with the Disappearing Funds a written revocation or duly executed
proxy bearing a later date. In addition, any shareholder who attends the meeting
in person may vote by ballot at the meeting, thereby canceling any proxy
previously given. The persons named in the accompanying proxy will vote as
directed by the proxy, but in the absence of voting directions in any proxy that
is signed and returned, they intend to vote "FOR" the Reorganization proposals
and may vote in their discretion with respect to other matters not now known to
the Board of Directors of Pilgrim Advisory Funds that may be presented at the
meeting.
VOTING RIGHTS
Shareholders of the Disappearing Funds are entitled to one vote for each
share held as to any matter on which they are entitled to vote and each
fractional share shall be entitled to a proportionate fractional vote. Shares
have no preemptive or subscription rights.
Shareholders of the Disappearing Funds at the close of business on
_________, 2000 (the "Record Date") will be entitled to be present and give
voting instructions for their respective Funds at the Meeting with respect to
their shares owned as of that Record Date. As of the Record Date, ______ shares
of the MidCap Value Funds were outstanding and entitled to vote and
_________shares of the LargeCap Leaders Fund were outstanding and entitled to
vote.
Approval of a Reorganization requires the affirmative vote of a majority of
the outstanding shares of the Disappearing Fund. In the event that shareholders
of only one of these Funds approve a Reorganization, that particular Fund whose
shareholders approved the Reorganization could be reorganized into the MagnaCap
Fund. The Fund not approving the Reorganization may continue to operate as a
separate entity.
The holders of a one-third of the outstanding shares present in person or
represented by proxy shall constitute a quorum. In the absence of a quorum, a
majority of outstanding shares entitled to vote that are present in person or by
proxy may adjourn the meeting from time to time until a quorum is present.
If a shareholder abstains from voting as to any matter, or if a broker
returns a "non-vote" proxy, indicating a lack of authority to vote on a matter,
the shares represented by the abstention or non-vote will be deemed present at
the meeting for purposes of determining a quorum. However, abstentions and
broker non-votes will not be deemed represented at the meeting for purposes of
calculating the vote on any matter. As a result, an abstention or broker
non-vote will have the same effect as a vote against the Reorganizations. The
Disappearing Funds expect that, before the meeting, broker-dealer firms holding
19
<PAGE>
shares of the Funds in "street name" for their customers will request voting
instructions from their customers and beneficial owners. If these instructions
are not received by the date specified in the broker-dealer firms' proxy
solicitation materials, the Funds understand that the broker-dealers that are
the members of the New York Stock Exchange may vote on items to be considered at
the meeting on behalf of their customers and beneficial owners under the rules
of the New York Stock Exchange.
To the knowledge of Pilgrim Advisory Funds, as of November 1, 2000, no
current Director owns 1% or more of the outstanding shares of the MidCap Value
Fund, and the officers and Directors own, as a group, less than 1% of the shares
of the MidCap Value Fund.
To the knowledge of Pilgrim Advisory Funds, as of November 1, 2000, no
current Director owns 1% or more of the outstanding shares of the LargeCap
Leaders Fund, and the officers and Directors own, as a group, less than 1% of
the shares of the LargeCap Leaders Fund.
Appendix E hereto lists the persons that, as of November 1, 2000, owned
beneficially or of record 5% or more of the outstanding shares of any Class of
the Disappearing Funds or MagnaCap Fund.
OTHER MATTERS TO COME BEFORE THE MEETING
Pilgrim Advisory Funds does not know of any matters to be presented at
the meeting other than those described in this Proxy Statement/Prospectus. If
other business should properly come before the meeting, the proxyholders will
vote thereon in accordance with their best judgment.
SHAREHOLDER PROPOSALS
Pilgrim Advisory Funds is not required to hold regular annual meetings and,
in order to minimize their costs, do not intend to hold meetings of shareholders
unless so required by applicable law, regulation, regulatory policy or if
otherwise deemed advisable by the Disappearing Funds' management. Therefore it
is not practicable to specify a date by which shareholder proposals must be
received in order to be incorporated in an upcoming proxy statement for an
annual meeting.
REPORTS TO SHAREHOLDERS
ING Pilgrim Investments will furnish, without charge, a copy of the most
recent Annual Report regarding the Disappearing Funds and the most recent
Semi-Annual Report succeeding the Annual Report, if any, on request. Requests
for such reports should be directed to Pilgrim at 7337 East Doubletree Ranch
Road, Scottsdale, Arizona 85258 or at (800) 992-0180.
IN ORDER THAT THE PRESENCE OF A QUORUM AT THE MEETING MAY BE ASSURED,
PROMPT EXECUTION AND RETURN OF THE ENCLOSED PROXY CARD IS REQUESTED. A
SELF-ADDRESSED, POSTAGE-PAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
James M. Hennessy,
Secretary
___________, 2000
7337 East Doubletree Ranch Road
Scottsdale, Arizona 85258
20
<PAGE>
APPENDIX A
PILGRIM MAGNACAP FUND
PORTFOLIO MANAGER'S REPORT
Set forth below is an excerpt from MagnaCap Fund's Annual Report, dated June 30,
2000 regarding the Fund's performance.
Management Team: Howard N. Kornblue, Senior Vice President and Senior Portfolio
Manager; G. David Underwood, CFA, Vice President and Director of Research;
Robert M. Kloss, Equity Analyst.
Goal: The MagnaCap Fund (the "Fund" or "MagnaCap") seeks growth and capital,
with dividend income as a secondary consideration. As a disciplined investment
philosophy fund, MagnaCap invests in a very select group of companies that have
been able to sustain growth over a 10-year period. In selecting portfolio
securities, companies are generally assessed with reference to the following
criteria as ideal:
* A company must have paid or had the financial capability from its
operations to have paid a dividend in 8 out of the last 10 years.
* A company must have increased its dividend or had the financial capability
from its operations to have increased its dividend at least 100% over the
past 10 years.
* Dividend payout must be less than 65% of current earnings.
* Long-term debt should be no more than 25% of the company's total
capitalization, or a company's bonds must be rated at least A- or A-3.
* The current price should be in the lower half of the stock's price/earnings
ratio range for the past ten years, or the ratio of the price of the
company's stock at the time of purchase to its anticipated future earnings
must be an attractive value in relation to the average for its industry
peer group or that of the S&P 500 Composite Stock Price Index.
Market Overview: Stocks finished the second quarter with losses in all the major
indexes. The S&P 500 Index finished the second quarter down 2.9%, while the Dow
Jones Industrial Average lost 4.3%. After reaching a record on March 10 of
5,049, the Nasdaq Composite Index fell 37% to 3,165 on May 23. Ultimately, the
technology-heavy composite finished at 3,966, down 607, or 13.3%, for the second
quarter. The index had a particularly strong June, increasing 16.6% -- the fifth
best month in the Nasdaq' history. Leading the way higher in the broader market
in the second quarter were drug stocks, and consumer and food stocks. Merger
agreements struck by Bestfoods and Nabisco helped bolster the whole food sector.
The vastly different picture on the technology side of the market also
encompassed telecommunications stocks, with AT&T, Ericsson and Motorola coming
in as some of the biggest decliners. The market focused on earnings. One of the
biggest drivers of the stock market has been corporate earnings
preannouncements. Surprises on the profit front have roiled whole sectors of the
stock market. On June 28 the Federal Reserve Bank decided to hold the line on
interest rates, choosing to pause after raising them six times since last June.
The central bank's decision came amid signs the U.S. economy is slowing. As a
result, the federal funds rate remained at 6.5%, the highest level in nine
years. Over the last year, the Federal Reserve Bank has been boosting interest
rates in an effort to slow the economy and keep inflation from escalating. They
are seeking to achieve a "soft landing" in which growth slows enough to keep
inflation under control but not so much that it threatens the country's record
9.5 year economic expansion.
Performance: For the one year ended June 30, 2000, the Fund's Class A shares,
excluding sales charges, declined 0.36%, compared to the Standard & Poor's 500
index, which gained 7.24% for the same period. For the period from inception
A-1
<PAGE>
(11/22/99) through June 30, 2000, the Fund's Class Q shares declined 2.58%,
compared to the Standard & Poor's 500 Index, which gained 3.22% for the same
period.
Portfolio Specifics: We believe that the Fund's past success can be attributed
to the very explicit investment criteria which normally determine the kinds of
companies that qualify for inclusion in the portfolio. Out of a universe of
approximately 4,000 publicly traded companies, and based upon in-house and
external research, we aim to select the 60 to 80 equities which we believe will
be most likely to exhibit a high degree of performance. Among the top performing
holdings were Altera (semiconductors), Intel (semiconductors), Alliance Capital
(entertainment). At the end of June 2000, the top industry groups were
diversified manufacturing, medical products, integrated oil, telephone, and
computers. The top stock holdings were AFLAC, Johnson & Johnson, McDonalds,
General Electric and Tellabs.
Market Outlook: Going forward, we will continue to employ a "bottom-up" approach
to stock selection, drawing from the pool of companies that come closest to
meeting the Fund's strict investment criteria given market conditions, the
circumstances of the company and the sector within which it falls. The bull
market in U.S. stocks is in its ninth year. It has been firmly based on
extraordinary changes in the economy that have given us the longest economic
expansion in U.S. history. This bull market has been one of the best in U.S.
history and we believe it is likely to continue for several reasons. First, the
economic expansion that has propelled stock prices higher has been one of the
most durable. It has been accompanied by mild inflation, job creation and
high-quality profit growth. Second, the current economic and market cycles have
benefited from several long-term structural changes. This includes a notable
reduction in the government's budget deficit. There has also been a shift to a
more sophisticated, technology driven private sector that has spurred widespread
productivity gains, which offers new opportunities for growth and jobs. Most
bull markets end when stocks are overpriced. However, it has traditionally been
extremely difficult to identify the degree of overpricing at which any
particular bull market will end. We believe stock prices can continue to rise
selectively in 2000 in concert with improvements in corporate earnings and cash
flows. Accordingly, we intend to remain almost fully invested, selecting stocks
on the basis described at the beginning of this paragraph.
<TABLE>
<CAPTION>
6/30/90 6/91 6/92 6/93 6/94 6/95 6/96 6/97 6/98 6/99 6/30/00
------- ---- ---- ---- ---- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pilgrim MagnaCap Fund
Class A With
Sales Charge 10,000 9,912 11,095 12,006 13,102 15,803 19,170 25,077 30,225 35,039 34,914
Pilgrim MagnaCap Fund
Class A Without
Sales Charge 10,000 10,521 11,777 12,744 13,907 16,774 20,348 26,619 32,083 37,192 37,060
S&P 500 Index 10,000 10,739 12,180 13,840 14,035 17,693 22,294 30,029 39,087 47,982 51,458
</TABLE>
A-2
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
SINCE INCEPTION OF SINCE INCEPTION OF
CLASS A, B AND M CLASS C
1 YEAR 5 YEARS 10 YEARS 7/17/95 6/1/99
------ ------- -------- ------- ------
<S> <C> <C> <C> <C> <C>
Including Sales Charge:
Class A (1) -6.09% 15.79% 13.32% -- --
Class B (2) -6.11% -- -- 15.99% --
Class C (3) -2.17% -- -- -- 2.64%
Class M (4) -4.18% -- -- 15.70% --
Excluding Sales Charge:
Class A -0.36% 17.18% 14.00% -- --
Class B -1.11% -- -- 16.22% --
Class C -1.17% -- -- -- 2.64%
Class M -0.71% -- -- 16.54% --
S&P 500 Index 7.24% 23.80% 17.80% 23.43%(5) 12.12%
</TABLE>
----------
(1) Reflects deduction of the maximum Class A sales charge of 5.75%.
(2) Reflects deduction of the Class B deferred sales charge of 5% and 2%,
respectively, for the 1 year and since inception returns.
(3) Reflects deduction of the Class C deferred sales charge of 1.00% for the
since inception return.
(4) Reflects deduction of the maximum Class M sales charge of 3.50%.
(5) Since inception performance for the index is shown from 8/01/95.
11/22/99 6/30/00
-------- -------
Pilgrim MagnaCap Fund Class Q 10,000 9,820
S&P 500 Index 10,000 10,237
AVERAGE ANNUAL TOTAL RETURNS FOR THE
PERIOD ENDED JUNE 30, 2000
SINCE INCEPTION
11/22/99
--------
Class Q -2.58%
S&P 500 Index 3.22%
Based on a $10,000 initial investment the graph and table above illustrates the
total return of Pilgrim MagnaCap Fund against the Standard & Poor's 500
Composite Stock Price Index. The Index has an inherent performance advantage
over the Fund since it has no cash in its portfolio, imposes no sales charges
and incurs no operating expenses. An investor cannot invest directly in an
index. The Fund's performance is shown without the imposition of any sales
charges.
Performance data represents past performance and is no assurance of future
results. Investment return and principal value of an investment in the Fund will
fluctuate. Shares, when sold, may be worth more or less than their original
cost.
This letter contains statements that may be "forward-looking" statements. Actual
results may differ materially from those projected in the "forward-looking"
statements.
The views expressed in this report reflect those of the portfolio manager, only
through the end of the period as stated on the cover. The portfolio manager's
views are subject to change at any time based on market and other conditions.
Portfolio holdings are subject to change daily.
Principal Risk Factor(s): Exposure to financial and market risks that accompany
investments in equities.
A-3
<PAGE>
APPENDIX B
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this _____ day of _____________, 2000, by and between Pilgrim Investment Funds,
Inc., (the "Investment Funds"), a Maryland corporation with its principal place
of business at 7337 E. Doubletree Ranch Road, Scottsdale, Arizona 85258, on
behalf of its series, Pilgrim MagnaCap Fund (the "Acquiring Fund"), and the
Pilgrim Advisory Funds, Inc., ("Advisory Funds"), a Maryland Corporation with
its principal place of business at 7337 E. Doubletree Ranch Road, Scottsdale,
Arizona 85258, on behalf of its series, Pilgrim MidCap Value Fund (the "Acquired
Fund").
This Agreement is intended to be and is adopted as a plan of
reorganization and liquidation within the meaning of Section 368(a)(1) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of the transfer of all of the
assets of the Acquired Fund to the Acquiring Fund in exchange solely for Class
A, Class B, Class C, Class M and Class Q voting shares of beneficial interest
(no par value per share) of the Acquiring Fund (the "Acquiring Fund Shares"),
the assumption by the Acquiring Fund of all liabilities of the Acquired Fund,
and the distribution of the Acquiring Fund Shares to the shareholders of the
Acquired Fund in complete liquidation of the Acquired Fund as provided herein,
all upon the terms and conditions hereinafter set forth in this Agreement.
WHEREAS, the Acquired Fund and the Acquiring Fund are open-end, registered
investment companies of the management type or a series thereof and the Acquired
Fund owns securities which generally are assets of the character in which the
Acquiring Fund is permitted to invest;
WHEREAS, the Directors of Investment Funds have determined that the
exchange of all of the assets of the Acquired Fund for Acquiring Fund Shares and
the assumption of all liabilities of the Acquired Fund by the Acquiring Fund is
in the best interests of the Acquiring Fund and its shareholders and that the
interests of the existing shareholders of the Acquiring Fund would not be
diluted as a result of this transaction; and
WHEREAS, the Directors of Advisory Funds, have determined that the
exchange of all of the assets of the Acquired Fund for Acquiring Fund Shares and
the assumption of all liabilities of the Acquired Fund by the Acquiring Fund is
in the best interests of the Acquired Fund and its shareholders and that the
interests of the existing shareholders of the Acquired Fund would not be diluted
as a result of this transaction;
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND TO THE ACQUIRING FUND IN EXCHANGE
FOR THE ACQUIRING FUND SHARES, THE ASSUMPTION OF ALL ACQUIRED FUND
LIABILITIES AND THE LIQUIDATION OF THE ACQUIRED FUND
1.1 Subject to the requisite approval of the Acquired Fund shareholders
and the other terms and conditions herein set forth and on the basis of the
representations and warranties contained herein, the Acquired Fund agrees to
transfer all of the Acquired Fund's assets, as set forth in paragraph 1.2, to
the Acquiring Fund, and the Acquiring Fund agrees in exchange therefor: (i) to
deliver to the Acquired Fund the number of full and fractional Class A, Class B,
Class C , Class M and Class Q Acquiring Fund Shares determined by dividing the
value of the Acquired Fund's net assets with respect to each class, computed in
the manner and as of the time and date set forth in paragraph 2.1, by the net
B-1
<PAGE>
asset value of one Acquiring Fund Share of the same class, computed in the
manner and as of the time and date set forth in paragraph 2.2; and (ii)to assume
all liabilities of the Acquired Fund, as set forth in paragraph 1.3. Such
transactions shall take place at the closing provided for in paragraph 3.1 (the
"Closing").
1.2 The assets of the Fund to be acquired by the Acquiring Fund shall
consist of all assets and property, including, without limitation, all cash,
securities, commodities and futures interests and dividends or interests
receivable that are owned by the Acquired Fund and any deferred or prepaid
expenses shown as an asset on the books of the Acquired Fund on the closing date
provided for in paragraph 3.1 (the "Closing Date") (collectively, "Assets").
1.3 The Acquired Fund will endeavor to discharge all of its known
liabilities and obligations prior to the Closing Date. The Acquiring Fund shall
also assume all of the liabilities of the Acquired Fund, whether accrued or
contingent, known or unknown, existing at the Valuation Date (collectively,
"Liabilities"). On or as soon as practicable prior to the Closing Date, the
Acquired Fund will declare and pay to its shareholders of record one or more
dividends and/or other distributions so that it will have distributed
substantially all (and in no event less than 98%) of its investment company
taxable income (computed without regard to any deduction for dividends paid) and
realized net capital gain, if any, for the current taxable year through the
Closing Date.
1.4 Immediately after the transfer of assets provided for in paragraph
1.1, the Acquired Fund will distribute to the Acquired Fund's shareholders of
record with respect to each class of its shares, determined as of immediately
after the close of business on the Closing Date (the "Acquired Fund
Shareholders"), on a pro rata basis within that class, the Acquiring Fund Shares
of the same class received by the Acquired Fund pursuant to paragraph 1.1, and
will completely liquidate. Such distribution and liquidation will be
accomplished, with respect to each class of the Acquired Fund's shares, by the
transfer of the Acquiring Fund Shares then credited to the account of the
Acquired Fund on the books of the Acquiring Fund to open accounts on the share
records of the Acquiring Fund in the names of the Acquired Fund Shareholders.
The aggregate net asset value of Class A, Class B, Class C, Class M and Class Q
Acquiring Fund Shares to be so credited to Class A, Class B, Class C, Class M
and Class Q Acquired Fund Shareholders shall, with respect to each class, be
equal to the aggregate net asset value of the Acquired Fund shares of that same
class owned by such shareholders on the Closing Date. All issued and outstanding
shares of the Acquired Fund will simultaneously be canceled on the books of the
Acquired Fund, although share certificates representing interests in Class A,
Class B, Class C, Class M and Class Q shares of the Acquired Fund will represent
a number of the same class of Acquiring Fund Shares after the Closing Date, as
determined in accordance with Section 2.3. The Acquiring Fund shall not issue
certificates representing the Class A, Class B, Class C, Class M and Class Q
Acquiring Fund Shares in connection with such exchange.
1.5 Ownership of Acquiring Fund Shares will be shown on the books of the
Acquiring Fund's transfer agent.
1.6 Any reporting responsibility of the Acquired Fund including, but not
limited to, the responsibility for filing of regulatory reports, tax returns, or
other documents with the Securities and Exchange Commission (the "Commission"),
any state securities commission, and any federal, state or local tax authorities
or any other relevant regulatory authority, is and shall remain the
responsibility of the Acquired Fund.
2. VALUATION
2.1 The value of the Assets shall be the value computed as of immediately
after the close of business of the New York Stock Exchange and after the
declaration of any dividends on the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures in the
then-current prospectus and statement of additional information with respect to
the Acquiring Fund, and valuation procedures established by the Acquiring Fund's
Board of Directors.
B-2
<PAGE>
2.2 The net asset value of a Class A, Class B, Class C, Class M and Class
Q Acquiring Fund Share shall be the net asset value per share computed with
respect to that class as of the Valuation Date, using the valuation procedures
set forth in the Acquiring Fund's then-current prospectus and statement of
additional information with respect to the Acquiring Fund, and valuation
procedures established by the Acquiring Fund's Board of Directors.
2.3 The number of the Class A, Class B, Class C, Class M and Class Q
Acquiring Fund Shares to be issued (including fractional shares, if any) in
exchange for the Acquired Fund's assets shall be determined with respect to each
such class by dividing the value of the net assets with respect to the Class A,
Class B, Class C, Class M and Class Q shares of the Acquired Fund, as the case
may be, determined using the same valuation procedures referred to in paragraph
2.1, by the net asset value of an Acquiring Fund Share, determined in accordance
with paragraph 2.2.
2.4 All computations of value shall be made by the Acquired Fund's
designated record keeping agent and shall be subject to confirmation by the
Acquiring Fund's record keeping agent and by each Fund's respective independent
accountants.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be _____ ___, 2001, or such other date as the
parties may agree to in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of immediately after the close of
business on the Closing Date unless otherwise agreed to by the parties. The
close of business on the Closing Date shall be as of 4:00 p.m., Eastern Time.
The Closing shall be held at the offices of the Acquiring Fund or at such other
time and/or place as the parties may agree.
3.2 The Acquired Fund shall direct Investors Fiduciary Trust Company, as
custodian for the Acquired Fund (the "Custodian"), to deliver, at the Closing, a
certificate of an authorized officer stating that (i) the Assets shall have been
delivered in proper form to the Acquiring Fund within two business days prior to
or on the Closing Date, and (ii) all necessary taxes in connection with the
delivery of the Assets, including all applicable federal and state stock
transfer stamps, if any, have been paid or provision for payment has been made.
The Acquired Fund's portfolio securities represented by a certificate or other
written instrument shall be presented by the Acquired Fund Custodian to the
custodian for the Acquiring Fund for examination no later than five business
days preceding the Closing Date, and shall be transferred and delivered by the
Acquired Fund as of the Closing Date for the account of the Acquiring Fund duly
endorsed in proper form for transfer in such condition as to constitute good
delivery thereof. The Custodian shall deliver as of the Closing Date by book
entry, in accordance with the customary practices of each securities depository,
as defined in Rule 17f-4 under the Investment Company Act of 1940, as amended
(the "1940 Act") in which the Acquired Fund's Assets are deposited and the
Custodian, the Acquired Fund's Assets deposited with such depositories. The cash
to be transferred by the Acquired Fund shall be delivered by wire transfer of
federal funds on the Closing Date.
3.3 The Acquired Fund shall direct DST Systems, Inc. (the "Transfer
Agent"), on behalf of the Acquired Fund, to deliver at the Closing a certificate
of an authorized officer stating that its records contain the names and
addresses of the Acquired Fund Shareholders and the number and percentage
ownership of outstanding Class A, Class B, Class C, Class M and Class Q shares
owned by each such shareholder immediately prior to the Closing. The Acquiring
Fund shall issue and deliver a confirmation evidencing the Acquiring Fund Shares
to be credited on the Closing Date to the Secretary of the Acquiring Fund, or
provide evidence satisfactory to the Acquired Fund that such Acquiring Fund
Shares have been credited to the Acquired Fund's account on the books of the
Acquiring Fund. At the Closing each party shall deliver to the other such bills
of sale, checks, assignments, share certificates, if any, receipts or other
documents as such other party or its counsel may reasonably request.
B-3
<PAGE>
3.4 In the event that on the Valuation Date (a) the New York Stock
Exchange or another primary trading market for portfolio securities of the
Acquiring Fund or the Acquired Fund shall be closed to trading or trading
thereupon shall be restricted, or (b) trading or the reporting of trading on
such Exchange or elsewhere shall be disrupted so that, in the judgment of the
Board of Directors of the Acquired Fund or the Board of Directors of the
Acquiring Fund, accurate appraisal of the value of the net assets of the
Acquiring Fund or the Acquired Fund, respectively, is impracticable, the Closing
Date shall be postponed until the first business day after the day when trading
shall have been fully resumed and reporting shall have been restored.
4. REPRESENTATIONS AND WARRANTIES
4.1 Except as has been disclosed to the Acquiring fund in a written
instrument executed by an officer of the Advisory Funds, the Advisory Funds on
behalf of the Acquired Fund represents and warrants to Investment Funds as
follows:
(a) The Acquired Fund is duly organized as a series of Advisory Funds,
which is a corporation duly organized, validly existing and in good standing
under the laws of the State of Maryland, with power under Advisory Funds'
Articles of Incorporation to own all of its properties and assets and to carry
on its business as it is now being conducted;
(b) Advisory Funds is a registered investment company classified as a
management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act, and the registration of
shares of the Acquired Fund under the Securities Act of 1933, as amended ("1933
Act"), is in full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquired Fund of
the transactions contemplated herein, except such as have been obtained under
the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act")
and the 1940 Act and such as may be required by state securities laws;
(d) The current prospectus and statement of additional information of the
Acquired Fund and each prospectus and statement of additional information of the
Acquired Fund used during the three years previous to the date of this Agreement
conforms or conformed at the time of its use in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and does not or did not at the time of
its use include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
materially misleading;
(e) On the Closing Date, the Acquired Fund will have good and marketable
title to the Assets and full right, power, and authority to sell, assign,
transfer and deliver such Assets hereunder free of any liens or other
encumbrances, and upon delivery and payment for such Assets, the Acquiring Fund
will acquire good and marketable title thereto, subject to no restrictions on
the full transfer thereof, including such restrictions as might arise under the
1933 Act, other than as disclosed to the Acquiring Fund;
(f) The Acquired Fund is not engaged currently, and the execution,
delivery and performance of this Agreement will not result, in (i) a material
violation of the Advisory Fund's Articles of Incorporation or By-Laws or of any
agreement, indenture, instrument, contract, lease or other undertaking to which
the Advisory Funds on behalf of the Acquired Fund is a party or by which it is
bound, or (ii) the acceleration of any obligation, or the imposition of any
penalty, under any agreement, indenture, instrument, contract, lease, judgment
or decree to which the Advisory Funds on behalf of the Acquired Fund is a party
or by which it is bound;
(g) All material contracts or other commitments of the Acquired Fund
(other than this Agreement and certain investment contracts including options,
futures, and forward contracts) will terminate without liability to the Acquired
Fund on or prior to the Closing Date;
B-4
<PAGE>
(h) Except as otherwise disclosed in writing to and accepted by Investment
Funds on behalf of the Acquired Fund, no litigation or administrative proceeding
or investigation of or before any court or governmental body is presently
pending or, to its knowledge, threatened against the Acquired Fund or any of its
properties or assets that, if adversely determined, would materially and
adversely affect its financial condition or the conduct of its business. The
Advisory Funds on behalf of the Acquired Fund knows of no facts which might form
the basis for the institution of such proceedings and is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects its business or its
ability to consummate the transactions herein contemplated;
(i) The Statement of Assets and Liabilities, Statements of Operations and
Changes in Net Assets, and Portfolio of Investments of the Acquired Fund at June
30, 2000, have been audited by KPMG LLP, independent auditors, and are in
accordance with generally accepted accounting principles ("GAAP") consistently
applied, and such statements (copies of which have been furnished to the
Acquiring Fund) present fairly, in all material respects, the financial
condition of the Acquired Fund as of such date in accordance with GAAP, and
there are no known contingent liabilities of the Acquired Fund required to be
reflected on a balance sheet (including the notes thereto) in accordance with
GAAP as of such date not disclosed therein;
(j) Since June 30, 2000, there has not been any material adverse change in
the Acquired Fund's financial condition, assets, liabilities or business, other
than changes occurring in the ordinary course of business, or any incurrence by
the Acquired Fund of indebtedness maturing more than one year from the date such
indebtedness was incurred, except as otherwise disclosed to and accepted by the
Acquiring Fund. For the purposes of this subparagraph (j), a decline in net
asset value per share of the Acquired Fund due to declines in market values of
securities in the Acquired Fund's portfolio, the discharge of Acquired Fund
liabilities, or the redemption of Acquired Fund Shares by shareholders of the
Acquired Fund shall not constitute a material adverse change;
(k) On the Closing Date, all Federal and other tax returns, dividend
reporting forms, and other tax-related reports of the Acquired Fund required by
law to have been filed by such date (including any extensions) shall have been
filed and are or will be correct in all material respects, and all Federal and
other taxes shown as due or required to be shown as due on said returns and
reports shall have been paid or provision shall have been made for the payment
thereof, and to the best of the Acquired Fund's knowledge, no such return is
currently under audit and no assessment has been asserted with respect to such
returns;
(l) For each taxable year of its operation (including the taxable year
ending on the Closing Date), the Acquired Fund has met (or will meet) the
requirements of Subchapter M of the Code for qualification as a regulated
investment company, has been (or will be) eligible to and has computed (or will
compute) its federal income tax under Section 852 of the Code, and will have
distributed all of its investment company taxable income and net capital gain
(as defined in the Code) that has accrued through the Closing Date, and before
the Closing Date will have declared dividends sufficient to distribute all of
its investment company taxable income and net capital gain for the period ending
on the Closing Date;
(m) All issued and outstanding shares of the Acquired Fund are, and on the
Closing Date will be, duly and validly issued and outstanding, fully paid and
non-assessable and have been offered and sold in every state and the District of
Columbia in compliance in all material respects with applicable registration
requirements of the 1933 Act and state securities laws. All of the issued and
outstanding shares of the Acquired Fund will, at the time of Closing, be held by
the persons and in the amounts set forth in the records of the Transfer Agent,
on behalf of the Acquired Fund, as provided in paragraph 3.3. The Acquired Fund
does not have outstanding any options, warrants or other rights to subscribe for
or purchase any of the shares of the Acquired Fund, nor is there outstanding any
security convertible into any of the Acquired Fund shares;
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(n) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Closing Date by all necessary action, if any,
on the part of the Directors of Advisory Funds on behalf of the Acquired Fund,
and, subject to the approval of the shareholders of the Acquired Fund, this
Agreement will constitute a valid and binding obligation of the Acquired Fund,
enforceable in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other laws relating to or
affecting creditors' rights and to general equity principles;
(o) The information to be furnished by the Acquired Fund for use in
registration statements, proxy materials and other documents filed or to be
filed with any federal, state or local regulatory authority (including the
National Association of Securities Dealers, Inc.), which may be necessary in
connection with the transactions contemplated hereby, shall be accurate and
complete in all material respects and shall comply in all material respects with
Federal securities and other laws and regulations thereunder applicable thereto;
and
(p) The proxy statement of the Acquired Fund (the "Proxy Statement") to be
included in the Registration Statement referred to in paragraph 5.6, insofar as
it relates to the Acquired Fund, will, on the effective date of the Registration
Statement and on the Closing Date (i) not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not materially misleading provided, however,
that the representations and warranties in this subparagraph (p) shall not apply
to statements in or omissions from the Proxy Statement and the Registration
Statement made in reliance upon and in conformity with information that was
furnished by the Acquiring Fund for use therein, and (ii) comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and
the rules and regulations thereunder.
4.2 Except as has been disclosed to the Advisory Funds in a written
instrument executed by an officer of Investment Funds, Investment Funds, on
behalf of the Acquiring Fund represents and warrants to the Advisory Funds as
follows:
(a) The Acquiring Fund is duly organized as a series of Investment Funds,
which is a corporation duly organized, validly existing and in good standing
under the laws of the State of Maryland with power under Investment Funds'
Articles of Incorporation to own all of its properties and assets and to carry
on its business as it is now being conducted;
(b) Investment Funds is a registered investment company classified as a
management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act and the registration of
shares of the Acquiring Fund under the 1933 Act, is in full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquiring Fund of
the transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act and the 1940 Act and such as may be required by state
securities laws;
(d) The current prospectus and statement of additional information of the
Acquiring Fund and each prospectus and statement of additional information of
the Acquiring Fund used during the three years previous to the date of this
Agreement conforms or conformed at the time of its use in all material respects
to the applicable requirements of the 1933 Act and the 1940 Act and the rules
and regulations of the Commission thereunder and does not or did not at the time
of its use include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
materially misleading;
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(e) On the Closing Date, the Acquiring Fund will have good and marketable
title to the Acquiring Fund's assets, free of any liens of other encumbrances,
except those liens or encumbrances as to which the Acquired Fund has received
notice and necessary documentation at or prior to the Closing;
(f) The Acquiring Fund is not engaged currently, and the execution,
delivery and performance of this Agreement will not result, in (i) a material
violation of Investment Funds' Articles of Incorporation or By-Laws or of any
agreement, indenture, instrument, contract, lease or other undertaking to which
Investment Funds on behalf of the Acquiring Fund is a party or by which it is
bound, or (ii) the acceleration of any obligation, or the imposition of any
penalty, under any agreement, indenture, instrument, contract, lease, judgment
or decree to which the Investment Funds on behalf of Acquiring Fund is a party
or by which it is bound;
(g) Except as otherwise disclosed in writing to and accepted by the
Advisory Funds on behalf of the Acquired Fund, no litigation or administrative
proceeding or investigation of or before any court or governmental body is
presently pending or, to its knowledge, threatened against Investment Fund on
behalf of the Acquiring Fund or any of its properties or assets that, if
adversely determined, would materially and adversely affect its financial
condition or the conduct of its business. The Investment Funds on behalf of the
Acquiring Fund knows of no facts which might form the basis for the institution
of such proceedings and is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body which materially and
adversely affects the Acquiring Fund's business or the Acquiring Fund's ability
to consummate the transactions herein contemplated;
(h) The Statement of Assets and Liabilities, Statements of Operations and
Changes in Net Assets and Portfolio of Investments of the Acquiring Fund at June
30, 2000, have been audited by KPMG LLP, independent auditors, and are in
accordance with GAAP consistently applied, and such statements (copies of which
have been furnished to the Acquired Fund) present fairly, in all material
respects, the financial condition of the Acquiring Fund as of such date in
accordance with GAAP, and there are no known contingent liabilities of the
Acquiring Fund required to be reflected on a balance sheet (including the notes
thereto) in accordance with GAAP as of such date not disclosed therein;
(i) Since June 30, 2000, there has not been any material adverse change in
the Acquiring Fund's financial condition, assets, liabilities or business, other
than changes occurring in the ordinary course of business, or any incurrence by
the Acquiring Fund of indebtedness maturing more than one year from the date
such indebtedness was incurred, except as otherwise disclosed to and accepted by
the Acquired Fund. For purposes of this subparagraph (i), a decline in net asset
value per share of the Acquiring Fund due to declines in market values of
securities in the Acquiring Fund's portfolio, the discharge of Acquiring Fund
liabilities, or the redemption of Acquiring Fund Shares by shareholders of the
Acquiring Fund, shall not constitute a material adverse change;
(j) On the Closing Date, all Federal and other tax returns, dividend
reporting forms, and other tax-related reports of the Acquiring Fund required by
law to have been filed by such date (including any extensions) shall have been
filed and are or will be correct in all material respects, and all Federal and
other taxes shown as due or required to be shown as due on said returns and
reports shall have been paid or provision shall have been made for the payment
thereof, and to the best of the Acquiring Fund's knowledge no such return is
currently under audit and no assessment has been asserted with respect to such
returns;
(k) For each taxable year of its operation (including the taxable year
including the Closing Date), the Acquiring Fund has met (or will meet) the
requirements of Subchapter M of the Code for qualification as a regulated
investment company, has been eligible to and has computed (or will compute) its
federal income tax under Section 852 of the Code;
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(l) All issued and outstanding Acquiring Fund Shares are, and on the
Closing Date will be, duly and validly issued and outstanding, fully paid and
non-assessable and have been offered and sold in every state and the District of
Columbia in compliance in all material respects with applicable registration
requirements of the 1933 Act and state securities laws. The Acquiring Fund does
not have outstanding any options, warrants or other rights to subscribe for or
purchase any Acquiring Fund Shares, nor is there outstanding any security
convertible into any Acquiring Fund Shares;
(m) The execution, delivery and performance of this Agreement will have
been fully authorized prior to the Closing Date by all necessary action, if any,
on the part of the Directors of Investment Funds on behalf of the Acquiring Fund
and this Agreement will constitute a valid and binding obligation of Investment
Funds on behalf of the Acquiring Fund, enforceable in accordance with its terms,
subject, as to enforcement, to bankruptcy, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors' rights and to
general equity principles;
(n) The Class A, Class B, Class C, Class M and Class Q Acquiring Fund
Shares to be issued and delivered to the Acquired Fund, for the account of the
Acquired Fund Shareholders, pursuant to the terms of this Agreement, will on the
Closing Date have been duly authorized and, when so issued and delivered, will
be duly and validly issued Acquiring Fund Shares, and will be fully paid and
non-assessable.
(o) The information to be furnished by Investment Funds for use in the
registration statements, proxy materials and other documents that may be
necessary in connection with the transactions contemplated hereby shall be
accurate and complete in all material respects and shall comply in all material
respects with Federal securities and other laws and regulations applicable
thereto; and
(p) That insofar as it relates to the Acquiring Fund, the Registration
Statement relating to the Acquiring Fund Shares issuable hereunder, and the
proxy materials of the Acquired Fund to be included in the Registration
Statement, and any amendment or supplement to the foregoing, will, from the
effective date of the Registration Statement through the date of the meeting of
shareholders of the Acquired Fund contemplated therein (i) not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading provided,
however, that the representations and warranties in this subparagraph (p) shall
not apply to statements in or omissions from the Registration Statement made in
reliance upon and in conformity with information that was furnished by the
Acquired Fund for use therein, and (ii) comply in all material respects with the
provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and
regulations thereunder.
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 The Acquiring Fund and the Acquired Fund each will operate its
business in the ordinary course between the date hereof and the Closing Date, it
being understood that such ordinary course of business will include the
declaration and payment of customary dividends and distributions, and any other
distribution that may be advisable.
5.2 The Acquired Fund will call a meeting of the shareholders of the
Acquired Fund to consider and act upon this Agreement and to take all other
action necessary to obtain approval of the transactions contemplated herein.
5.3 The Acquired Fund covenants that the Class A, Class B, Class C, and
Class M and Class Q Acquiring Fund Shares to be issued hereunder are not being
acquired for the purpose of making any distribution thereof, other than in
accordance with the terms of this Agreement.
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<PAGE>
5.4 The Acquired Fund will assist the Acquiring Fund in obtaining such
information as the Acquiring Fund reasonably requests concerning the beneficial
ownership of the Acquired Fund shares.
5.5 Subject to the provisions of this Agreement, the Acquiring Fund and
the Acquired Fund will each take, or cause to be taken, all action, and do or
cause to be done, all things reasonably necessary, proper or advisable to
consummate and make effective the transactions contemplated by this Agreement.
5.6 The Acquired Fund will provide the Acquiring Fund with information
reasonably necessary for the preparation of a prospectus (the "Prospectus")
which will include the Proxy Statement referred to in paragraph 4.1(p), all to
be included in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the 1934 Act and the
1940 Act, in connection with the meeting of the shareholders of the Acquired
Fund to consider approval of this Agreement and the transactions contemplated
herein.
5.7 As soon as is reasonably practicable after the Closing, the Acquired
Fund will make a liquidating distribution to its shareholders consisting of the
Class A, Class B, Class C, Class M and Class Q Acquiring Fund Shares received at
the Closing.
5.8 The Acquiring Fund and the Acquired Fund shall each use its reasonable
best efforts to fulfill or obtain the fulfillment of the conditions precedent to
effect the transactions contemplated by this Agreement as promptly as
practicable.
5.9 The Advisory Funds on behalf of the Acquired Fund covenants that it
will, from time to time, as and when reasonably requested by the Acquiring Fund,
execute and deliver or cause to be executed and delivered all such assignments
and other instruments, and will take or cause to be taken such further action as
Investment Funds on behalf of the Acquiring Fund may reasonably deem necessary
or desirable in order to vest in and confirm (a) the Advisory Funds', title to
and possession of, Acquiring Fund Shares to be delivered hereunder, and (b) the
Investment Funds, on behalf of the Acquiring Fund's, title to and possession of
all the assets and otherwise to carry out the intent and purpose of this
Agreement.
5.10 The Acquiring Fund will use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act and such of
the state blue sky or securities laws as may be necessary in order to continue
its operations after the Closing Date.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of Advisory Funds on behalf of the Acquired Fund to
consummate the transactions provided for herein shall be subject, at Advisory
Funds' election, to the performance by Investment Funds on behalf of the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations and warranties of Investment Funds on behalf of
the Acquiring Fund contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date;
6.2 Investment Funds shall have delivered to Advisory Funds a certificate
executed in its name by its President or Vice President and its Treasurer or
Assistant Treasurer, in a form reasonably satisfactory to Advisory Funds and
dated as of the Closing Date, to the effect that the representations
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<PAGE>
and warranties of Investment Funds on behalf of the Acquiring Fund made in this
Agreement are true and correct at and as of the Closing Date, except as they may
be affected by the transactions contemplated by this Agreement and as to such
other matters as Advisory Funds shall reasonably request;
6.3 Investment Funds on behalf of the Acquiring Fund shall have performed
all of the covenants and complied with all of the provisions required by this
Agreement to be performed or complied with by Investment Funds on behalf of the
Acquiring Fund on or before the Closing Date; and
6.4 The Acquired Fund and the Acquiring Fund shall have agreed on the
number of full and fractional Acquiring Fund Shares of each Class to be issued
in connection with the Reorganization after such number has been calculated in
accordance with paragraph 1.1.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of Investment Funds on behalf of the Acquiring Fund to
complete the transactions provided for herein shall be subject, at the
Investment Funds' election, to the performance by the Advisory Funds on behalf
of the Acquired Fund of all of the obligations to be performed by it hereunder
on or before the Closing Date and, in addition thereto, the following
conditions:
7.1 All representations and warranties of Advisory Funds on behalf of the
Acquired Fund contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date;
7.2 The Advisory Funds shall have delivered to the Acquiring Fund a
statement of the Acquired Fund's assets and liabilities, as of the Closing Date,
certified by the Treasurer of the Advisory Funds;
7.3 The Advisory Funds shall have delivered to the Acquiring Fund on the
Closing Date a certificate executed in its name by its President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
satisfactory to the Investment Funds and dated as of the Closing Date, to the
effect that the representations and warranties of the Advisory Funds on behalf
of the Acquired Fund made in this Agreement are true and correct at and as of
the Closing Date, except as they may be affected by the transactions
contemplated by this Agreement, and as to such other matters as the Investment
Funds shall reasonably request;
7.4 The Advisory Funds on behalf of the Acquired Fund shall have performed
all of the covenants and complied with all of the provisions required by this
Agreement to be performed or complied with by the Advisory Funds on behalf of
the Acquired Fund on or before the Closing Date;
7.5 The Acquired Fund and the Acquiring Fund shall have agreed on the
number of full and fractional Acquiring Fund Shares of each Class to be issued
in connection with the Reorganization after such number has been calculated in
accordance with paragraph 1.1; and
7.6 The Acquired Fund shall have declared and paid a distribution or
distributions prior to the Closing that, together with all previous
distributions, shall have the effect of distributing to its shareholders (i) all
of its investment company taxable income and all of its net realized capital
gains, if any, for the period from the close of its last fiscal year to 4:00
p.m. Eastern time on the Closing; and (ii) any undistributed investment company
taxable income and net realized capital gains from any period to the extent not
otherwise already distributed.
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<PAGE>
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND AND THE
ACQUIRED FUND
If any of the conditions set forth below have not satisfied on or before
the Closing Date with respect to the Acquired Fund or the Acquiring Fund, the
other party to this Agreement shall, at its option, not be required to
consummate the transactions contemplated by this Agreement:
8.1 The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of the
Acquired Fund in accordance with the provisions of Advisory Funds' Articles of
Incorporation, By-Laws, applicable Maryland law and the 1940 Act, and certified
copies of the resolutions evidencing such approval shall have been delivered to
the Acquiring Fund. Notwithstanding anything herein to the contrary, neither
Investment Funds nor Advisory Funds may waive the conditions set forth in this
paragraph 8.1;
8.2 On the Closing Date no action, suit or other proceeding shall be
pending or, to its knowledge, threatened before any court or governmental agency
in which it is sought to restrain or prohibit, or obtain damages or other relief
in connection with, this Agreement or the transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and
permits of Federal, state and local regulatory authorities deemed necessary by
Investment Funds or Advisory Funds to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties of the
Acquiring Fund or the Acquired Fund, provided that either party hereto may for
itself waive any of such conditions;
8.4 The Registration Statement shall have become effective under the 1933
Act and no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act; and
8.5 The parties shall have received the opinion of Dechert addressed to
Advisory Funds and Investment Funds substantially to the effect that, based upon
certain facts, assumptions, and representations, the transaction contemplated by
this Agreement shall constitute a tax-free reorganization for Federal income tax
purposes. The delivery of such opinion is conditioned upon receipt by Dechert of
representations it shall request of Investment Funds and Advisory Funds.
Notwithstanding anything herein to the contrary, neither Investment Funds nor
Advisory Funds may waive the condition set forth in this paragraph 8.5.
9. BROKERAGE FEES AND EXPENSES
9.1 Investment Funds on behalf of the Acquiring Fund and Advisory Funds on
behalf of the Acquired Fund represent and warrant to each other that there are
no brokers or finders entitled to receive any payments in connection with the
transactions provided for herein.
9.2 The expenses relating to the proposed Reorganization will be shared so
that (1) half of such costs are borne by the investment adviser to the Acquired
and Acquiring Funds, and (2) half are borne by the Acquired and Acquiring Funds
and will be paid by the Acquired Fund and Acquiring Fund pro rata based upon the
relative net assets of the Acquired Fund and Acquiring Fund as of the close of
business on the record date for determining the shareholders of the Acquired
Fund entitled to vote on the Reorganization. The costs of the Reorganization
shall include, but not be limited to, costs associated with obtaining any
necessary order of exemption from the 1940 Act, preparation of the Registration
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<PAGE>
Statement, printing and distributing the Acquiring Fund's prospectus and the
Acquired Fund's proxy materials, legal fees, accounting fees, securities
registration fees, and expenses of holding shareholders' meetings.
Notwithstanding any of the foregoing, expenses will in any event be paid by the
party directly incurring such expenses if and to the extent that the payment by
another person of such expenses would result in the disqualification of such
party as a "regulated investment company" within the meaning of Section 851 of
the Code.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 Investment Funds and Advisory Funds agree that neither party has made
any representation, warranty or covenant not set forth herein and that this
Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder. The
covenants to be performed after the Closing shall survive the Closing.
11. TERMINATION
This Agreement and the transactions contemplated hereby may be terminated
and abandoned by resolution of the Board of Directors of Advisory Funds or the
Board of Directors of Investment Funds at any time prior to the Closing Date, if
circumstances should develop that, in the opinion of either Board, make
proceeding with the Agreement inadvisable.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be deemed necessary or advisable by the authorized officers of Advisory
Funds and Investment Funds; provided, however, that following the meeting of the
shareholders of the Acquired Fund called by Advisory Funds pursuant to paragraph
5.2 of this Agreement, no such amendment may have the effect of changing the
provisions for determining the number of the Class A, Class B, Class C, Class M
and Class Q Acquiring Fund Shares to be issued to the Acquired Fund Shareholders
under this Agreement to the detriment of such shareholders without their further
approval.
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by
facsimile, personal service or prepaid or certified mail addressed to Investment
Funds or to Advisory Funds, 7337 E. Doubletree Ranch Road, Scottsdale, Arizona
85258, attn: James M. Hennessy, in each case with a copy to Dechert, 1775 Eye
Street, N.W., Washington, D.C. 20006, attn: Jeffrey S. Puretz.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT; LIMITATION OF LIABILITY
14.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
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14.3 This Agreement shall be governed by and construed in accordance with
the laws of the State of Maryland without regard to its principles of conflicts
of laws.
14.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed by its President or Vice President and its seal to be affixed
thereto and attested by its Secretary or Assistant Secretary.
Pilgrim Investment Funds, Inc. on behalf of
Attest: its Pilgrim MagnaCap Fund series
By:
------------------------------- -----------------------------------
SECRETARY
Its:
----------------------------------
Pilgrim Advisory Funds, Inc. on behalf of its
Attest: Pilgrim MidCap Value Fund series
By:
------------------------------- -----------------------------------
SECRETARY
Its:
----------------------------------
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<PAGE>
APPENDIX B-1
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this _____ day of _____________, 2001, by and between Pilgrim Investment Funds,
Inc. ("Investment Funds"), a Maryland corporation with its principal place of
business at 7337 E. Doubletree Ranch Road, Scottsdale, Arizona 85258, on behalf
of its series, Pilgrim MagnaCap Fund (the "Acquiring Fund"), and the Pilgrim
Advisory Funds, Inc. ("Advisory Funds"), a Maryland Corporation with its
principal place of business at 7337 E. Doubletree Ranch Road, Scottsdale,
Arizona 85258, on behalf of its series, Pilgrim LargeCap Leaders Fund (the
"Acquired Fund").
This Agreement is intended to be and is adopted as a plan of reorganization
and liquidation within the meaning of Section 368(a)(1) of the United States
Internal Revenue Code of 1986, as amended (the "Code"). The reorganization (the
"Reorganization") will consist of the transfer of all of the assets of the
Acquired Fund to the Acquiring Fund in exchange solely for Class A, Class B,
Class C, Class M and Class Q voting shares of common stock ($0.10 par value) of
the Acquiring Fund (the "Acquiring Fund Shares"), the assumption by the
Acquiring Fund of all liabilities of the Acquired Fund, and the distribution of
the Acquiring Fund Shares to the shareholders of the Acquired Fund in complete
liquidation of the Acquired Fund as provided herein, all upon the terms and
conditions hereinafter set forth in this Agreement.
WHEREAS, the Acquired Fund and the Acquiring Fund are open-end, registered
investment companies of the management type or a series thereof and the Acquired
Fund owns securities which generally are assets of the character in which the
Acquiring Fund is permitted to invest;
WHEREAS, the Directors of Investment Funds have determined that the
exchange of all of the assets of the Acquired Fund for Acquiring Fund Shares and
the assumption of all liabilities of the Acquired Fund by the Acquiring Fund is
in the best interests of the Acquiring Fund and its shareholders and that the
interests of the existing shareholders of the Acquiring Fund would not be
diluted as a result of this transaction; and
WHEREAS, the Directors of Advisory Funds have determined that the exchange
of all of the assets of the Acquired Fund for Acquiring Fund Shares and the
assumption of all liabilities of the Acquired Fund by the Acquiring Fund is in
the best interests of the Acquired Fund and its shareholders and that the
interests of the existing shareholders of the Acquired Fund would not be diluted
as a result of this transaction;
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND TO THE ACQUIRING FUND IN EXCHANGE
FOR THE ACQUIRING FUND SHARES, THE ASSUMPTION OF ALL ACQUIRED FUND
LIABILITIES AND THE LIQUIDATION OF THE ACQUIRED FUND
1.1 Subject to the requisite approval of the Acquired Fund shareholders and
the other terms and conditions herein set forth and on the basis of the
representations and warranties contained herein, the Acquired Fund agrees to
transfer all of the Acquired Fund's assets, as set forth in paragraph 1.2, to
the Acquiring Fund, and the Acquiring Fund agrees in exchange therefor: (i) to
deliver to the Acquired Fund the number of full and fractional Class A, Class B,
Class C , Class M and Class Q Acquiring Fund Shares determined by dividing the
value of the Acquired Fund's net assets with respect to each class, computed in
the manner and as of the time and date set forth in paragraph 2.1, by the net
asset value of one Acquiring Fund Share of the same class, computed in the
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<PAGE>
manner and as of the time and date set forth in paragraph 2.2; and (ii) to
assume all liabilities of the Acquired Fund, as set forth in paragraph 1.3. Such
transactions shall take place at the closing provided for in paragraph 3.1 (the
"Closing").
1.2 The assets of the Acquired Fund to be acquired by the Acquiring Fund
shall consist of all assets and property, including, without limitation, all
cash, securities, commodities and futures interests and dividends or interests
receivable that are owned by the Acquired Fund, and any deferred or prepaid
expenses shown as an asset on the books of the Acquired Fund on the closing date
provided for in paragraph 3.1 (the "Closing Date") (collectively, "Assets").
1.3 The Acquired Fund will endeavor to discharge all of its known
liabilities and obligations prior to the Closing Date. The Acquiring Fund shall
also assume all of the liabilities of the Acquired Fund, whether accrued or
contingent, known or unknown, existing at the Valuation Date ("collectively,
"Liabilities"). On or as soon as practicable prior to the Closing Date, the
Acquired Fund will declare and pay to its shareholders of record one or more
dividends and/or other distributions so that it will have distributed
substantially all (and in no event less than 98%) of its investment company
taxable income (computed without regard to any deduction for dividends paid) and
realized net capital gain, if any, for the current taxable year through the
Closing Date.
1.4 Immediately after the transfer of assets provided for in paragraph 1.1,
the Acquired Fund will distribute to the Acquired Fund's shareholders of record
with respect to each class of its shares, determined as of immediately after the
close of business on the Closing Date (the "Acquired Fund Shareholders"), on a
pro rata basis within that class, the Acquiring Fund Shares of the same class
received by the Acquired Fund pursuant to paragraph 1.1, and will completely
liquidate. Such distribution and liquidation will be accomplished, with respect
to each class of the Acquired Fund's shares, by the transfer of the Acquiring
Fund Shares then credited to the account of the Acquired Fund on the books of
the Acquiring Fund to open accounts on the share records of the Acquiring Fund
in the names of the Acquired Fund Shareholders. The aggregate net asset value of
Class A, Class B, Class C, Class M and Class Q Acquiring Fund Shares to be so
credited to Class A, Class B, Class C, Class M and Class Q Acquired Fund
Shareholders shall, with respect to each class, be equal to the aggregate net
asset value of the Acquired Fund shares of that same class owned by such
shareholders on the Closing Date. All issued and outstanding shares of the
Acquired Fund will simultaneously be canceled on the books of the Acquired Fund,
although share certificates representing interests in Class A, Class B, Class C,
Class M and Class Q shares of the Acquired Fund will represent a number of the
same class of Acquiring Fund Shares after the Closing Date, as determined in
accordance with Section 2.3. The Acquiring Fund shall not issue certificates
representing the Class A, Class B, Class C, Class M and Class Q Acquiring Fund
Shares in connection with such exchange.
1.5 Ownership of Acquiring Fund Shares will be shown on the books of the
Acquiring Fund's transfer agent.
1.6 Any reporting responsibility of the Acquired Fund including, but not
limited to, the responsibility for filing of regulatory reports, tax returns, or
other documents with the Securities and Exchange Commission (the "Commission"),
any state securities commission, and any federal, state or local tax authorities
or any other relevant regulatory authority, is and shall remain the
responsibility of the Acquired Fund.
2. VALUATION
2.1 The value of the Assets shall be the value computed as of immediately
after the close of business of the New York Stock Exchange and after the
declaration of any dividends on the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures in the
then-current prospectus and statement of additional information with respect to
the Acquiring Fund, and valuation procedures established by the Acquiring Fund's
Board of Directors.
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2.2 The net asset value of a Class A, Class B, Class C, Class M and Class Q
Acquiring Fund Share shall be the net asset value per share computed with
respect to that class as of the Valuation Date, using the valuation procedures
set forth in the Acquiring Fund's then-current prospectus and statement of
additional information with respect to the Acquiring Fund, and valuation
procedures established by the Acquiring Fund's Board of Directors.
2.3 The number of the Class A, Class B, Class C, Class M and Class Q
Acquiring Fund Shares to be issued (including fractional shares, if any) in
exchange for the Acquired Fund's assets shall be determined with respect to each
such class by dividing the value of the net assets with respect to the Class A,
Class B, Class C, Class M and Class Q shares of the Acquired Fund, as the case
may be, determined using the same valuation procedures referred to in paragraph
2.1, by the net asset value of an Acquiring Fund Share, determined in accordance
with paragraph 2.2.
2.4 All computations of value shall be made by the Acquired Fund's
designated record keeping agent and shall be subject to confirmation by the
Acquiring Fund's record keeping agent and by each Fund's respective independent
accountants.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be _____ ___, 2001, or such other date as the
parties may agree to in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of immediately after the close of
business on the Closing Date unless otherwise agreed to by the parties. The
close of business on the Closing Date shall be as of 4:00 p.m., Eastern Time.
The Closing shall be held at the offices of the Acquiring Fund or at such other
time and/or place as the parties may agree.
3.2 The Acquired Fund shall direct Investors Fiduciary Trust Company, as
custodian for the Acquired Fund (the "Custodian"), to deliver, at the Closing, a
certificate of an authorized officer stating that (i) the Assets shall have been
delivered in proper form to the Acquiring Fund within two business days prior to
or on the Closing Date, and (ii) all necessary taxes in connection with the
delivery of the Assets, including all applicable federal and state stock
transfer stamps, if any, have been paid or provision for payment has been made.
The Acquired Fund's portfolio securities represented by a certificate or other
written instrument shall be presented by the Acquired Fund Custodian to the
custodian for the Acquiring Fund for examination no later than five business
days preceding the Closing Date, and shall be transferred and delivered by the
Acquired Fund as of the Closing Date for the account of the Acquiring Fund duly
endorsed in proper form for transfer in such condition as to constitute good
delivery thereof. The Custodian shall deliver as of the Closing Date by book
entry, in accordance with the customary practices of each securities depository,
as defined in Rule 17f-4 under the Investment Company Act of 1940, as amended
(the "1940 Act") in which the Acquired Fund's Assets are deposited and the
Custodian, the Acquired Fund's Assets deposited with such depositories. The cash
to be transferred by the Acquired Fund shall be delivered by wire transfer of
federal funds on the Closing Date.
3.3 The Acquired Fund shall direct DST Systems, Inc. (the "Transfer
Agent"), on behalf of the Acquired Fund, to deliver at the Closing a certificate
of an authorized officer stating that its records contain the names and
addresses of the Acquired Fund Shareholders and the number and percentage
ownership of outstanding Class A, Class B, Class C, Class M and Class Q shares
owned by each such shareholder immediately prior to the Closing. The Acquiring
Fund shall issue and deliver a confirmation evidencing the Acquiring Fund Shares
to be credited on the Closing Date to the Secretary of the Acquiring Fund, or
provide evidence satisfactory to the Acquired Fund that such Acquiring Fund
Shares have been credited to the Acquired Fund's account on the books of the
Acquiring Fund. At the Closing each party shall deliver to the other such bills
of sale, checks, assignments, share certificates, if any, receipts or other
documents as such other party or its counsel may reasonably request.
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3.4 In the event that on the Valuation Date (a) the New York Stock Exchange
or another primary trading market for portfolio securities of the Acquiring Fund
or the Acquired Fund shall be closed to trading or trading thereupon shall be
restricted, or (b) trading or the reporting of trading on such Exchange or
elsewhere shall be disrupted so that, in the judgment of the Board of Directors
of the Acquired Fund or the Board of Directors of the Acquiring Fund, accurate
appraisal of the value of the net assets of the Acquiring Fund or the Acquired
Fund, respectively, is impracticable, the Closing Date shall be postponed until
the first business day after the day when trading shall have been fully resumed
and reporting shall have been restored.
4. REPRESENTATIONS AND WARRANTIES
4.1 Except as has been disclosed to the Acquiring Fund in a written
instrument executed by an officer of the Advisory Funds, the Advisory Funds on
behalf of the Acquired Fund represents and warrants to Investment Funds as
follows:
(a) The Acquired Fund is duly organized as a series of Advisory Funds,
which is a corporation duly organized, validly existing and in good standing
under the laws of the State of Maryland, with power under Advisory Funds'
Articles of Incorporation to own all of its properties and assets and to carry
on its business as it is now being conducted;
(b) Advisory Funds is a registered investment company classified as a
management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act, and the registration of
shares of the Acquired Fund under the Securities Act of 1933, as amended ("1933
Act"), is in full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquired Fund of
the transactions contemplated herein, except such as have been obtained under
the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act")
and the 1940 Act and such as may be required by state securities laws;
(d) The current prospectus and statement of additional information of the
Acquired Fund and each prospectus and statement of additional information of the
Acquired Fund used during the three years previous to the date of this Agreement
conforms or conformed at the time of its use in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and does not or did not at the time of
its use include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
materially misleading;
(e) On the Closing Date, the Acquired Fund will have good and marketable
title to the Assets and full right, power, and authority to sell, assign,
transfer and deliver such Assets hereunder free of any liens or other
encumbrances, and upon delivery and payment for such Assets, the Acquiring Fund
will acquire good and marketable title thereto, subject to no restrictions on
the full transfer thereof, including such restrictions as might arise under the
1933 Act, other than as disclosed to the Acquiring Fund;
(f) The Acquired Fund is not engaged currently, and the execution, delivery
and performance of this Agreement will not result, in (i) a material violation
of the Advisory Funds' Articles of Incorporation or By-Laws or of any agreement,
indenture, instrument, contract, lease or other undertaking to which the
Advisory Funds on behalf of the Acquired Fund is a party or by which it is
bound, or (ii) the acceleration of any obligation, or the imposition of any
penalty, under any agreement, indenture, instrument, contract, lease, judgment
or decree to which the Advisory Funds on behalf of the Acquired Fund is a party
or by which it is bound;
(g) All material contracts or other commitments of the Acquired Fund (other
than this Agreement and certain investment contracts including options, futures,
and forward contracts) will terminate without liability to the Acquired Fund on
or prior to the Closing Date;
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(h) Except as otherwise disclosed in writing to and accepted by Investment
Funds on behalf of the Acquiring Fund, no litigation or administrative
proceeding or investigation of or before any court or governmental body is
presently pending or, to its knowledge, threatened against the Acquired Fund or
any of its properties or assets that, if adversely determined, would materially
and adversely affect its financial condition or the conduct of its business. The
Advisory Funds on behalf of the Acquired Fund knows of no facts which might form
the basis for the institution of such proceedings and is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects its business or its
ability to consummate the transactions herein contemplated;
(i) The Statement of Assets and Liabilities, Statements of Operations and
Changes in Net Assets, and Portfolio of Investments of the Acquired Fund at June
30, 2000, have been audited by KPMG LLP, independent auditors, and are in
accordance with generally accepted accounting principles ("GAAP") consistently
applied, and such statements (copies of which have been furnished to the
Acquiring Fund) present fairly, in all material respects, the financial
condition of the Acquired Fund as of such date in accordance with GAAP, and
there are no known contingent liabilities of the Acquired Fund required to be
reflected on a balance sheet (including the notes thereto) in accordance with
GAAP as of such date not disclosed therein;
(j) Since June 30, 2000, there has not been any material adverse change in
the Acquired Fund's financial condition, assets, liabilities or business, other
than changes occurring in the ordinary course of business, or any incurrence by
the Acquired Fund of indebtedness maturing more than one year from the date such
indebtedness was incurred, except as otherwise disclosed to and accepted by the
Acquiring Fund. For the purposes of this subparagraph (j), a decline in net
asset value per share of the Acquired Fund due to declines in market values of
securities in the Acquired Fund's portfolio, the discharge of Acquired Fund
liabilities, or the redemption of Acquired Fund Shares by shareholders of the
Acquired Fund shall not constitute a material adverse change;
(k) On the Closing Date, all Federal and other tax returns, dividend
reporting forms, and other tax-related reports of the Acquired Fund required by
law to have been filed by such date (including any extensions) shall have been
filed and are or will be correct in all material respects, and all Federal and
other taxes shown as due or required to be shown as due on said returns and
reports shall have been paid or provision shall have been made for the payment
thereof, and to the best of the Acquired Fund's knowledge, no such return is
currently under audit and no assessment has been asserted with respect to such
returns;
(l) For each taxable year of its operation (including the taxable year
ending on the Closing Date), the Acquired Fund has met (or will meet) the
requirements of Subchapter M of the Code for qualification as a regulated
investment company, has been (or will be) eligible to and has computed (or will
compute) its federal income tax under Section 852 of the Code, and will have
distributed all of its investment company taxable income and net capital gain
(as defined in the Code) that has accrued through the Closing Date, and before
the Closing Date will have declared dividends sufficient to distribute all of
its investment company taxable income and net capital gain for the period ending
on the Closing Date;
(m) All issued and outstanding shares of the Acquired Fund are, and on the
Closing Date will be, duly and validly issued and outstanding, fully paid and
non-assessable and have been offered and sold in every state and the District of
Columbia in compliance in all material respects with applicable registration
requirements of the 1933 Act and state securities laws. All of the issued and
outstanding shares of the Acquired Fund will, at the time of Closing, be held by
the persons and in the amounts set forth in the records of the Transfer Agent,
on behalf of the Acquired Fund, as provided in paragraph 3.3. The Acquired Fund
does not have outstanding any options, warrants or other rights to subscribe for
or purchase any of the shares of the Acquired Fund, nor is there outstanding any
security convertible into any of the Acquired Fund shares;
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<PAGE>
(n) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Closing Date by all necessary action, if any,
on the part of the Directors of Advisory Funds on behalf of the Acquired Fund,
and, subject to the approval of the shareholders of the Acquired Fund, this
Agreement will constitute a valid and binding obligation of the Acquired Fund,
enforceable in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other laws relating to or
affecting creditors' rights and to general equity principles;
(o) The information to be furnished by the Acquired Fund for use in
registration statements, proxy materials and other documents filed or to be
filed with any federal, state or local regulatory authority (including the
National Association of Securities Dealers, Inc.), which may be necessary in
connection with the transactions contemplated hereby, shall be accurate and
complete in all material respects and shall comply in all material respects with
Federal securities and other laws and regulations thereunder applicable thereto;
and
(p) The proxy statement of the Acquired Fund (the "Proxy Statement") to be
included in the Registration Statement referred to in paragraph 5.6, insofar as
it relates to the Acquired Fund, will, on the effective date of the Registration
Statement and on the Closing Date (i) not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not materially misleading provided, however,
that the representations and warranties in this subparagraph (p) shall not apply
to statements in or omissions from the Proxy Statement and the Registration
Statement made in reliance upon and in conformity with information that was
furnished by the Acquiring Fund for use therein, and (ii) comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and
the rules and regulations thereunder.
4.2 Except as has been disclosed to the Advisory Funds in a written
instrument executed by an officer of Investment Funds, Investment Funds on
behalf of the Acquiring Fund represents and warrants to the Advisory Funds as
follows:
(a) The Acquiring Fund is duly organized as a series of Investment Funds,
which is a corporation duly organized, validly existing and in good standing
under the laws of the State of Maryland with power under Investment Funds'
Articles of Incorporation to own all of its properties and assets and to carry
on its business as it is now being conducted;
(b) Investment Funds is a registered investment company classified as a
management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act and the registration of
shares of the Acquiring Fund under the 1933 Act, is in full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquiring Fund of
the transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act and the 1940 Act and such as may be required by state
securities laws;
(d) The current prospectus and statement of additional information of the
Acquiring Fund and each prospectus and statement of additional information of
the Acquiring Fund used during the three years previous to the date of this
Agreement conforms or conformed at the time of its use in all material respects
to the applicable requirements of the 1933 Act and the 1940 Act and the rules
and regulations of the Commission thereunder and does not or did not at the time
of its use include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
materially misleading;
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<PAGE>
(e) On the Closing Date, the Acquiring Fund will have good and marketable
title to the Acquiring Fund's assets, free of any liens of other encumbrances,
except those liens or encumbrances as to which the Acquired Fund has received
notice and necessary documentation at or prior to the Closing;
(f) The Acquiring Fund is not engaged currently, and the execution,
delivery and performance of this Agreement will not result, in (i) a material
violation of Investment Funds' Articles of Incorporation or By-Laws or of any
agreement, indenture, instrument, contract, lease or other undertaking to which
Investment Funds on behalf of the Acquiring Fund is a party or by which it is
bound, or (ii) the acceleration of any obligation, or the imposition of any
penalty, under any agreement, indenture, instrument, contract, lease, judgment
or decree to which Investment Funds on behalf of the Acquiring Fund is a party
or by which it is bound;
(g) Except as otherwise disclosed in writing to and accepted by Advisory
Funds on behalf of the Acquired Fund, no litigation or administrative proceeding
or investigation of or before any court or governmental body is presently
pending or, to its knowledge, threatened against Investment Fund on behalf of
the Acquiring Fund or any of its properties or assets that, if adversely
determined, would materially and adversely affect its financial condition or the
conduct of its business. The Investment Funds on behalf of the Acquiring Fund
knows of no facts which might form the basis for the institution of such
proceedings and is not a party to or subject to the provisions of any order,
decree or judgment of any court or governmental body which materially and
adversely affects the Acquiring Fund's business or the Acquiring Fund's ability
to consummate the transactions herein contemplated;
(h) The Statement of Assets and Liabilities, Statements of Operations and
Changes in Net Assets and Portfolio of Investments of the Acquiring Fund at June
30, 2000, have been audited by KPMG LLP, independent auditors, and are in
accordance with GAAP consistently applied, and such statements (copies of which
have been furnished to the Acquired Fund) present fairly, in all material
respects, the financial condition of the Acquiring Fund as of such date in
accordance with GAAP, and there are no known contingent liabilities of the
Acquiring Fund required to be reflected on a balance sheet (including the notes
thereto) in accordance with GAAP as of such date not disclosed therein;
(i) Since June 30, 2000, there has not been any material adverse change in
the Acquiring Fund's financial condition, assets, liabilities or business, other
than changes occurring in the ordinary course of business, or any incurrence by
the Acquiring Fund of indebtedness maturing more than one year from the date
such indebtedness was incurred, except as otherwise disclosed to and accepted by
the Acquired Fund. For purposes of this subparagraph (i), a decline in net asset
value per share of the Acquiring Fund due to declines in market values of
securities in the Acquiring Fund's portfolio, the discharge of Acquiring Fund
liabilities, or the redemption of Acquiring Fund Shares by shareholders of the
Acquiring Fund, shall not constitute a material adverse change;
(j) On the Closing Date, all Federal and other tax returns, dividend
reporting forms, and other tax-related reports of the Acquiring Fund required by
law to have been filed by such date (including any extensions) shall have been
filed and are or will be correct in all material respects, and all Federal and
other taxes shown as due or required to be shown as due on said returns and
reports shall have been paid or provision shall have been made for the payment
thereof, and to the best of the Acquiring Fund's knowledge no such return is
currently under audit and no assessment has been asserted with respect to such
returns;
(k) For each taxable year of its operation (including the taxable year
including the Closing Date), the Acquiring Fund has met (or will meet) the
requirements of Subchapter M of the Code for qualification as a regulated
investment company, has been eligible to and has computed (or will compute) its
federal income tax under Section 852 of the Code;
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<PAGE>
(l) All issued and outstanding Acquiring Fund Shares are, and on the
Closing Date will be, duly and validly issued and outstanding, fully paid and
non-assessable and have been offered and sold in every state and the District of
Columbia in compliance in all material respects with applicable registration
requirements of the 1933 Act and state securities laws. The Acquiring Fund does
not have outstanding any options, warrants or other rights to subscribe for or
purchase any Acquiring Fund Shares, nor is there outstanding any security
convertible into any Acquiring Fund Shares;
(m) The execution, delivery and performance of this Agreement will have
been fully authorized prior to the Closing Date by all necessary action, if any,
on the part of the Directors of Investment Funds on behalf of the Acquiring Fund
and this Agreement will constitute a valid and binding obligation of Investment
Funds on behalf of the Acquiring Fund, enforceable in accordance with its terms,
subject, as to enforcement, to bankruptcy, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors' rights and to
general equity principles;
(n) The Class A, Class B, Class C, Class M and Class Q Acquiring Fund
Shares to be issued and delivered to the Acquired Fund, for the account of the
Acquired Fund Shareholders, pursuant to the terms of this Agreement, will on the
Closing Date have been duly authorized and, when so issued and delivered, will
be duly and validly issued Acquiring Fund Shares, and will be fully paid and
non-assessable.
(o) The information to be furnished by Investment Funds for use in the
registration statements, proxy materials and other documents that may be
necessary in connection with the transactions contemplated hereby shall be
accurate and complete in all material respects and shall comply in all material
respects with Federal securities and other laws and regulations applicable
thereto; and
(p) That insofar as it relates to the Acquiring Fund, the Registration
Statement relating to the Acquiring Fund Shares issuable hereunder, and the
proxy materials of the Acquired Fund to be included in the Registration
Statement, and any amendment or supplement to the foregoing, will, from the
effective date of the Registration Statement through the date of the meeting of
shareholders of the Acquired Fund contemplated therein (i) not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading provided,
however, that the representations and warranties in this subparagraph (p) shall
not apply to statements in or omissions from the Registration Statement made in
reliance upon and in conformity with information that was furnished by the
Acquired Fund for use therein, and (ii) comply in all material respects with the
provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and
regulations thereunder.
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 The Acquiring Fund and the Acquired Fund each will operate its business
in the ordinary course between the date hereof and the Closing Date, it being
understood that such ordinary course of business will include the declaration
and payment of customary dividends and distributions, and any other distribution
that may be advisable.
5.2 The Acquired Fund will call a meeting of the shareholders of the
Acquired Fund to consider and act upon this Agreement and to take all other
action necessary to obtain approval of the transactions contemplated herein.
5.3 The Acquired Fund covenants that the Class A, Class B, Class C, and
Class M and Class Q Acquiring Fund Shares to be issued hereunder are not being
acquired for the purpose of making any distribution thereof, other than in
accordance with the terms of this Agreement.
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<PAGE>
5.4 The Acquired Fund will assist the Acquiring Fund in obtaining such
information as the Acquiring Fund reasonably requests concerning the beneficial
ownership of the Acquired Fund shares.
5.5 Subject to the provisions of this Agreement, the Acquiring Fund and the
Acquired Fund will each take, or cause to be taken, all action, and do or cause
to be done, all things reasonably necessary, proper or advisable to consummate
and make effective the transactions contemplated by this Agreement.
5.6 The Acquired Fund will provide the Acquiring Fund with information
reasonably necessary for the preparation of a prospectus (the "Prospectus")
which will include the Proxy Statement referred to in paragraph 4.1(p), all to
be included in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the 1934 Act and the
1940 Act, in connection with the meeting of the shareholders of the Acquired
Fund to consider approval of this Agreement and the transactions contemplated
herein.
5.7 As soon as is reasonably practicable after the Closing, the Acquired
Fund will make a liquidating distribution to its shareholders consisting of the
Class A, Class B, Class C, Class M and Class Q Acquiring Fund Shares received at
the Closing.
5.8 The Acquiring Fund and the Acquired Fund shall each use its reasonable
best efforts to fulfill or obtain the fulfillment of the conditions precedent to
effect the transactions contemplated by this Agreement as promptly as
practicable.
5.9 The Advisory Funds on behalf of the Acquired Fund covenants that it
will, from time to time, as and when reasonably requested by the Acquiring Fund,
execute and deliver or cause to be executed and delivered all such assignments
and other instruments, and will take or cause to be taken such further action as
Investment Funds on behalf of the Acquiring Fund may reasonably deem necessary
or desirable in order to vest in and confirm (a) the Advisory Funds', on behalf
of the Acquired Fund's title to and possession of Acquiring Funds' Shares to be
delivered hereunder, and (b) the Investment Funds on behalf of the Acquiring
Fund's, title to and possession of all the assets and otherwise to carry out the
intent and purpose of this Agreement.
5.10 The Acquiring Fund will use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act and such of
the state blue sky or securities laws as may be necessary in order to continue
its operations after the Closing Date.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of Advisory Funds on behalf of the Acquired Fund to
consummate the transactions provided for herein shall be subject, at the
Advisory Funds' election, to the performance by Investment Funds on behalf of
the Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations and warranties of Investment Funds on behalf of the
Acquiring Fund contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date;
6.2 Investment Funds shall have delivered to the Advisory Funds a
certificate executed in its name by its President or Vice President and its
Treasurer or Assistant Treasurer, in a form reasonably satisfactory to Advisory
Funds and dated as of the Closing Date, to the effect that the representations
and warranties of Investment Funds on behalf of the Acquiring Fund made in this
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<PAGE>
Agreement are true and correct at and as of the Closing Date, except as they may
be affected by the transactions contemplated by this Agreement and as to such
other matters as Advisory Funds shall reasonably request;
6.3 Investment Funds on behalf of the Acquiring Fund shall have performed
all of the covenants and complied with all of the provisions required by this
Agreement to be performed or complied with by Investment Funds on behalf of the
Acquiring Fund on or before the Closing Date; and
6.4 The Acquired Fund and the Acquiring Fund shall have agreed on the
number of full and fractional Acquiring Fund Shares of each Class to be issued
in connection with the Reorganization after such number has been calculated in
accordance with paragraph 1.1.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of Investment Funds on behalf of the Acquiring Fund to
complete the transactions provided for herein shall be subject, at the
Investment Funds' election, to the performance by the Advisory Funds on behalf
of the Acquired Fund of all of the obligations to be performed by it hereunder
on or before the Closing Date and, in addition thereto, the following
conditions:
7.1 All representations and warranties of Advisory Funds on behalf of the
Acquired Fund contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date;
7.2 The Advisory Funds shall have delivered to the Acquiring Fund a
statement of the Acquired Fund's assets and liabilities, as of the Closing Date,
certified by the Treasurer of the Advisory Funds;
7.3 The Advisory Funds shall have delivered to the Acquiring Fund on the
Closing Date a certificate executed in its name by its President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
satisfactory to the Investment Funds and dated as of the Closing Date, to the
effect that the representations and warranties of the Advisory Funds on behalf
of the Acquired Fund made in this Agreement are true and correct at and as of
the Closing Date, except as they may be affected by the transactions
contemplated by this Agreement, and as to such other matters as the Investment
Funds shall reasonably request;
7.4 The Advisory Funds on behalf of the Acquired Fund shall have performed
all of the covenants and complied with all of the provisions required by this
Agreement to be performed or complied with by the Advisory Funds on behalf of
the Acquired Fund on or before the Closing Date;
7.5 The Acquired Fund and the Acquiring Fund shall have agreed on the
number of full and fractional Acquiring Fund Shares of each Class to be issued
in connection with the Reorganization after such number has been calculated in
accordance with paragraph 1.1; and
7.6 The Acquired Fund shall have declared and paid a distribution or
distributions prior to the Closing that, together with all previous
distributions, shall have the effect of distributing to its shareholders (i) all
of its investment company taxable income and all of its net realized capital
gains, if any, for the period from the close of its last fiscal year to 4:00
p.m. Eastern time on the Closing; and (ii) any undistributed investment company
taxable income and net realized capital gains from any period to the extent not
otherwise already distributed.
B-1-10
<PAGE>
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND AND THE
ACQUIRED FUND
If any of the conditions set forth below have not satisfied on or before
the Closing Date with respect to Advisory Funds on behalf of the Acquired Fund
or Investment Funds on behalf of the Acquiring Fund, the other party to this
Agreement shall, at its option, not be required to consummate the transactions
contemplated by this Agreement:
8.1 The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of the
Acquired Fund in accordance with the provisions of Advisory Funds' Articles of
Incorporation, By-Laws, applicable Maryland law and the 1940 Act, and certified
copies of the resolutions evidencing such approval shall have been delivered to
the Acquiring Fund. Notwithstanding anything herein to the contrary, neither
Investment Funds nor Advisory Funds may waive the conditions set forth in this
paragraph 8.1;
8.2 On the Closing Date, no action, suit or other proceeding shall be
pending or, to its knowledge, threatened before any court or governmental agency
in which it is sought to restrain or prohibit, or obtain damages or other relief
in connection with, this Agreement or the transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and
permits of Federal, state and local regulatory authorities deemed necessary by
Investment Funds or Advisory Funds to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties of the
Acquiring Fund or the Acquired Fund, provided that either party hereto may for
itself waive any of such conditions;
8.4 The Registration Statement shall have become effective under the 1933
Act and no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act; and
8.5 The parties shall have received the opinion of Dechert addressed to
Advisory Funds and Investment Funds substantially to the effect that, based upon
certain facts, assumptions, and representations, the transaction contemplated by
this Agreement shall constitute a tax-free reorganization for Federal income tax
purposes. The delivery of such opinion is conditioned upon receipt by Dechert of
representations it shall request of the Investment Funds and Advisory Funds.
Notwithstanding anything herein to the contrary, neither Investment Funds nor
Advisory Funds may waive the condition set forth in this paragraph 8.5.
9. BROKERAGE FEES AND EXPENSES
9.1 Investment Funds on behalf of the Acquiring Fund and Advisory Funds on
behalf of the Acquired Fund represent and warrant to each other that there are
no brokers or finders entitled to receive any payments in connection with the
transactions provided for herein.
9.2 The expenses relating to the proposed Reorganization will be shared so
that (1) half of such costs are borne by the investment adviser to the Acquired
and Acquiring Funds, and (2) half are borne by the Acquired and Acquiring Funds
and will be paid by the Acquired Fund and Acquiring Fund pro rata based upon the
relative net assets of the Acquired Fund and Acquiring Fund as of the close of
business on the record date for determining the shareholders of the Acquired
Fund entitled to vote on the Reorganization. The costs of the Reorganization
shall include, but not be limited to, costs associated with obtaining any
necessary order of exemption from the 1940 Act, preparation of the Registration
B-1-11
<PAGE>
Statement, printing and distributing the Acquiring Fund's prospectus and the
Acquired Fund's proxy materials, legal fees, accounting fees, securities
registration fees, and expenses of holding shareholders' meetings.
Notwithstanding any of the foregoing, expenses will in any event be paid by the
party directly incurring such expenses if and to the extent that the payment by
another person of such expenses would result in the disqualification of such
party as a "regulated investment company" within the meaning of Section 851 of
the Code.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 Investment Funds and Advisory Funds agree that neither party has made
any representation, warranty or covenant not set forth herein and that this
Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder. The
covenants to be performed after the Closing shall survive the Closing.
11. TERMINATION
This Agreement and the transactions contemplated hereby may be terminated
and abandoned by resolution of the Board of Directors of Advisory Funds or the
Board of Directors of Investment Funds at any time prior to the Closing Date, if
circumstances should develop that, in the opinion of either Board, make
proceeding with the Agreement inadvisable.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be deemed necessary or advisable by the authorized officers of Advisory
Funds and Investment Funds; provided, however, that following the meeting of the
shareholders of the Acquired Fund called by Advisory Funds pursuant to paragraph
5.2 of this Agreement, no such amendment may have the effect of changing the
provisions for determining the number of the Class A, Class B, Class C, Class M
and Class Q Acquiring Fund Shares to be issued to the Acquired Fund Shareholders
under this Agreement to the detriment of such shareholders without their further
approval.
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by
facsimile, personal service or prepaid or certified mail addressed to Investment
Funds or to Advisory Funds, 7337 E. Doubletree Ranch Road, Scottsdale, Arizona
85258, attn: James M. Hennessy, in each case with a copy to Dechert, 1775 Eye
Street, N.W., Washington, D.C. 20006, attn: Jeffrey S. Puretz.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT; LIMITATION OF LIABILITY
14.1 The Article and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
B-1-12
<PAGE>
14.3 This Agreement shall be governed by and construed in accordance with
the laws of the State of Maryland without regard to its principles of conflicts
of laws.
14.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its President or Vice President and its seal to be affixed
thereto and attested by its Secretary or Assistant Secretary.
Pilgrim Investment Funds, Inc. on behalf of
Attest: its Pilgrim MagnaCap Fund series
By:
------------------------------- -----------------------------------
SECRETARY
Its:
----------------------------------
Pilgrim Advisory Funds, Inc. on behalf of its
Attest: Pilgrim LargeCap Leaders Fund series
By:
------------------------------- -----------------------------------
SECRETARY
Its:
----------------------------------
B-1-13
<PAGE>
APPENDIX C
ADDITIONAL INFORMATION REGARDING PILGRIM MAGNACAP FUND
(THE "FUND")
SHAREHOLDER GUIDE
Pilgrim Purchase Options(TM)
This Proxy Statement/Prospectus relates to five separate Classes of the
Fund: Class A, Class B, Class C, Class M and Class Q, each of which represents
an identical interest in the Fund's investment portfolio, but are offered with
different sales charges and distribution fee (Rule 12b-1) arrangements. As
described below and elsewhere in this Proxy Statement/Prospectus, the contingent
deferred sales load structure and conversion characteristics of the Fund shares
that will be issued to you in the Reorganization will be the same as those that
apply to the Disappearing Fund shares held by you immediately prior to the
Reorganization, and the period that you held shares of the Disappearing Fund
will be included in the holding period of the Fund for purposes of calculating
contingent deferred sales charges and determining conversion rights. Purchases
of the shares of the Fund after the Reorganization will be subject to the sales
load structure and conversion rights discussed below.
The sales charges and fees for each Class of shares of the Fund are shown
and contrasted in the chart below.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS M CLASS Q
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Maximum Initial Sales Charge on Purchases 5.75%(1) None None 3.50%(1) None
Contingent Deferred Sales Charge ("CDSC") None(2) 5.00%(3) 1.00%(4) None None
Annual Distribution (12b-1) and Service Fees(5) 0.30% 1.00% 1.00% 0.75% 0.25%
Maximum Purchase Unlimited $250,000 Unlimited $1,000,000 Unlimited
Automatic Conversion to Class A N/A 8 Years(6) N/A N/A N/A
</TABLE>
----------
(1) Imposed upon purchase. Reduced for purchases of $50,000 and over.
(2) For investments of $1 million or more, a CDSC of no more than 1% may be
assessed on redemptions of shares that were purchased without an initial
sales charge. See "Class A Shares: Initial Sales Charge Alternative" and
"Class M Shares: Initial Sales Charge Alternative" in this Appendix C.
(3) Imposed upon redemption within 6 years from purchase. Fee has scheduled
reductions after the first year. See "Class B Shares: Deferred Sales Charge
Alternative" in this Appendix C.
(4) Imposed upon redemption within 1 year from purchase.
(5) Annual asset-based distribution charge.
(6) Class B shares of the Fund issued to shareholders of the Disappearing Funds
in the Reorganization will convert to Class A shares in the eighth year
from the original date of purchase of the Class B shares of the
Disappearing Funds.
The relative impact of the initial sales charges and ongoing annual
expenses will depend on the length of time a share is held. Orders for Class B
shares and Class M shares in excess of $250,000 and $1,000,000, respectively,
will be accepted as orders for Class A shares or declined.
C-1
<PAGE>
CLASS A SHARES: INITIAL SALES CHARGE ALTERNATIVE. Class A shares of the
Fund are sold at the net asset value ("NAV") per share in effect plus a sales
charge as described in the following table. For waivers or reductions of the
Class A shares sales charges, see "Special Purchases without a Sales Charge" and
"Reduced Sales Charges" below.
AS A % OF THE AS A %
YOUR INVESTMENT OFFERING PRICE OF NAV
--------------- -------------- ------
Less than $50,000 5.75% 6.10%
$50,000 - $99,999 4.50% 4.71%
$100,000 - $249,999 3.50% 3.63%
$250,000 - $499,999 2.50% 2.56%
$500,000 - $1,000,000 2.00% 2.04%
There is no initial sales charge on purchases of $1,000,000 or more.
However, the shares will be subject to a CDSC if they are redeemed within one or
two years of purchase, depending on the amount of the purchase, as follows:
PERIOD DURING
YOUR INVESTMENT CDSC WHICH CDSC APPLIES
--------------- ---- ------------------
$1,000,000 - $2,499,999 1.00% 2 years
$2,500,000 - $4,999,999 0.50% 1 year
$5,000,000 and over 0.25% 1 year
Class A shares of the Fund issued in connection with the Reorganization
with respect to Class A shares of Disappearing Funds that were subject to a CDSC
at the time of the Reorganization, will be subject to a CDSC of up to 1% from
the date of purchase of the original shares of the Disappearing Funds.
REDUCED SALES CHARGES. An investor may immediately qualify for a reduced
sales charge on a purchase of Class A shares of the Fund or other open-end funds
in the Pilgrim funds or ING funds which offer Class A shares, or shares with
front-end sales charges ("Participating Funds") by completing the Letter of
Intent section of an Application to purchase Fund shares. Executing the Letter
of Intent expresses an intention to invest during the next 13 months a specified
amount, which, if made at one time, would qualify for a reduced sales charge. An
amount equal to the Letter of Intent amount multiplied by the maximum sales
charge imposed on purchases of the Fund and Class will be restricted within your
account to cover additional sales charges that may be due if your actual total
investment fails to qualify for the reduced sales charges. See the Statement of
Additional Information for the Fund for details on the Letter of Intent option
or contact the Shareholder Servicing Agent at (800) 992-0180 for more
information.
A sales charge may also be reduced by taking into account the current
value of your existing holdings in the Fund or any other open-end funds in the
Pilgrim funds (excluding Pilgrim Money Market Fund) ("Rights of Accumulation").
The reduced sales charges apply to quantity purchases made at one time or on a
cumulative basis over any period of time. See the Statement of Additional
Information for the Fund for details or contact the Shareholder Servicing Agent
at (800) 992-0180 for more information.
For the purposes of Rights of Accumulation and the Letter of Intent
Privilege, shares held by investors in the Pilgrim funds which impose a CDSC may
be combined with Class A shares for a reduced sales charge but will not affect
any CDSC which may be imposed upon the redemption of shares of the Fund which
imposes a CDSC.
C-2
<PAGE>
SPECIAL PURCHASES WITHOUT A SALES CHARGE. Class A shares may be purchased
without a sales charge by certain individuals and institutions. For additional
information, contact the Shareholder Servicing Agent at (800) 992-0180, or see
the Statement of Additional Information for the Fund.
CLASS B SHARES: DEFERRED SALES CHARGE ALTERNATIVE. Class B shares are
offered at their NAV per share without any initial sales charge. Class B shares
that are redeemed within six years of purchase, however, will be subject to a
CDSC as described in the table that follows. Class B shares of the Fund are
subject to a distribution and service fee at an annual rate of 1.00% of the
average daily net assets of the Class, which is higher than the distribution and
service fees of Class A shares. The higher distribution and service fees mean a
higher expense ratio, so Class B shares pay correspondingly lower dividends and
may have a lower NAV than Class A shares. Orders for Class B shares in excess of
$250,000 will be accepted as orders for Class A shares or declined. The amount
of the CDSC is based on the lesser of the NAV of the Class B shares at the time
of purchase or redemption. There is no CDSC on Class B shares acquired through
the reinvestment of dividends and capital gains distributions. The CDSCs are as
follows:
YEAR OF REDEMPTION AFTER PURCHASE CDSC
--------------------------------- ----
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth 1%
After Sixth Year None
Class B shares will automatically convert into Class A shares
approximately eight years after purchase. Class B shares of the Fund issued in
connection with the Reorganization with respect to Class B shares of the
Disappearing Fund will convert to Class A shares eight years after the purchase
of the original shares of the Disappearing Fund. For additional information on
the CDSC and the conversion of Class B, see the Fund's Statement of Additional
Information.
Class C Shares. Class C shares are offered at their NAV per share without
an initial sales charge. Class C shares may be subject to a CDSC of 1% if
redeemed within one year of purchase. The amount of the CDSC is based on the
lesser of the NAV of the Class C shares at the time of purchase or redemption.
There is no CDSC on Class C shares acquired through the reinvestment of
dividends and capital gains distributions.
Class M Shares: Initial Sales Charge Alternative. Class M shares of the
Fund are sold at the NAV per share in effect plus a sales charge as described in
the following table. For waivers or reductions of the Class M shares sales
charges, see "Special Purchases without a Sales Charge" and "Reduced Sales
Charges" below.
AS A % OF THE AS A %
YOUR INVESTMENT OFFERING PRICE OF NAV
--------------- -------------- ------
Less than $50,000 3.50% 3.63%
$50,000 - $99,999 2.50% 2.56%
$100,000 - $249,999 1.50% 1.52%
$250,000 - $499,999 1.00% 1.01%
$500,000 and over None None
C-3
<PAGE>
REDUCED SALES CHARGES. An investor may immediately qualify for a reduced
sales charge on a purchase of Class M shares of the Fund or other open-end funds
in the Pilgrim Funds or ING Funds which offer Class M shares, or shares with
front-end sales charges ("Participating Funds") by completing the Letter of
Intent section of an Application to purchase Fund shares. Executing the Letter
of Intent expresses an intention to invest during the next 13 months a specified
amount, which, if made at one time, would qualify for a reduced sales charge. An
amount equal to the Letter amount multiplied by the maximum sales charge imposed
on purchases of the Fund and Class will be restricted within your account to
cover additional sales charges that may be due if your actual total investment
fails to qualify for the reduced sales charges. See the Statement of Additional
Information for the Fund for details on the Letter of Intent option or contact
the Shareholder Servicing Agent at (800) 992-0180 for more information.
A sales charge may also be reduced by taking into account the current
value of your existing holdings in the Fund or any other open-end funds in the
Pilgrim Funds (excluding Pilgrim Money Market Fund) ("Rights of Accumulation").
The reduced sales charges apply to quantity purchases made at one time or on a
cumulative basis over any period of time. See the Statement of Additional
Information for the Fund for details or contact the Shareholder Servicing Agent
at (800) 992-0180 for more information.
For the purposes of Rights of Accumulation and the Letter of Intent
Privilege, shares held by investors in the Pilgrim Funds which impose a CDSC may
be combined with Class M shares for a reduced sales charge but will not affect
any CDSC which may be imposed upon the redemption of shares of the Fund which
imposes a CDSC.
SPECIAL PURCHASES WITHOUT A SALES CHARGE. Class M shares may be purchased
without a sales charge by certain individuals and institutions. For additional
information, contact the Shareholder Servicing Agent at (800) 992-0180, or see
the Statement of Additional Information for the Fund.
CLASS Q SHARES. Class Q Shares are offered at NAV without a sales charge
to qualified retirement plans, financial and other institutions and "wrap
accounts." The minimum initial investment is $250,000, and the minimum
subsequent investment is $10,000. The Distributor may waive these minimums from
time to time.
WAIVERS OF CDSC. The CDSC will be waived in the following cases. In
determining whether a CDSC is applicable, it will be assumed that shares held in
the shareholder's account that are not subject to such charge are redeemed
first.
1) The CDSC will be waived in the case of redemption following the death
or permanent disability of a shareholder if made within one year of death or
initial determination of permanent disability. The waiver is available only for
those shares held at the time of death or initial determination of permanent
disability.
2) The CDSC also may be waived for Class B shares redeemed pursuant to a
Systematic Withdrawal Plan, up to a maximum of 12% per year of a shareholder's
account value based on the value of the account at the time the plan is
established and annually thereafter, provided all dividends and distributions
are reinvested and the total redemptions do not exceed 12% annually.
3) The CDSC also will be waived in the case of mandatory distributions
from a tax-deferred retirement plan or an IRA.
C-4
<PAGE>
If you think you may be eligible for a CDSC waiver, contact the
Shareholder Servicing Agent at (800) 992-0180.
REINSTATEMENT PRIVILEGE. Class B and Class C shareholders who have
redeemed their shares in any open-end Pilgrim Fund may reinvest some or all of
the proceeds in the same share Class within 90 days without a sales charge.
Reinstated Class B and Class C shares will retain their original cost and
purchase date for purposes of the CDSC. This privilege can be used only once per
calendar year. See the Statement of Additional Information for the Fund for
details or contact the Shareholder Servicing Agent at (800) 992-0180 for more
information.
RULE 12b-1 PLAN. The Fund has a distribution plan pursuant to Rule 12b-1
under the Investment Company Act of 1940 applicable to each Class of shares of
the Fund ("Rule 12b-1 Plan"). Under the Rule 12b-1 Plan, ING Pilgrim Securities,
Inc., (the "Distributor") may receive from the Fund an annual fee in connection
with the offering, sale and shareholder servicing of the Fund's Class A, Class
B, Class C, Class M and Class Q shares.
DISTRIBUTION AND SERVICING FEES. As compensation for services rendered and
expenses borne by the Distributor in connection with the distribution of shares
of the Fund and in connection with services rendered to shareholders of the
Fund, the Fund pays the Distributor servicing fees and distribution fees up to
the annual rates set forth below (calculated as a percentage of the Fund's
average daily net assets attributable to that Class):
SERVICING FEE DISTRIBUTION FEE
------------- ----------------
Class A 0.25% 0.05%
Class B 0.25% 0.75%
Class C 0.25% 0.75%
Class M 0.25% 0.50%
Class Q 0.25% None
Fees paid under the Rule 12b-1 Plan may be used to cover the expenses of
the Distributor from the sale of Class A, Class B, Class C, Class M or Class Q
shares of the Fund, including payments to Authorized Dealers, and for
shareholder servicing. Because these fees are paid out of the Fund's assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
OTHER EXPENSES. In addition to the management fee and other fees described
previously, the Fund pays other expenses, such as legal, audit, transfer agency
and custodian fees, proxy solicitation costs, and the compensation of Directors
who are not affiliated with ING Pilgrim Investments, Inc. ("ING Pilgrim
Investments"). Most Fund expenses are allocated proportionately among all of the
outstanding shares of that Fund. However, the Rule 12b-1 Plan fees for each
Class of shares are charged proportionately only to the outstanding shares of
that Class.
C-5
<PAGE>
PURCHASING SHARES. The Fund reserves the right to liquidate sufficient
shares to recover annual Transfer Agent fees should the investor fail to
maintain his/her account value at a minimum of $1,000.00 ($250.00 for IRA's).
The minimum initial investment in the Fund is $1,000 ($250 for IRAs), and the
minimum for additional investment in the Fund is $100. The minimum initial
investment for pre-authorized retirement plan is $100 plus monthly investments
of at least $100.
The Fund and the Distributor reserve the right to reject any purchase
order. Please note cash, travelers checks, third party checks, money orders and
checks drawn on non-U.S. banks (even if payment may be effected through a U.S.
bank) will not be accepted. ING Pilgrim Investments reserves the right to waive
minimum investment amounts.
PRICE OF SHARES. When you buy shares, you pay the NAV plus any
applicable sales charge. When you sell shares, you receive the NAV minus any
applicable deferred sales charge. Exchange orders are effected at NAV.
DETERMINATION OF NET ASSET VALUE. The NAV of each Class of the Fund's
shares is determined daily as of the close of regular trading on the New York
Stock Exchange (usually at 4:00 p.m. New York City time) on each day that it is
open for business. The NAV of each Class represents that Class' pro rata share
of that Fund's net assets as adjusted for any Class specific expenses (such as
fees under a Rule 12b-1 plan), and divided by that Class' outstanding shares. In
general, the value of the Fund's assets is based on actual or estimated market
value, with special provisions for assets not having readily available market
quotations, and short-term debt securities, and for situations where market
quotations are deemed unreliable. The NAV per share of each Class of the Fund
will fluctuate in response to changes in market conditions and other factors.
Portfolio securities for which market quotations are readily available are
stated at market value. Short-term debt securities having a maturity of 60 days
or less are valued at amortized cost, unless the amortized cost does not
approximate market value. Securities prices may be obtained from automated
pricing services. When market quotations are not readily available or are deemed
unreliable, securities are valued at their fair value as determined in good
faith under the supervision of the Board of Directors. Valuing securities at
fair value involves greater reliance on judgment than valuing securities that
have readily available market quotations. For information on valuing foreign
securities, see the Fund's Statement of Additional Information.
PRE-AUTHORIZED INVESTMENT PLAN. You may establish a pre-authorized
investment plan to purchase shares with automatic bank account debiting. For
further information on pre-authorized investment plans, contact the Shareholder
Servicing Agent at (800) 992-0181.
RETIREMENT PLANS. The Fund has available prototype qualified retirement
plans for both corporations and for self-employed individuals. Also available
are prototype IRA, Roth IRA and Simple IRA plans (for both individuals and
employers), Simplified Employee Pension Plans, Pension and Profit Sharing Plans
and Tax Sheltered Retirement Plans for employees of public educational
institutions and certain non-profit, tax-exempt organizations. State Street Bank
and Trust Company ("SSB") acts as the custodian under these plans. For further
information, contact the Shareholder Servicing Agent at (800) 992-0180. SSB
currently receives a $12 custodian fee annually for the maintenance of such
accounts.
EXECUTION OF REQUESTS. Purchase and sale requests are executed at the NAV
next determined after the order is received in proper form by the Transfer Agent
or Distributor. A purchase order will be deemed to be in proper form when all of
the required steps set forth above under "Purchase of Shares" have been
completed. If you purchase by wire, however, the order will be deemed to be in
proper form after the telephone notification and the federal funds wire have
been received. If you purchase by wire, you must submit an application form in a
timely fashion. If an order or payment by wire is received after the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. Eastern
Time), the shares will not be credited until the next business day.
C-6
<PAGE>
You will receive a confirmation of each new transaction in your account,
which also will show you the number of shares of the Fund you own including the
number of shares being held in safekeeping by the Transfer Agent for your
account. You may rely on these confirmations in lieu of certificates as evidence
of your ownership. Certificates representing shares of the Fund will not be
issued unless you request them in writing.
TELEPHONE ORDERS. The Fund and its Transfer Agent will not be responsible
for the authenticity of phone instructions or losses, if any, resulting from
unauthorized shareholder transactions if they reasonably believe that such
instructions were genuine. The Fund and its Transfer Agent have established
reasonable procedures to confirm that instructions communicated by telephone are
genuine. These procedures include recording telephone instructions for exchanges
and expedited redemptions, requiring the caller to give certain specific
identifying information, and providing written confirmation to shareholders of
record not later than five days following any such telephone transactions. If
the Fund and its Transfer Agent do not employ these procedures, they may be
liable for any losses due to unauthorized or fraudulent telephone instructions.
Telephone redemptions may be executed on all accounts other than retirement
accounts.
EXCHANGE PRIVILEGES AND RESTRICTIONS
An exchange privilege is available. Exchange requests may be made in
writing to the Transfer Agent or by calling the Shareholder Servicing Agent at
(800) 992-0180. There is no specific limit on exchange frequency; however, the
Fund is intended for long term investment and not as a trading vehicle. ING
Pilgrim Investments reserves the right to prohibit excessive exchanges (more
than four per year). ING Pilgrim Investments reserves the right, upon 60 days'
prior notice, to restrict the frequency of, otherwise modify, or impose charges
of up to $5.00 upon exchanges. The total value of shares being exchanged must at
least equal the minimum investment requirement of the fund into which they are
being exchanged. The Fund may change or cancel its no charge policies at any
time, upon 60 days' written notice to shareholders.
Shares of any Class of the Fund generally may be exchanged for shares of
that same Class of any other open-end Pilgrim Fund or ING Fund without payment
of any additional sales charge. In most instances if you exchange and
subsequently redeem your shares, any applicable CDSC will be based on the full
period of the share ownership. Shareholders exercising the exchange privilege
with any other open-end Pilgrim fund or ING fund should carefully review the
Prospectus of that Fund. Exchanges of shares are sales and may result in a gain
or loss for federal and state income tax purposes. You will automatically be
assigned the telephone exchange privilege unless you mark the box on the Account
Application that signifies you do not wish to have this privilege. The exchange
privilege is only available in states where shares of the fund being acquired
may be legally sold.
You will automatically have the ability to request an exchange by calling
the Shareholder Service Agent at (800) 992-0180 unless you mark the box on the
Account Application that indicates that you do not wish to have the telephone
exchange privilege.
C-7
<PAGE>
SYSTEMATIC EXCHANGE PRIVILEGE. With an initial account balance of at
least $5,000 and subject to the information and limitations outlined above, you
may elect to have a specified dollar amount of shares systematically exchanged,
monthly, quarterly, semi-annually or annually (on or about the 10th of the
applicable month), from your account to an identically registered account in the
same Class of any other open-end Pilgrim Fund. This exchange privilege may be
modified at any time or terminated upon 60 days' written notice to shareholders.
SMALL ACCOUNTS. Due to the relatively high cost of handling small
investments, the Fund reserves the right upon 30 days' written notice to redeem,
at NAV, the shares of any shareholder whose account (except for IRAs) has a
value of less than $1,000, other than as a result of a decline in the NAV per
share.
With respect to Class Q shares, if you draw down a non-retirement account
so that its total value is less than the Fund minimum, you may be asked to
purchase more shares within 60 days. If you do not take action, the Fund may
close out your account and mail you the proceeds. Your account will not be
closed if its drop in value is due to the Fund's performance.
HOW TO REDEEM SHARES
Shares of the Fund will be redeemed at the NAV (less any applicable CDSC
and/or federal income tax withholding) next determined after receipt of a
redemption request in good form on any day the New York Stock Exchange is open
for business.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to have monthly, quarterly,
semi-annual or annual payments in any fixed amount of $100 or more made to
yourself, or to anyone else you properly designate, as long as the account has a
current value of at least $10,000. With respect to Class Q Shares, you may elect
to have monthly, quarterly, semi-annual or annual payments in any fixed amount
of $1,000 or more made to yourself or to anyone else you properly designate, as
long as the account has a current value of at least $250,000. For additional
information, contact the Shareholder Servicing Agent at (800) 992-0180, or see
the Fund's Statement of Additional Information.
PAYMENTS. Payment to shareholders for shares redeemed or repurchased
ordinarily will be made within three days after receipt by the Transfer Agent of
a written request in good order. The Fund may delay the mailing of a redemption
check until the check used to purchase the shares being redeemed has cleared
which may take up to 15 days or more. To reduce such delay, all purchases should
be made by bank wire or federal funds. The Fund may suspend the right of
redemption under certain extraordinary circumstances in accordance with the
Rules of the Securities and Exchange Commission. The Fund intends to pay in cash
for all shares redeemed, but under abnormal conditions that make payment in cash
harmful to the Fund, the Fund may make payment wholly or partly in securities at
their then current market value equal to the redemption price. In such case, the
Fund could elect to make payment in securities for redemptions in excess of
$250,000 or 1% of its net assets during any 90-day period for any one
shareholder. An investor may incur brokerage costs in converting such securities
to cash.
C-8
<PAGE>
MANAGEMENT OF THE FUND
INVESTMENT MANAGER. ING Pilgrim Investments has overall responsibility for
the management of the Fund. The Fund and ING Pilgrim Investments have entered
into an agreement that requires ING Pilgrim Investments to provide or oversee
all investment advisory and portfolio management services for the Fund. ING
Pilgrim Investments provides the Fund with office space, equipment and personnel
necessary to administer the Fund. The agreement with ING Pilgrim Investments can
be canceled by the Board of Directors of the Fund upon 60 days written notice.
Organized in December 1994, ING Pilgrim Investments is registered as an
investment adviser with the Securities and Exchange Commission. As of September
30, 2000, ING Pilgrim Investments managed over $20.7 billion in assets. ING
Pilgrim Investments bears its expenses of providing the services described
above. Investment management fees are computed and accrued daily and paid
monthly.
PARENT COMPANY AND DISTRIBUTOR. ING Pilgrim Investments and the
Distributor are indirect, wholly owned subsidiaries of ING Groep N.V. (NYSE:
ING) ("ING Group"). ING Group is a global financial institution active in the
field of insurance, banking and asset management in more than 65 countries, with
almost 100,000 employees.
SHAREHOLDER SERVICING AGENT. ING Pilgrim Group, Inc. serves as Shareholder
Servicing Agent for the Fund. The Shareholder Servicing Agent is responsible for
responding to written and telephonic inquiries from shareholders. The Fund pays
the Shareholder Servicing Agent a monthly fee on a per-contact basis, based upon
incoming and outgoing telephonic and written correspondence.
PORTFOLIO TRANSACTIONS. ING Pilgrim Investments will place orders to
execute securities transactions that are designed to implement the Fund's
investment objectives and policies. ING Pilgrim Investments will use its
reasonable efforts to place all purchase and sale transactions with brokers,
dealers and banks ("brokers") that provide "best execution" of these orders. In
placing purchase and sale transactions, ING Pilgrim Investments may consider
brokerage and research services provided by a broker to ING Pilgrim Investments
or its affiliates, and the Fund may pay a commission for effecting a securities
transaction that is in excess of the amount another broker would have charged if
ING Pilgrim Investments determines in good faith that the amount of commission
is reasonable in relation to the value of the brokerage and research services
provided by the broker. In addition, ING Pilgrim Investments may place
securities transactions with brokers that provide certain services to the Fund.
ING Pilgrim Investments also may consider a broker's sale of Fund shares if ING
Pilgrim Investments is satisfied that the Fund would receive best execution of
the transaction from that broker.
C-9
<PAGE>
DIVIDENDS, DISTRIBUTIONS & TAXES
DIVIDENDS AND DISTRIBUTIONS. The Fund generally distributes most or all of
its net earnings in the form of dividends. This Fund pays dividends, if any,
semi-annually.
Any dividends and distributions paid by the Fund will be automatically
reinvested in additional shares of the respective Class of that Fund, unless you
elect to receive distributions in cash. When a dividend or distribution is paid,
the NAV per share is reduced by the amount of the payment. You may, upon written
request or by completing the appropriate section of the Account Application in
the Pilgrim Prospectus, elect to have all dividends and other distributions paid
on a Class A, B, C, M or Q account in the Fund invested into a Pilgrim fund or
ING fund which offers Class A, B, C, M or Q shares.
FEDERAL TAXES. The following information is meant as a general summary for
U.S. shareholders. Please see the Fund's Statement of Additional Information for
additional information. You should rely your own tax adviser for advice about
the particular federal, state and local tax consequences to you of investing in
the Fund.
The Fund will distribute most of its net investment income and net capital
gains to its shareholders each year. Although the Fund will not be taxed on
amounts it distributes, most shareholders will be taxed on amounts they receive.
A particular distribution generally will be taxable as either ordinary income or
long-term capital gains. It does not matter how long you have held your Fund
shares or whether you elect to receive your distributions in cash or reinvest
them in additional Fund shares. For example, if the Fund designates a particular
distribution as a long-term capital gains distribution, it will be taxable to
you at your long-term capital gains rate.
Dividends declared by the Fund in October, November or December and paid
during the following January may be treated as having been received by
shareholders in the year the distributions were declared.
You will receive an annual statement summarizing your dividend and capital
gains distributions.
If you invest through a tax-deferred account, such as a retirement plan,
you generally will not have to pay tax on dividends until they are distributed
from the account. These accounts are subject to complex tax rules, and you
should consult your tax adviser about investment through a tax-deferred account.
There may be tax consequences to you if you sell or redeem Fund shares.
You will generally have a capital gain or loss, which will be long-term or
short-term, generally depending on how long you hold those shares. If you
exchange shares, you may be treated as if you sold them. You are responsible for
any tax liabilities generated by your transactions.
As with all mutual funds, the Fund may be required to withhold U.S.
federal income tax at the rate of 31% of all taxable distributions payable to
you if you fail to provide the Fund with your correct taxpayer identification
number or to make required certifications, or if you have been notified by the
IRS that you are subject to backup withholding. Backup withholding is not an
additional tax; rather, it is a way in which the IRS ensures it will collect
taxes otherwise due. Any amounts withheld may be credited against your U.S.
federal income tax liability.
C-10
<PAGE>
FINANCIAL HIGHLIGHTS
FINANCIAL
PILGRIM MAGNACAP FUND HIGHLIGHTS
--------------------------------------------------------------------------------
The information in the table below has been audited by KPMG LLP, independent
auditors.
<TABLE>
<CAPTION>
Class A
-----------------------------------------------
Year Ended June 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $ 17.69 17.07 15.92 16.69 14.03
Income from investment operations:
Net investment income (loss) $ 0.07 0.07 0.04 0.10 0.09
Net realized and unrealized gains on
investments $ (0.08) 2.37 3.02 4.16 2.87
Total from investment operations $ (0.01) 2.44 3.06 4.26 2.96
Less distributions from:
Net investment income $ 0.05 0.04 0.06 0.12 0.06
Net realized gains on investments $ 1.79 1.78 1.85 4.91 0.24
Net asset value, end of period $ 15.84 17.69 17.07 15.92 16.69
Total Return(2): % (0.36) 15.93 20.53 30.82 21.31
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 303,864 368,508 348,759 290,355 235,393
Ratios to average net assets:
Expenses(3) % 1.29 1.35 1.37 1.46 1.68
Net investment income (loss)(3) % 0.41 0.41 0.29 0.64 0.54
Portfolio turnover rate % 26 48 53 77 15
Class B
------------------------------------------------------
July 17,
1995(1) to
Year Ended June 30, June 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period $ 17.36 16.86 15.81 16.59 14.22
Income from investment operations:
Net investment income (loss) $ (0.05) (0.04) (0.04) -- 0.06
Net realized and unrealized gains on
investments $ (0.08) 2.32 2.97 4.13 2.61
Total from investment operations $ (0.13) 2.28 2.93 4.13 2.67
Less distributions from:
Net investment income $ -- -- 0.03 -- 0.06
Net realized gains on investments $ 1.79 1.78 1.85 4.91 0.24
Net asset value, end of period $ 15.44 17.36 16.86 15.81 16.59
Total Return(2): % (1.11) 15.12 19.76 29.92 18.98
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 87,167 116,227 77,787 37,427 10,509
Ratios to average net assets:
Expenses(3) % 1.99 2.05 2.07 2.16 2.38
Net investment income (loss)(3) % (0.29) (0.29) (0.41) (0.04) 0.07
Portfolio turnover rate % 26 48 53 77 15
Class C Class M
-------------------- ---------------------------------------------
Year June 1, July 17,
ended 1999(1) to 1995(1) to
June 30, June 30, Year ended June 30, June 30,
2000 1999 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
Per Share Operating Performance:
Net asset value, beginning of period $ 17.37 16.69 17.51 16.95 15.87 16.63 14.22
Income from investment operations:
Net investment income (loss) $ (0.10) -- (0.01) (0.01) -- 0.02 0.08
Net realized and unrealized gains on
investments $ (0.04) 0.68 (0.06) 2.35 2.98 4.16 2.63
Total from investment operations $ (0.14) 0.68 (0.07) 2.34 2.98 4.18 2.71
Less distributions from:
Net investment income $ -- -- 0.01 -- 0.05 0.03 0.06
Net realized gains on investments $ 1.79 -- 1.79 1.78 1.85 4.91 0.24
Net asset value, end of period $ 15.44 17.37 15.64 17.51 16.95 15.87 16.63
Total Return(2): % (1.17) 4.07 (0.71) 15.41 20.00 30.26 19.26
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 3,660 601 13,050 16,351 14,675 6,748 1,961
Ratios to average net assets:
Expenses(3) % 1.99 1.12 1.74 1.80 1.82 1.91 2.13
Net investment income (loss)(3) % (0.29) 0.42 (0.04) (0.04) (0.16) 0.22 0.32
Portfolio turnover rate % 26 48 26 48 53 77 15
</TABLE>
C-11
<PAGE>
Class Q
----------------
Nov. 22, 1999(1)
to
June 30, 2000
-------------
Per Share Operating Performance:
Net asset value, beginning of period $ 16.26
Income from investment operations:
Net investment income (loss) $ 0.05
Net realized and unrealized gains on investments $ (0.47)
Total from investment operations $ (0.42)
Less distributions from:
Net investment income $ --
Net realized gains on investments $ --
Net asset value, end of period $ 15.84
Total Return(2): % (2.58)
Ratios/Supplemental Data:
Net assets, end of period (000's) $ 9,928
Ratios to average net assets:
Expenses(3) % 1.24
Net investment income (loss)(3) % 0.46
Portfolio turnover % 26
----------
(1) Commencement of offering shares.
(2) Total return is calculated assuming reinvestment of all dividends and
capital gain distributions at net asset value and excluding the deduction
of sales charges. Total return for less than one year is not annualized.
(3) Annualized for periods less than one year.
C-12
<PAGE>
APPENDIX D
The following is a list of the ING Funds, which are managed by an affiliate of
ING Pilgrim Investments, and the Pilgrim Funds and the classes of shares of each
fund that are expected to be offered at or shortly after the Reorganization:
FUND CLASSES OFFERED
---- ---------------
ING FUNDS
U.S. EQUITY
Internet Fund A, B and C
Tax Efficient Equity Fund A, B and C
GLOBAL/INTERNATIONAL EQUITY
European Equity Fund A, B and C
Global Communications Fund A, B and C
Global Information Technology Fund A, B and C
FIXED INCOME
High Yield Bond Fund A, B and C
Intermediate Bond Fund A, B and C
Money Market Fund A, B, C and I
National Tax-Exempt Bond Fund A, B and C
PILGRIM FUNDS
U.S. EQUITY
Balanced Fund A, B, C, Q and T
Bank and Thrift Fund A and B
Convertible Fund A, B, C and Q
Corporate Leaders Trust Fund A
Growth and Income Fund A, B, C and Q
Growth + Value Fund A, B, C and Q
Growth Opportunities Fund A, B, C, Q, I and T
LargeCap Growth Fund A, B, C and Q
MagnaCap Fund A, B, C, Q and M
MidCap Growth Fund A, B, C and Q
MidCap Opportunities Fund A, B, C, Q and I
Research Enhanced Index Fund A, B, C, Q and I
SmallCap Growth Fund A, B, C, Q
SmallCap Opportunities Fund A, B, C, Q, I and T
GLOBAL/INTERNATIONAL EQUITY
Asia-Pacific Equity Fund A, B and M
Emerging Countries Fund A, B, C and Q
Gold Fund (to be renamed Precious Metals Fund) A
International Fund A, B, C and Q
International Core Growth Fund A, B, C and Q
International SmallCap Growth Fund A, B, C and Q
International Value Fund A, B, C and Q
Troika Dialog Russia Fund A
Worldwide Growth Fund A, B, C and Q
FIXED INCOME
GNMA Income Fund A, B, C, Q, M and T
High Yield Fund A, B, C, Q and M
High Yield Fund II A, B, C, Q and T
Lexington Money Market Trust A
Pilgrim Money Market Fund A, B and C
Strategic Income Fund A, B, C and Q
D-1
<PAGE>
APPENDIX E
As of November 1, 2000, the following persons owned beneficially or of
record 5% or more of the outstanding shares of the specified Class of MidCap
Value Fund:
<TABLE>
<CAPTION>
% OF CLASS % OF FUND % OF FUND
BEFORE BEFORE AFTER
NAME AND ADDRESS CLASS REORGANIZATION REORGANIZATION REORGANIZATION
---------------- ----- -------------- -------------- --------------
<S> <C> <C> <C> <C>
PaineWebber FBO Class C 19.68% 0.83%
Steven and Cindy Record Holder
Friedman JTWROS
27655 Middlebelt
Farmington Hills, MI
48334
</TABLE>
As of November 1, 2000, no persons owned beneficially or of record 5% or
more of the outstanding shares of any Class of LargeCap Leaders Fund or MagnaCap
Fund.
E-1
<PAGE>
PART B
PILGRIM INVESTMENT FUNDS, INC.
-------------------------------------------------------------------
Statement of Additional Information
______________, 2000
-------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Acquisition of the Assets and Liabilities of By and in Exchange for Shares of
Pilgrim MagnaCap Fund
Pilgrim MidCap Value Fund (a series of Pilgrim Investment Funds, Inc.)
(a series of Pilgrim Advisory Funds, Inc.) 7337 East Doubletree Ranch Road
7337 East Doubletree Ranch Road Scottsdale, Arizona 85258
Scottsdale, Arizona 85258
AND
Pilgrim LargeCap Leaders Fund
(a series of Pilgrim Advisory Funds, Inc.)
7337 East Doubletree Ranch Road
Scottsdale, Arizona 85258
</TABLE>
This Statement of Additional Information is available to the Shareholders of
both Pilgrim MidCap Value Fund and Pilgrim LargeCap Leaders Fund in connection
with a proposed transaction whereby all of the assets and liabilities of MidCap
Value Fund and LargeCap Leaders Fund, each a series of Pilgrim Advisory Funds,
Inc. will be transferred to Pilgrim MagnaCap Fund, a series of Pilgrim
Investment Funds, Inc., in exchange for shares of Pilgrim MagnaCap Fund.
This Statement of Additional Information of the Pilgrim Investment Funds, Inc.
consists of this cover page and the following documents, each of which was filed
electronically with the Securities and Exchange Commission and is incorporated
by reference herein:
1. The Statement of Additional Information for Pilgrim MagnaCap Fund, Pilgrim
MidCap Value Fund and Pilgrim LargeCap Leaders Fund dated November 1, 2000,
as filed on November 1, 2000.
2. The Financial Statements of Pilgrim MagnaCap Fund are included in the
Annual Report of Pilgrim Investment Funds, Inc. dated June 30, 2000, as
filed on September 7, 2000.
3. The Financial Statements of Pilgrim MidCap Value Fund are included in the
Annual Report of Pilgrim Advisory Funds, Inc. dated June 30, 2000, as filed
on September 9, 2000.
1
<PAGE>
4. The Financial Statements of Pilgrim LargeCap Leaders Fund are included in
the Annual Report of Pilgrim Advisory Funds, Inc. dated June 30, 2000, as
filed on September 7, 2000.
This Statement of Additional Information is not a prospectus. A Proxy
Statement/Prospectus dated _______________, 2000 relating to the Reorganizations
of Pilgrim MidCap Value Fund and Pilgrim LargeCap Leaders Fund may be obtained,
without charge, by writing to Pilgrim at 7337 East Doubletree Ranch Road,
Scottsdale, Arizona 85258 or calling (800) 992-0180. This Statement of
Additional Information should be read in conjunction with the Proxy
Statement/Prospectus.
2
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
Shown below are financial statements for each Fund and PRO FORMA financial
statements for the combined Fund, assuming the reorganization is consummated, as
of June 30, 2000. The first table presents Statements of Assets and Liabilities
(unaudited) for each Fund and PRO FORMA figures for the combined Fund. The
second table presents Statements of Operations (unaudited) for each Fund and PRO
FORMA figures for the combined Fund. The third table presents Portfolios of
Investments for each Fund (unaudited) and PRO FORMA figures for the combined
Fund. The tables are followed by the Notes to the Pro Forma Financial Statements
(unaudited).
STATEMENTS OF ASSETS AND LIABILITIES As of June 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
MagnaCap LargeCap MidCap Pro Forma Pro Forma
Fund Leaders Value Adjustments Combined
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in securities at
market value* $406,990,017 $36,730,816 $29,388,822 $473,109,655
Short-term investments at
amortized cost 13,465,911 2,114,000 3,232,000 18,811,911
Cash 18,204 134,890 10,210 163,304
Receivables:
Fund shares sold 110,400 99,464 6,457 216,321
Dividends and interest 526,663 30,282 18,894 575,839
Investment securities sold -- 164,029 82,197 246,226
Other 33,356 20,203 -- 53,559
Prepaid expenses 28,948 26,860 20,496 76,304
------------ ----------- ----------- ------------
Total Assets 421,173,499 39,320,544 32,759,076 493,253,119
------------ ----------- ----------- ------------
LIABILITIES:
Payable for investment securities
purchased 2,212,865 1,335,301 1,173,228 4,721,394
Payable for fund shares redeemed 555,164 89,266 83,628 728,058
Payable to affiliate 417,173 45,432 46,432 509,037
Other accrued expenses and liabilities 320,313 42,559 40,318 403,190
Total Liabilities 3,505,515 1,512,558 1,343,606 6,361,679
------------ ----------- ----------- ------------
NET ASSETS $417,667,984 $37,807,986 $31,415,470 $486,891,440
============ =========== =========== ============
NET ASSETS CONSIST OF:
Paid-in capital $286,457,020 $31,399,144 $28,853,491 $346,709,655
Undistributed net investment income 872,876 -- -- 872,876
Accumulated net realized gain on
investments 29,968,024 1,746,427 1,920,781 33,635,232
Net unrealized appreciation
(depreciation) of investments 100,370,064 4,662,415 641,198 105,673,677
------------ ----------- ----------- ------------
Net Assets $417,667,984 $37,807,986 $31,415,470 $486,891,440
============ =========== =========== ============
Class A:
Net Assets $303,863,754 $10,023,911 $ 8,874,538 $322,762,203
Shares outstanding 19,184,981 631,068 620,787 (60,434)(A) 20,376,402
Net asset value and redemption price
per share $ 15.84 $ 15.88 $ 14.30 $ 15.84
Maximum offering price per share $ 16.81 $ 16.85 $ 15.17 $ 16.81
Class B:
Net Assets $ 87,166,507 $21,543,981 $15,840,407 $124,550,895
Shares outstanding 5,645,177 1,407,914 1,149,578 (135,901)(A) 8,066,768
Net asset value and redemption price
per share $ 15.44 $ 15.30 $ 13.78 $ 15.44
Maximum offering price per share $ 15.44 $ 15.30 $ 13.78 $ 15.44
Class C
Net Assets $ 3,660,453 $ 1,363,558 $ 2,687,960 $ 7,711,971
Shares outstanding 237,011 89,006 195,028 (21,565)(A) 499,480
Net asset value and redemption price
per share $ 15.44 $ 15.32 $ 13.78 $ 15.44
Maximum offering price per share $ 15.44 $ 15.32 $ 13.78 $ 15.44
Class M:
Net Assets $ 13,049,521 $ 4,677,457 $ 3,873,298 $ 21,600,276
Shares outstanding 834,479 301,320 278,473 (33,180)(A) 1,381,092
Net asset value and redemption price
per share $ 15.64 $ 15.52 $ 13.91 $ 15.64
Maximum offering price per share $ 16.21 $ 16.09 $ 14.41 $ 16.21
Class Q:
Net Assets $ 9,927,749 $ 199,079 $ 139,267 $ 10,266,095
Shares outstanding 626,744 12,534 9,749 (915)(A) 648,112
Net asset value and redemption price
per share $ 15.84 $ 15.88 $ 14.29 $ 15.84
Maximum offering price per share $ 15.84 $ 15.88 $ 14.29 $ 15.84
*Cost of Securities $306,619,953 $32,068,401 $28,747,624 $367,435,978
</TABLE>
(A) Reflects new shares issued, net of retired shares of the Fund.
(Calculation: Net Assets / NAV per share)
3
<PAGE>
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
MagnaCap LargeCap MidCap Pro Forma Pro Forma
Fund Leaders Value Adjustments Combined
---------- ---------- ---------- ----------- ----------
Year Ended Year Ended Year Ended Year Ended Year Ended
June 30, June 30, June 30, June 30, June 30,
2000 2000 2000 2000 2000
------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends, net of foreign taxes $ 6,411,880 $ 447,922 $ 410,689 $ 7,270,491
Interest 1,359,240 110,892 89,322 1,559,454
------------ ----------- ----------- ------------
Total investment income 7,771,120 558,814 500,011 8,829,945
------------ ----------- ----------- ------------
EXPENSES:
Investment management fees 3,251,123 382,174 396,010 (319,486)(A) 3,709,821
Distribution expenses
Class A 994,817 22,870 29,081 9,480(A) 1,056,248
Class B 1,030,869 230,542 210,118 1,471,529
Class C 26,458 7,964 4,057 38,479
Class M 108,690 38,910 48,713 196,313
Class Q 14,864 79 137 15,080
Transfer agent and registrar fees 721,472 95,282 117,873 934,627
Shareholder Reporting 146,421 15,238 16,015 177,674
Registration and filing fees 100,509 55,876 51,863 (107,739)(B) 100,509
Recordkeeping and pricing fees 82,218 6,352 8,653 97,223
Professional fees 60,170 5,810 6,239 (12,049)(B) 60,170
Custodian fees 52,887 6,805 7,779 67,471
Shareholder servicing fees 31,735 4,056 5,230 41,021
Directors' fees 29,515 3,311 3,607 (6,918)(B) 29,515
Insurance 21,139 1,899 2,452 (4,351)(B) 21,139
Miscellaneous 13,160 1,097 2,341 16,598
Interest and credit facility fee 6,126 483 645 (1,128)(B) 6,126
Organization expense -- 27,603 27,602 (55,205)(B) --
------------ ----------- ----------- ------------ ------------
Total expenses 6,692,173 906,351 938,415 (497,396) 8,039,543
------------ ----------- ----------- ------------ ------------
Less:
Waived and reimbursed fees -- 31,375 48,900 (80,275)(C) --
Earnings credits 740 548 1,712 3,000
------------ ----------- ----------- ------------ ------------
Net expenses 6,691,433 874,428 887,803 (417,121) 8,036,543
------------ ----------- ----------- ------------ ------------
Net investment income (loss) 1,079,687 (315,614) (387,792) 417,121 793,402
------------ ----------- ----------- ------------ ------------
NET REALIZED AND UNREALIZED LOSS
ON INVESTMENTS:
Net realized gain from:
Investments 29,968,024 2,990,062 2,719,300 35,677,386
Net change in unrealized
appreciation (depreciation) of:
Investments (35,597,984) (1,997,225) (9,096,135) (46,691,344)
------------ ----------- ----------- ------------
Net loss from investments (5,629,960) 992,837 (6,376,835) (11,013,958)
------------ ----------- ----------- ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ (4,550,273) $ 677,223 $(6,764,627) $ 417,121 $(10,220,556)
============ =========== =========== ============ ============
</TABLE>
(A) Reflects adjustment in expenses due to effects of management contract and
12b-1 plan rates.
(B) Reflects adjustment in expenses due to elimination of duplicative services.
(C) Reflects change in the amounts that would be waived or reimbursed by
Pilgrim Investments, Inc. because Surviving Fund has no expense limit.
4
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
LargeCap MidCap
Magnacap Leaders Value Pro Forma
Shares Shares Shares Shares
------ ------ ------ ------
<S> <C> <C> <C> <C>
COMMON STOCK: 97.17%
AUTO MANUFACTURERS: 0.10%
10,600 10,600 Ford Motor Co.
AUTO PARTS & EQUIPMENT: 0.01%
1,388 1,388 @ Visteon Corp.
BANKS: 5.35%
50,000 50,000 Bank of America Corp.
35,000 35,000 Bank of New York Co., Inc.
90,000 12,950 102,950 Chase Manhattan Corp.
99,200 99,200 Comerica, Inc.
13,650 13,650 Commerce Bancshares, Inc.
40,000 40,000 Fifth Third Bancorp
100,000 100,000 Fleet Boston Financial Corp.
32,000 32,000 North Fork Bancorp
125,000 11,900 136,900 UnionBanCal Corp.
95,000 95,000 Wells Fargo & Co.
BEVERAGES: 3.77%
100,000 7,300 107,300 Anheuser-Busch Companies, Inc.
10,300 10,300 Coca-Cola Co.
10,000 10,000 Coors (Adolph)
190,000 15,100 205,100 PepsiCo, Inc.
CHEMICALS: 2.20%
70,030 9,994 80,024 Du Pont (E.I.) de Nemours & Co.
165,100 165,100 Praxair, Inc.
13,000 13,000 Rohm & Haas Co.
18,700 18,700 Sigma-Aldrich Corp.
COMMERCIAL SERVICES: 1.47%
15,500 15,500 @ Convergys Corp.
205,000 20,000 225,000 Equifax, Inc.
14,000 14,000 H & R Block, Inc.
COMPUTERS: 7.12%
100,000 8,900 108,900 @ Cisco Systems, Inc.
180,000 22,400 202,400 Compaq Computer Corp.
97,000 97,000 @ Computer Sciences Corp.
12,100 12,100 @ Dell Computer Corp.
49,500 4,000 53,500 Hewlett-Packard Co.
4,800 4,800 International Business Machines
76,000 6,500 82,500 @ Sun Microsystems, Inc.
COSMETICS/PERSONAL CARE: 0.13%
10,500 10,500 Colgate-Palmolive Co.
DISTRIBUTION/WHOLESALE: 0.19%
9,600 9,600 Fastenal Co.
15,000 15,000 Grainger (W.W.), Inc.
DIVERSIFIED FINANCIAL SERVICES: 4.47%
150,000 150,000 Alliance Capital Management Holdings
11,700 11,700 American Express Co.
97,500 8,150 105,650 Citigroup, Inc.
60,000 9,000 69,000 Fannie Mae
70,000 10,900 80,900 Freddie Mac
7,000 7,000 Merrill Lynch & Co., Inc.
ELECTRIC: 2.44%
22,000 22,000 Cinergy
120,000 10,500 130,500 Duke Energy Co.
150,000 20,900 170,900 Southern Co.
ELECTRICAL COMPONENTS & EQUIPMENT: 0.15%
17,700 17,700 @ American Power Conversion
ELECTRONICS: 2.93%
18,879 1,526 20,405 @ Agilent Technologies, Inc.
9,000 9,000 Johnson Controls, Inc.
10,800 10,800 Lernout & Hauspie Speech Products
105,000 14,000 119,000 Parker Hannifin Corp.
170,000 14,800 184,800 @ Solectron Corp.
ENVIRONMENTAL CONTROL: 0.16%
48,700 48,700 @ Republic Services, Inc.
FOOD: 2.02%
100,000 100,000 Heinz (H.J.) Co
14,300 14,300 Safeway, Inc.
250,000 250,000 @ Sara Lee Corp.
FOREST PRODUCTS & PAPER: 0.26%
15,100 15,100 Int'l Paper Co.
15,900 15,900 Mead Corp.
16,000 16,000 Willamette Industries
HAND/MACHINE TOOLS: 0.10%
19,200 19,200 Snap-On, Inc.
HEALTHCARE-PRODUCTS: 4.73%
9,000 9,000 Bausch & Lomb, Inc.
137,000 137,000 Baxter Int'l, Inc.
27,400 27,400 @ Edwards Lifesciences Corp.
105,000 6,300 111,300 Johnson & Johnson
20,000 20,000 Mallinckrodt, Inc.
Largecap Midcap
Magnacap Leaders Value Pro Forma
Market Value Market Value Market Value Market Value
------------- ------------ ------------ -------------
COMMON STOCK: 97.17%
AUTO MANUFACTURERS: 0.10%
Ford Motor Co. $ 455,800 $ 455,800
------------- ------------ ------------ -------------
AUTO PARTS & EQUIPMENT: 0.01%
@ Visteon Corp. 16,828 16,828
------------- ------------ ------------ -------------
BANKS: 5.35%
Bank of America Corp. $ 2,150,000 2,150,000
Bank of New York Co., Inc. 1,627,500 1,627,500
Chase Manhattan Corp. 4,145,625 596,509 4,742,134
Comerica, Inc. 4,451,600 4,451,600
Commerce Bancshares, Inc. $ 406,087 406,087
Fifth Third Bancorp 2,530,000 2,530,000
Fleet Boston Financial Corp. 3,400,000 3,400,000
North Fork Bancorp 484,000 484,000
UnionBanCal Corp. 2,320,312 220,894 2,541,206
Wells Fargo & Co. 3,681,250 3,681,250
------------- ------------ ------------ -------------
24,306,287 596,509 1,110,981 26,013,777
------------- ------------ ------------ -------------
BEVERAGES: 3.77%
Anheuser-Busch Companies, Inc. 7,468,750 545,219 8,013,969
Coca-Cola Co. 591,606 591,606
Coors (Adolph) 605,000 605,000
PepsiCo, Inc. 8,443,125 671,006 9,114,131
------------- ------------ ------------ -------------
15,911,875 1,807,831 605,000 18,324,706
------------- ------------ ------------ -------------
CHEMICALS: 2.20%
Du Pont (E.I.) de Nemours & Co. 3,063,813 437,238 3,501,051
Praxair, Inc. 6,180,931 6,180,931
Rohm & Haas Co. 448,500 448,500
Sigma-Aldrich Corp. 546,975 546,975
------------- ------------ ------------ -------------
9,244,744 437,238 995,475 10,677,457
------------- ------------ ------------ -------------
COMMERCIAL SERVICES: 1.47%
@ Convergys Corp. 804,062 804,062
Equifax, Inc. 5,381,250 525,000 5,906,250
H & R Block, Inc. 453,250 453,250
------------- ------------ ------------ -------------
5,381,250 - 1,782,312 7,163,562
------------- ------------ ------------ -------------
COMPUTERS: 7.12%
@ Cisco Systems, Inc. 6,356,250 565,706 6,921,956
Compaq Computer Corp. 4,601,250 572,600 5,173,850
@ Computer Sciences Corp. 7,244,688 7,244,688
@ Dell Computer Corp. 596,681 596,681
Hewlett-Packard Co. 6,181,312 499,500 6,680,812
International Business Machines 525,900 525,900
@ Sun Microsystems, Inc. 6,911,250 591,094 7,502,344
------------- ------------ ------------ -------------
31,294,750 3,351,481 34,646,231
------------- ------------ ------------ -------------
COSMETICS/PERSONAL CARE: 0.13%
Colgate-Palmolive Co. 628,688 628,688
------------- ------------ ------------ -------------
DISTRIBUTION/WHOLESALE: 0.19%
Fastenal Co. 486,000 486,000
Grainger (W.W.), Inc. 462,187 462,187
------------- ------------ ------------ -------------
948,187 948,187
------------- ------------ ------------ -------------
DIVERSIFIED FINANCIAL SERVICES: 4.47%
Alliance Capital Management Holdings 7,115,625 7,115,625
American Express Co. 609,863 609,863
Citigroup, Inc. 5,874,375 491,038 6,365,413
Fannie Mae 3,131,250 469,688 3,600,938
Freddie Mac 2,835,000 441,450 3,276,450
Merrill Lynch & Co., Inc. 804,425 804,425
------------- ------------ ------------ -------------
18,956,250 2,816,464 21,772,714
------------- ------------ ------------ -------------
ELECTRIC: 2.44%
Cinergy 559,625 559,625
Duke Energy Co. 6,765,000 591,938 7,356,938
Southern Co. 3,496,875 487,231 3,984,106
------------- ------------ ------------ -------------
10,261,875 1,079,169 559,625 11,900,669
------------- ------------ ------------ -------------
ELECTRICAL COMPONENTS & EQUIPMENT: 0.15%
@ American Power Conversion 722,381 722,381
------------- ------------ ------------ -------------
ELECTRONICS: 2.93%
@ Agilent Technologies, Inc. 1,392,326 112,493 1,504,819
Johnson Controls, Inc. 461,813 461,813
Lernout & Hauspie Speech Products 475,875 475,875
Parker Hannifin Corp. 3,596,250 479,500 4,075,750
@ Solectron Corp. 7,118,750 619,750 7,738,500
------------- ------------ ------------ -------------
12,107,326 732,243 1,417,188 14,256,757
------------- ------------ ------------ -------------
ENVIRONMENTAL CONTROL: 0.16%
@ Republic Services, Inc. 779,200 779,200
------------- ------------ ------------ -------------
FOOD: 2.02%
Heinz (H.J.) Co 4,375,000 4,375,000
Safeway, Inc. 645,288 645,288
@ Sara Lee Corp. 4,828,125 4,828,125
------------- ------------ ------------ -------------
9,203,125 645,288 9,848,413
------------- ------------ ------------ -------------
FOREST PRODUCTS & PAPER: 0.26%
Int'l Paper Co. 450,169 450,169
Mead Corp. 401,475 401,475
Willamette Industries 436,000 436,000
------------- ------------ ------------ -------------
450,169 837,475 1,287,644
------------- ------------ ------------ -------------
HAND/MACHINE TOOLS: 0.10%
Snap-On, Inc. 511,200 511,200
------------- ------------ ------------ -------------
HEALTHCARE-PRODUCTS: 4.73%
Bausch & Lomb, Inc. 696,375 696,375
Baxter Int'l, Inc. 9,632,812 9,632,812
@ Edwards Lifesciences Corp. 506,900 506,900
Johnson & Johnson 10,696,875 641,813 11,338,688
Mallinckrodt, Inc. 868,750 868,750
------------- ------------ ------------ -------------
20,836,587 641,813 1,565,125 23,043,525
------------- ------------ ------------ -------------
</TABLE>
5
<PAGE>
PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LargeCap MidCap
MagnaCap Leaders Value Pro Forma
Shares Shares Shares Shares
------ ------ ------ ------
<S> <C> <C> <C> <C>
HEALTHCARE-SERVICES: 0.12%
8,100 8,100 @ Wellpoint Health Network
HOME FURNISHINGS: 0.19%
13,000 13,000 Maytag Corp.
4,900 4,900 @@ Sony Corp. ADR
HOUSEHOLD PRODUCTS/WARES: 1.52%
98,500 98,500 Avery-Dennison Corp.
29,000 29,000 Dial Corp.
21,000 21,000 Fortune Brands, Inc.
INSURANCE: 6.36%
250,000 250,000 Aflac, Inc.
65,000 65,000 American General Corp.
69,687 5,025 74,712 American Int'l Group
16,800 16,800 AXA Financial, Inc.
48,800 5,600 54,400 Marsh & McLennan Cos.
15,000 15,000 Nationwide Financial Services, Inc.
INTERNET: 0.10%
8,900 8,900 @ America Online, Inc.
LEISURE TIME: 0.79%
155,000 23,200 178,200 Carnival Corp.
20,000 20,000 Royal Caribbean Cruises, Ltd.
LODGING: 0.13%
19,600 19,600 Starwood Hotels & Resorts Worldwide
MACHINERY-DIVERSIFIED: 1.10%
13,500 13,500 Deere & Co.
120,000 120,000 Dover Corp.
MEDIA: 2.49%
12,100 12,100 @ Comcast Corp.
7,700 7,700 Gannett Co., Inc.
13,000 13,000 Hispanic Broadcasting System
70,000 12,000 82,000 New York Times Co.
6,800 6,800 Time Warner, Inc.
180,000 180,000 Walt Disney Co.
MINING: 0.51%
70,000 15,600 85,600 Alcoa, Inc.
MISCELLANEOUS MANUFACTURING: 5.19%
19,000 19,000 Applied Power, Inc.- Class A
23,000 23,000 Donaldson Co., Inc.
184,200 12,300 196,500 General Electric Co.
153,750 153,750 Honeywell Int'l, Inc.
167,500 13,700 181,200 @@ Tyco Int'l, Ltd.
OIL & GAS PRODUCERS: 5.24%
7,500 7,500 Amerada Hess Corp.
11,000 11,000 Anadarko Petroleum Corp.
7,500 7,500 Apache Corp.
13,000 13,000 Burlington Resources, Inc.
94,000 6,900 100,900 Chevron Corp.
191,413 191,413 Conoco, Inc.
8,500 8,500 Devon Energy Corp.
6,600 6,600 Exxon Mobile Corp.
13,500 13,500 Helmerich & Payne, Inc.
8,500 8,500 @@ Royal Dutch Petroleum co. ADR
13,500 13,500 Santa Fe Int'l Corp.
101,933 101,933 @@ Total Fina Elf SA ADR
OIL & GAS SERVICES: 2.39%
69,700 69,700 Halliburton Co.
104,000 8,000 112,000 Schlumberger Ltd.
PHARMACEUTICALS: 4.12%
132,000 14,900 146,900 Abbott Laboratories
72,600 8,100 80,700 Merck & Co., Inc.
13,600 13,600 @@ Novartis AG ADR
69,300 69,300 Omnicare, Inc.
13,000 13,000 Pfizer, Inc.
110,000 110,000 Schering-Plough Corp.
PIPELINES: 0.21%
8,900 8,900 El Paso Energy Corp.
8,900 8,900 Enron Corp.
Largecap Midcap
Magnacap Leaders Value Pro Forma
Market Value Market Value Market Value Market Value
------------- ------------ ------------ -------------
HEALTHCARE-SERVICES: 0.12%
@ Wellpoint Health Network 586,744 586,744
------------- ------------ ------------ -------------
HOME FURNISHINGS: 0.19%
Maytag Corp. 479,375 479,375
@@ Sony Corp. ADR 462,131 462,131
------------- ------------ ------------ -------------
462,131 479,375 941,506
------------- ------------ ------------ -------------
HOUSEHOLD PRODUCTS/WARES: 1.52%
Avery-Dennison Corp. 6,611,813 6,611,813
Dial Corp. 300,875 300,875
Fortune Brands, Inc. 484,312 484,312
------------- ------------ ------------ -------------
6,611,813 -- 785,187 7,397,000
------------- ------------ ------------ -------------
INSURANCE: 6.36%
Aflac, Inc. 11,484,375 11,484,375
American General Corp. 3,965,000 3,965,000
American Int'l Group 8,188,223 590,437 8,778,660
AXA Financial, Inc. 571,200 571,200
Marsh & McLennan Cos. 5,096,550 584,850 5,681,400
Nationwide Financial Services, Inc. 493,125 493,125
------------- ------------ ------------ -------------
28,734,148 1,746,487 493,125 30,973,760
------------- ------------ ------------ -------------
INTERNET: 0.10%
@ America Online, Inc. 469,475 469,475
------------- ------------ ------------ -------------
LEISURE TIME: 0.79%
Carnival Corp. 3,022,500 452,400 3,474,900
Royal Caribbean Cruises, Ltd. 370,000 370,000
------------- ------------ ------------ -------------
3,022,500 452,400 370,000 3,844,900
------------- ------------ ------------ -------------
LODGING: 0.13%
Starwood Hotels & Resorts Worldwide 638,225 638,225
------------- ------------ ------------ -------------
MACHINERY-DIVERSIFIED: 1.10%
Deere & Co. 499,500 499,500
Dover Corp. 4,867,500 4,867,500
------------- ------------ ------------ -------------
4,867,500 499,500 5,367,000
------------- ------------ ------------ -------------
MEDIA: 2.49%
@ Comcast Corp. 490,050 490,050
Gannett Co., Inc. 460,556 460,556
Hispanic Broadcasting System 430,625 430,625
New York Times Co. 2,765,000 474,000 3,239,000
Time Warner, Inc. 516,800 516,800
Walt Disney Co. 6,986,250 6,986,250
------------- ------------ ------------ -------------
9,751,250 1,467,406 904,625 12,123,281
------------- ------------ ------------ -------------
MINING: 0.51%
Alcoa, Inc. 2,030,000 452,400 2,482,400
------------- ------------ ------------ -------------
MISCELLANEOUS MANUFACTURING: 5.19%
Applied Power, Inc.- Class A 636,500 636,500
Donaldson Co., Inc. 454,250 454,250
General Electric Co. 9,762,600 651,900 10,414,500
Honeywell Int'l, Inc. 5,179,453 5,179,453
@@ Tyco Int'l, Ltd. 7,935,313 649,038 8,584,351
------------- ------------ ------------ -------------
22,877,366 1,300,938 1,090,750 25,269,054
------------- ------------ ------------ -------------
OIL & GAS PRODUCERS: 5.24%
Amerada Hess Corp. 463,125 463,125
Anadarko Petroleum Corp. 542,437 542,437
Apache Corp. 441,094 441,094
Burlington Resources, Inc. 497,250 497,250
Chevron Corp. 7,972,375 585,206 8,557,581
Conoco, Inc. 4,701,582 4,701,582
Devon Energy Corp. 477,594 477,594
Exxon Mobile Corp. 518,100 518,100
Helmerich & Payne, Inc. 504,563 504,563
@@ Royal Dutch Petroleum co. ADR 523,281 523,281
Santa Fe Int'l Corp. 471,656 471,656
@@ Total Fina Elf SA ADR 7,829,728 7,829,728
------------- ------------ ------------ -------------
20,503,685 2,666,274 2,358,032 25,527,991
------------- ------------ ------------ -------------
OIL & GAS SERVICES: 2.39%
Halliburton Co. 3,288,969 3,288,969
Schlumberger Ltd. 7,761,000 597,000 8,358,000
------------- ------------ ------------ -------------
11,049,969 597,000 11,646,969
------------- ------------ ------------ -------------
PHARMACEUTICALS: 4.12%
Abbott Laboratories 5,882,250 663,981 6,546,231
Merck & Co., Inc. 5,562,975 620,663 6,183,638
@@ Novartis AG ADR 544,000 544,000
Omnicare, Inc. 628,031 628,031
Pfizer, Inc. 624,000 624,000
Schering-Plough Corp. 5,555,000 5,555,000
------------- ------------ ------------ -------------
17,000,225 2,452,644 628,031 20,080,900
------------- ------------ ------------ -------------
PIPELINES: 0.21%
El Paso Energy Corp. 453,344 453,344
Enron Corp. 574,050 574,050
------------- ------------ ------------ -------------
574,050 453,344 1,027,394
------------- ------------ ------------ -------------
</TABLE>
6
<PAGE>
PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LargeCap MidCap
MagnaCap Leaders Value Pro Forma
Shares Shares Shares Shares
------ ------ ------ ------
<S> <C> <C> <C> <C>
RETAIL: 8.86%
100,000 8,500 108,500 @ Best Buy Co., Inc.
17,000 17,000 @ B.J.'s Wholesale Club, Inc.
30,400 30,400 Blockbuster, Inc.
4,200 4,200 Gap, Inc.
65,500 9,500 75,000 Home Depot, Inc.
63,000 63,000 Lowe's Cos.
300,000 14,400 314,400 McDonald's Corp.
29,000 29,000 Ross Stores
17,100 17,100 Sears, Roebuck and Co.
22,700 22,700 @ Shopko Stores, Inc.
52,000 8,300 60,300 Target Corp.
190,000 190,000 TJX Companies, Inc.
145,000 17,000 162,000 @ Tricon Global Restaurants, Inc.
19,700 19,700 Walgreen Co.
77,500 8,300 85,800 Wal-Mart Stores, Inc.
SAVINGS & LOANS: 2.73%
242,865 30,000 272,865 Charter One Financial, Inc.
69,200 69,200 Golden West Financial Corp.
31,000 31,000 Sovereign Bancorp, Inc.
120,000 17,500 137,500 Washington Mutual, Inc.
SEMICONDUCTORS: 2.82%
30,000 30,000 @ Altera Corp.
63,550 4,550 68,100 Intel Corp.
8,000 8,000 @ Lattice Semiconductor Corp.
8,800 8,800 @ National Semiconductor Corp.
7,600 7,600 Texas Instruments, Inc.
SOFTWARE: 2.31%
166,000 166,000 Automatic Data Processing
50,000 50,000 @ BMC Software, Inc.
6,600 6,600 @ Microsoft Corp.
TELECOMMUNICATIONS: 11.12%
20,000 20,000 @ ADC Telecommunications, Inc.
19,000 19,000 @ Andrew Corp.
65,000 65,000 Alltel Corp.
130,000 14,043 144,043 AT&T Corp.
90,000 8,720 98,720 @ Bell Atlantic Corp.
16,000 16,000 @ Broadwing, Inc.
13,000 13,000 Centurytel, Inc.
17,500 17,500 @ Crown Castle Int'l Corp.
30,000 30,000 GTE Corp.
8,600 8,600 Lucent Technologies, Inc.
10,896 10,896 Motorola, Inc.
160,000 9,900 169,900 @@ Nokia OYJ ADR @ PanAmSat Corp.
13,000 13,000 @ PanAmSat Corp.
145,500 11,600 157,100 @ SBC Communications, Inc.
142,500 142,500 @ Tellabs, Inc.
175,000 10,600 185,600 Worldcom, Inc.
TOBACCO: 1.16%
190,000 22,800 212,800 Philip Morris Companies, Inc.
TRANSPORTATION: 0.11%
13,500 13,500 FedEx Corp.
Total Long-Term Investments
(Cost: $306,619,953, $32,068,401,
$28,747,623, $367,435,977)
SHORT-TERM INVESTMENTS: 3.86%
COMMERCIAL PAPER: 2.76%
13,471,000 13,471,000 General Electric, 6.800%, due 07/03/00
REPURCHASE AGREEMENTS: 1.10%
State Street Bank & Trust Repurchase
Agreement 6.200% Due 07/03/2000
(Collateralized by U.S. Treasury Bills,
12.500% Due 08/15/2014, Market Value
2,114,000 2,114,000 $2,160,875)
State Street Repurchase Agreement, 6.200%
due 07/03/00 (Collateralized by $2,255,000
U.S. Treasury Bonds, 12.500% Due 08/15/14
3,232,000 3,232,000 Market Value $3,303,575)
Total Short-Term Investments (Cost:
$13,465,911, $2,114,000, $3,232,000,
18,817,000 $18,811,911)
TOTAL INVESTMENTS IN SECURITIES
(COST $320,085,863, $34,182,401,
$32,057,995, $386,326,259)*
OTHER ASSETS AND LIABILITIES-NET
NET ASSETS
Largecap Midcap
Magnacap Leaders Value Pro Forma
Market Value Market Value Market Value Market Value
------------- ------------ ------------ -------------
RETAIL: 8.86%
@ Best Buy Co., Inc. 6,325,000 537,625 6,862,625
@ B.J.'s Wholesale Club, Inc. 561,000 561,000
Blockbuster, Inc. 294,500 294,500
Gap, Inc. 131,250 131,250
Home Depot, Inc. 3,270,906 474,406 3,745,312
Lowe's Cos. 2,586,938 2,586,938
McDonald's Corp. 9,881,250 474,300 10,355,550
Ross Stores 494,813 494,813
Sears, Roebuck and Co. 557,887 557,887
@ Shopko Stores, Inc. 349,013 349,013
Target Corp. 3,016,000 481,400 3,497,400
TJX Companies, Inc. 3,562,500 3,562,500
@ Tricon Global Restaurants, Inc. 4,096,250 480,250 4,576,500
Walgreen Co. 634,094 634,094
Wal-Mart Stores, Inc. 4,465,937 478,287 4,944,224
------------ ----------- ----------- ------------
37,204,781 3,769,249 2,179,576 43,153,606
------------ ----------- ----------- ------------
SAVINGS & LOANS: 2.73%
Charter One Financial, Inc. 5,585,895 690,000 6,275,895
Golden West Financial Corp. 2,824,225 2,824,225
Sovereign Bancorp, Inc. 217,969 217,969
Washington Mutual, Inc. 3,465,000 505,312 3,970,312
------------ ----------- ----------- ------------
11,875,120 505,312 907,969 13,288,401
------------ ----------- ----------- ------------
SEMICONDUCTORS: 2.82%
@ Altera Corp. 3,058,125 3,058,125
Intel Corp. 8,495,841 608,278 9,104,119
@ Lattice Semiconductor Corp. 553,000 553,000
@ National Semiconductor Corp. 499,400 499,400
Texas Instruments, Inc. 522,025 522,025
------------ ----------- ----------- ------------
11,553,966 1,130,303 1,052,400 13,736,669
------------ ----------- ----------- ------------
SOFTWARE: 2.31%
Automatic Data Processing 8,891,375 8,891,375
@ BMC Software, Inc. 1,824,219 1,824,219
@ Microsoft Corp. 528,000 528,000
------------ ----------- ----------- ------------
10,715,594 528,000 11,243,594
------------ ----------- ----------- ------------
TELECOMMUNICATIONS: 11.12%
@ ADC Telecommunications, Inc. 1,677,500 1,677,500
@ Andrew Corp. 637,687 637,687
Alltel Corp. 4,025,937 4,025,937
AT&T Corp. 4,111,250 444,110 4,555,360
@ Bell Atlantic Corp. 4,573,125 443,085 5,016,210
@ Broadwing, Inc. 415,000 415,000
Centurytel, Inc. 373,750 373,750
@ Crown Castle Int'l Corp. 638,750 638,750
GTE Corp. 1,867,500 1,867,500
Lucent Technologies, Inc. 509,550 509,550
Motorola, Inc. 316,665 316,665
@@ Nokia OYJ ADR @ PanAmSat Corp. 7,990,000 494,381 8,484,381
SBC Communications, Inc. 567,938 567,938
@ Tellabs, Inc. 6,292,875 501,700 6,794,575
@ Worldcom, Inc. 9,752,344 9,752,344
8,028,125 486,275 8,514,400
------------ ----------- ----------- ------------
46,641,156 2,879,101 4,627,290 54,147,547
------------ ----------- ----------- ------------
TOBACCO: 1.16%
Philip Morris Companies, Inc. 5,046,875 605,625 5,652,500
------------ ----------- ----------- ------------
TRANSPORTATION: 0.11%
FedEx Corp. 513,000 513,000
------------ ----------- ----------- ------------
Total Long-Term Investments
(Cost: $306,619,953, $32,068,401,
$28,747,623, $367,435,977) 406,990,017 36,730,816 29,388,822 473,109,655
------------ ----------- ----------- ------------
SHORT-TERM INVESTMENTS: 3.86%
COMMERCIAL PAPER: 2.76%
General Electric, 6.800%, due 07/03/00 13,465,911
REPURCHASE AGREEMENTS: 1.10%
State Street Bank & Trust Repurchase
Agreement 6.200% Due 07/03/2000
(Collateralized by U.S. Treasury Bills,
12.500% Due 08/15/2014, Market Value
$2,160,875) 2,114,000
State Street Repurchase Agreement, 6.200%
due 07/03/00 (Collateralized by $2,255,000
U.S. Treasury Bonds, 12.500% Due 08/15/14
Market Value $3,303,575) 3,232,000
Total Short-Term Investments (Cost:
$13,465,911, $2,114,000, $3,232,000,
$18,811,911) 13,465,911 2,114,000 3,232,000 18,811,911
------------ ----------- ----------- ------------
TOTAL INVESTMENTS IN SECURITIES
(COST $320,085,863, $34,182,401,
$32,057,995, $386,326,259)* 420,455,928 38,844,816 32,620,822 491,921,566
OTHER ASSETS AND LIABILITIES-NET (2,787,944) (1,036,830) (1,205,352) (5,030,126)
------------ ----------- ----------- ------------
NET ASSETS $417,667,984 $37,807,986 $31,415,470 $486,891,440
============ =========== =========== ============
</TABLE>
@ Non-income producing security
@@ Foreign Issuer
ADR American Depository Receipt
7
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF COMBINATION:
On November 2, 2000, the Boards of Pilgrim MagnaCap Fund ("MagnaCap Fund"),
Pilgrim LargeCap Leaders Fund ("LargeCap Leaders Fund") and Pilgrim MidCap Value
Fund ("MidCap Value Fund"), approved an Agreement and Plan of Reorganization
(the "Plan") whereby, subject to approval by the shareholders of LargeCap
Leaders Fund and MidCap Value Fund, MagnaCap Fund will acquire all of the assets
of the LargeCap Leaders Fund and MidCap Value Fund subject to the liabilities of
such Funds, in exchange for a number of shares equal to the pro rata net assets
of shares of the MagnaCap Fund (the "Merger").
The Merger will be accounted for as a tax free merger of investment
companies. The pro forma combined financial statements are presented for the
information of the reader and may not necessarily be representative of what the
actual combined financial statements would have been had the reorganization
occurred at June 30, 2000. The unaudited pro forma portfolio of investments, and
statement of assets and liabilities reflect the financial position of MagnaCap
Fund, LargeCap Leaders Fund and MidCap Value Fund at June 30, 2000. The
unaudited pro forma statement of operations reflects the results of operations
of MagnaCap Fund, LargeCap Leaders Fund and MidCap Value Fund for the year ended
June 30, 2000. These statements have been derived from the Funds' respective
books and records utilized in calculating daily net asset value at the dates
indicated above for MagnaCap Fund, LargeCap Leaders Fund and MidCap Value Fund
under generally accepted accounting principles. The historical cost of
investment securities will be carried forward to the surviving entity and
results of operations of MagnaCap Fund for pre-combination periods will not be
restated.
The pro forma portfolio of investments, and statements of assets and
liabilities and operations should be read in conjunction with the historical
financial statements of the Funds incorporated by reference in the Statements of
Additional Information.
NOTE 2 - SECURITY VALUATION:
Investments in equity securities traded on a national securities exchange
or included on the NASDAQ National Market System are valued at the last reported
sale price. Securities traded on an exchange or NASDAQ for which there has been
no sale and securities traded in the over-the-counter-market are valued at the
mean between the last reported bid and ask prices. U.S. Government obligations
are valued by using market quotations or independent pricing services which uses
prices provided by market-makers or estimates of market values obtained from
yield data relating to instruments or securities with similar characteristics.
All investments quoted in foreign currencies will be valued daily in U.S.
Dollars on the basis of the foreign currency exchange rates prevailing at the
time such valuation is determined by each Fund's Custodian. Securities for which
market quotations are not readily available are valued at their respective fair
values as determined in good faith and in accordance with policies set by the
Board of Directors. Investments in securities maturing in less than 60 days are
valued at cost, which, when combined with accrued interest, approximates market
value.
8
<PAGE>
NOTE 3 - CAPITAL SHARES:
The pro forma net asset value per share assumes additional shares of common
stock issued in connection with the proposed acquisition of LargeCap Leaders
Fund and MidCap Value Fund by MagnaCap Fund as of June 30, 2000. The number of
additional shares issued was calculated by dividing the net asset value of each
Class of LargeCap Leaders Fund and MidCap Value Fund by the respective Class net
asset value per share of MagnaCap Fund.
NOTE 4 - PRO FORMA ADJUSTMENTS:
The accompanying pro forma financial statements reflect changes in fund
shares as if the merger had taken place on June 30, 2000. LargeCap Leaders Fund
and MidCap Value Fund expenses were adjusted assuming MagnaCap Fund's fee
structure was in effect for the year ended June 30, 2000.
NOTE 5 - MERGER COSTS:
Merger costs are estimated at approximately $125,000 and are not included
in the pro forma statement of operations since these costs are not reoccurring.
These costs represent the estimated expense of both Funds carrying out their
obligations under the Plan and consist of management's estimate of legal fees,
accounting fees, printing costs and mailing charges related to the proposed
merger. ING Pilgrim Investments, Investment Adviser to the Funds, will bear half
the cost of the Reorganization. The Funds will bear the other half of the
expenses relating to the proposed Reorganization.
NOTE 6 - FEDERAL INCOME TAXES:
It is the policy of the Funds, to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute substantially all of their net investment income and any net
realized gains to their shareholders. Therefore, a federal income tax or excise
tax provision is not required. In addition, by distributing during each calendar
year substantially all of its net investment income and net realized capital
gains, each Fund intends not to be subject to any federal excise tax.
The Board of Directors intends to offset any net capital gains with any
available capital loss carryforward until each carryforward has been fully
utilized or expires. In addition, no capital gain distribution shall be made
until the capital loss carryforward has been fully utilized or expires.
9
<PAGE>
SCHEDULE REFLECTING PROFORMA COMBINED EXPENSE RATIOS
Shown below are presentations of Annual Fund Operating Expenses on a PRO
FORMA basis. The table PRO FORMA I presents annual fund operating expenses
assuming that the Reorganizations with both the MidCap Value Fund and the
LargeCap Leaders Fund are consummated. The table PRO FORMA II presents annual
fund operating expenses assuming that the Reorganization with the MidCap Value
Fund is consummated, but not the Reorganization with the LargeCap Leaders Fund.
The table PRO FORMA III presents annual fund operating expenses assuming that
the Reorganization with the LargeCap Leaders Fund is consummated, but not the
Reorganization with the MidCap Value Fund. PRO FORMA tables II and III are
presented in case one of the Reorganizations is not consummated, which could
occur if the Reorganization is cancelled or because shareholders do not approve
it. These abbreviated PRO FORMA presentations are presented, and not full PRO
FORMA presentations of financial statements, because the latter are not
practicable and may be of limited utility.
PROFORMA I: Proposed Reorganization of MidCap Value Fund and LargeCap Leaders
Fund into Magna Cap Fund (1)
Distribution
and Shareholder Total Fund
Management Servicing (12b-1) Other Operating
Fees Fees (2) Expenses Expenses
---------- ----------------- -------- ---------
Class A
MidCap Value Fund 0.85% 0.25% 0.63% 1.73%
LargeCap Leaders Fund 0.85% 0.25% 0.59% 1.69%
MagnaCap Fund 0.71% 0.30% 0.28% 1.29%
Pro Forma 0.70% 0.30% 0.27% 1.27%
Class B
MidCap Value Fund 0.85% 1.00% 0.63% 2.48%
LargeCap Leaders Fund 0.85% 1.00% 0.59% 2.44%
MagnaCap Fund 0.71% 1.00% 0.28% 1.99%
Pro Forma 0.70% 1.00% 0.27% 1.97%
Class C
MidCap Value Fund 0.85% 1.00% 0.63% 2.48%
LargeCap Leaders Fund 0.85% 1.00% 0.59% 2.44%
MagnaCap Fund 0.71% 1.00% 0.28% 1.99%
Pro Forma 0.70% 1.00% 0.27% 1.97%
Class M
MidCap Value Fund 0.85% 0.75% 0.63% 2.23%
LargeCap Leaders Fund 0.85% 0.75% 0.59% 2.19%
MagnaCap Fund 0.71% 0.75% 0.28% 1.74%
Pro Forma 0.70% 0.75% 0.27% 1.72%
Class Q
MidCap Value Fund 0.85% 0.25% 0.63% 1.73%
LargeCap Leaders Fund 0.85% 0.25% 0.59% 1.69%
MagnaCap Fund 0.71% 0.25% 0.28% 1.24%
Pro Forma 0.70% 0.25% 0.27% 1.22%
----------
(1) The Surviving Fund's and Disappearing Funds' fiscal year end is June 30.
Expenses of the Funds are based upon expenses incurred by each Fund for the
fiscal year ended June 30, 2000, with the exception of MidCap Value Fund
and LargeCap Leaders Fund, which had a 0.15% decrease in management fees
effective July 26, 2000 which is reflected in these rates. Pro Forma
expenses are estimated and adjusted for anticipated contractual changes.
(2) As a result of distribution (Rule 12b-1) fees, a long term investor may pay
more than the economic equivalent of the maximum sales charge allowed by
the Rules of the National Association of Securities Dealers, Inc.
10
<PAGE>
PRO FORMA II: Proposed Reorganization of MidCap Value Fund into MagnaCap Fund
(assumes reorganization of LargeCap Leaders Fund does not occur) (1)
Distribution
and Shareholder Total Fund
Management Servicing (12b-1) Other Operating
Fees Fees (2) Expenses Expenses
---------- ----------------- -------- ---------
Class A
MidCap Value Fund 0.85% 0.25% 0.63% 1.73%
MagnaCap Fund 0.71% 0.30% 0.28% 1.29%
Pro Forma 0.70% 0.30% 0.28% 1.28%
Class B
MidCap Value Fund 0.85% 1.00% 0.63% 2.48%
MagnaCap Fund 0.71% 1.00% 0.28% 1.99%
Pro Forma 0.70% 1.00% 0.28% 1.98%
Class C
MidCap Value Fund 0.85% 1.00% 0.63% 2.48%
MagnaCap Fund 0.71% 1.00% 0.28% 1.99%
Pro Forma 0.70% 1.00% 0.28% 1.98%
Class M
MidCap Value Fund 0.85% 0.75% 0.63% 2.23%
MagnaCap Fund 0.71% 0.75% 0.28% 1.74%
Pro Forma 0.70% 0.75% 0.28% 1.73%
Class Q
MidCap Value Fund 0.85% 0.25% 0.63% 1.73%
MagnaCap Fund 0.71% 0.25% 0.28% 1.24%
Pro Forma 0.70% 0.25% 0.28% 1.23%
----------
(1) The Surviving Fund's and Disappearing Funds' fiscal year end is June 30.
Expenses of the Funds are based upon expenses incurred by each Fund for the
fiscal year ended June 30, 2000, with the exception of MidCap Value Fund
which had a 0.15% decrease in management fees effective July 26, 2000 which
is reflected in these rates. Pro Forma expenses are estimated and adjusted
for anticipated contractual changes.
(2) As a result of distribution (Rule 12b-1) fees, a long term investor may pay
more than the economic equivalent of the maximum sales charge allowed by
the Rules of the National Association of Securities Dealers, Inc.
11
<PAGE>
PROFORMA III: Proposed Reorganization of LargeCap Leaders Fund into MagnaCap
Fund (assumes reorganization of MidCap Value Fund does not occur) (1)
Distribution
and Shareholder Total Fund
Management Servicing (12b-1) Other Operating
Fees Fees (2) Expenses Expenses
---------- ----------------- -------- ---------
Class A
LargeCap Leaders Fund 0.85% 0.25% 0.59% 1.69%
MagnaCap Fund 0.71% 0.30% 0.28% 1.29%
Pro Forma 0.70% 0.30% 0.28% 1.28%
Class B
LargeCap Leaders Fund 0.85% 1.00% 0.59% 2.44%
MagnaCap Fund 0.71% 1.00% 0.28% 1.99%
Pro Forma 0.70% 1.00% 0.28% 1.98%
Class C
LargeCap Leaders Fund 0.85% 1.00% 0.59% 2.44%
MagnaCap Fund 0.71% 1.00% 0.28% 1.99%
Pro Forma 0.70% 1.00% 0.28% 1.98%
Class M
LargeCap Leaders Fund 0.85% 0.75% 0.59% 2.19%
MagnaCap Fund 0.71% 0.75% 0.28% 1.74%
Pro Forma 0.70% 0.75% 0.28% 1.73%
Class Q
LargeCap Leaders Fund 0.85% 0.25% 0.59% 1.69%
MagnaCap Fund 0.71% 0.25% 0.28% 1.24%
Pro Forma 0.70% 0.25% 0.28% 1.23%
----------
(1) The Surviving Fund's and Disappearing Funds' fiscal year end is June 30.
Expenses of the Funds are based upon expenses incurred by each Fund for the
fiscal year ended June 30, 2000, with the exception of LargeCap Leaders
Fund which had a 0.15% decrease in management fees effective July 26, 2000
which is reflected in these rates. Pro Forma expenses are estimated and
adjusted for anticipated contractual changes.
(2) As a result of distribution (Rule 12b-1) fees, a long term investor may pay
more than the economic equivalent of the maximum sales charge allowed by
the Rules of the National Association of Securities Dealers, Inc.
12
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Reference is made to Article VIII, Section 8 of the Registrant's By-Laws.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against policy as expressed in the Act and
is, therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Director, officer or controlling person of the Registrant
in the successful defense of any action, a suit or proceeding) is asserted by
such Director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 16. EXHIBITS
(1) (A) Form of Articles of Restatement of Articles of Incorporation (1)
(B) Form of Articles of Amendment to Articles of Incorporation (2)
(C) Form of Articles Supplementary designating Class C and Class Q (4)
(D) Form of Articles Supplementary designating Class Q (6)
(2) Form of Amended and Restated Bylaws of Registrant (1)
(3) Not Applicable
(4) (A) Form of Agreement and Plan of Reorganization between Pilgrim
Investment Funds, Inc., on behalf of Pilgrim MagnaCap Fund and Pilgrim
Advisory Funds, Inc. on behalf of Pilgrim MidCap Value Fund.
(B) Form of Agreement and Plan of Reorganization between Pilgrim
Investment Funds, Inc., on behalf of Pilgrim MagnaCap Fund and Pilgrim
Advisory Funds, Inc. on behalf of Pilgrim LargeCap Leaders Fund.
(5) See Exhibits 1 and 2
(6) (A) Form of Investment Management Agreement-High Yield Fund (7)
(B) Form of Investment Management Agreement-MagnaCap Fund (7)
(7) (A) Underwriting Agreement between the Registrant and Pilgrim Securities,
Inc.
(B) Form of Selling Group Agreement (1)
(8) Not Applicable
(9) (A) Form of Custody Agreement (1)
(B) Form of Recordkeeping Agreement (1)
<PAGE>
(10) (A) Form of Service and Distribution Plan for Class A Shares (1)
(B) Form of Service and Distribution Plan for Class B Shares (3)
(C) Form of Service and Distribution Plan for Class M Shares (1)
(D) Form of Service and Distribution Plan for Class C Shares (3)
(E) Form of Service Plan for Class Q Shares (5)
(G) Form of Amended and Restated Multiple Class Plan Adopted Pursuant to
Rule 18f-3 (5)
(11) Form of Opinion and Consent of Counsel
(12) Forms of Opinions and Consents of Counsel supporting tax matters and
consequences
(13) (A) Form of Shareholder Service Agreement (4)
(B) Form of Amended and Restated Expense Limitation Agreement (4)
(14) Consent of Independent Auditors
(15) Not Applicable
(16) Filed herewith
(17) Not Applicable
----------
(1) Filed as an exhibit to Post-Effective Amendment No. 38 to Registrant's Form
N-1A Registration Statement on October 30, 1997 and incorporated herein by
reference.
(2) Filed as an exhibit to Post-Effective Amendment No. 40 to Registrant's Form
N-1A Registration Statement on October 27, 1998 and incorporated herein by
reference.
(3) Filed as an exhibit to Post-Effective Amendment No. 41 to Registrant's Form
N-1A Registration Statement on March 25, 1999 and incorporated herein by
reference.
(4) Filed as an exhibit to Post-Effective Amendment No. 42 to Registrant's Form
N-1A Registration Statement on May 24, 1999 and incorporated herein by
reference.
(5) Filed as an exhibit to Post-Effective Amendment No. 44 to Registrant's Form
N-1A Registration Statement on October 29, 1999 and incorporated herein by
reference.
(6) Filed as an exhibit to Post-Effective Amendment No. 46 to Registrant's Form
N-1A Registration Statement on January 4, 2000.
(7) Filed as an exhibit to Post-Effective Amendment No. 47 to Registrant's Form
N-1A Registration Statement on November 1, 2000.
2
<PAGE>
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act of 1933 [17
CFR 230.145(c)], the reoffering prospectus will contain the information called
for by the applicable registration form for reofferings by persons who may be
deemed underwriters, in addition to the information called for by the other
items of the applicable form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new registration statement for
the securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement on Form N-14 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Scottsdale and State of Arizona on the 28th day of November, 2000.
PILGRIM INVESTMENTS FUNDS, INC.
By: /s/ James M. Hennessy
------------------------------
James M. Hennessy*
Senior Executive Vice
President & Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ John G. Turner
---------------------------- Director and Chairman November 28, 2000
John G. Turner*
/s/ Robert W. Stallings
---------------------------- Director and President November 28, 2000
Robert W. Stallings* (Chief Executive Officer)
/s/ Al Burton
---------------------------- Director November 28, 2000
Al Burton
/s/ Paul S. Doherty
---------------------------- Director November 28, 2000
Paul S. Doherty*
/s/ Robert B. Goode
---------------------------- Director November 28, 2000
Robert B. Goode*
/s/ Alan L. Gosule
---------------------------- Director November 28, 2000
Alan L. Gosule*
/s/ Walter H. May
---------------------------- Director November 28, 2000
Walter H. May*
4
<PAGE>
/s/ Jock Patton
---------------------------- Director November 28, 2000
Jock Patton*
/s/ David W.C. Putnam
---------------------------- Director November 28, 2000
David W.C. Putnam*
/s/ John R. Smith
---------------------------- Director November 28, 2000
John R. Smith*
/s/ David W. Wallace
---------------------------- Director November 28, 2000
David W. Wallace*
/s/ Michael J. Roland
---------------------------- Senior Vice President and November 28, 2000
Michael J. Roland* Principal Financial Officer
* By: /S/ James M. Hennessy
------------------------
James M. Hennessy
Attorney-in-Fact**
** Executed pursuant to powers of attorney filed herewith.
5
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Robert W. Stallings, James M. Hennessy, Jeffrey S. Puretz and Karen L.
Anderberg, and each of them his true and lawful attorney-in-fact as agent with
full power of substitution and resubstitution of him in his name, place, and
stead, to sign any and all registration statements on Form N-14 applicable to
Pilgrim Investment Funds, Inc. and any amendment or supplement thereto, and to
file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agent, or his substitutes, may lawfully do or
cause to be done by virtue hereof.
Dated: November 10, 2000
/s/ John G. Turner /s/ Alan L. Gosule
------------------------------- -------------------------------
John G. Turner Alan L. Gosule
/s/ Robert W. Stallings /s/ Walter H. May
------------------------------- -------------------------------
Robert W. Stallings Walter H. May
/s/ Al Burton /s/ Jock Patton
------------------------------- -------------------------------
Al Burton Jock Patton
/s/ Paul S. Doherty /s/ David W.C. Putnam
------------------------------- -------------------------------
Paul S. Doherty David W.C. Putnam
/s/ Robert B. Goode, Jr. /s/ John R. Smith
------------------------------- -------------------------------
Robert B. Goode, Jr. John R. Smith
/s/ David W. Wallace
-------------------------------
David W. Wallace
6
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Robert W. Stallings, James M. Hennessy, Jeffrey S. Puretz and Karen L.
Anderberg, and each of them his true and lawful attorney-in-fact as agent with
full power of substitution and resubstitution of him in his name, place, and
stead, to sign any and all registration statements on Form N-14 applicable to
Pilgrim Investment Funds, Inc. and any amendment or supplement thereto, and to
file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agent, or his substitutes, may lawfully do or
cause to be done by virtue hereof.
Dated: November 14, 2000 /s/ Michael J. Roland
----------------------------------
Michael J. Roland
7
<PAGE>
EXHIBIT INDEX
(4)(A) Form of Agreement and Plan of Reorganization between Pilgrim
Investment Funds, Inc., on behalf of Pilgrim MagnaCap Fund and
Pilgrim Advisory Funds, Inc., on behalf of MidCap Value Fund.
(4)(B) Form of Agreement and Plan of Reorganization between Pilgrim
Investment Funds, Inc., on behalf of Pilgrim MagnaCap Fund and
Pilgrim Advisory Funds, Inc., on behalf of LargeCap Leaders Fund.
(7)(A) Underwriting Agreement between Registrant and Pilgrim Securities, Inc.
(11) Form of Opinion and Consent of Counsel
(12) Forms of Opinions and Consents of Counsel supporting tax matters and
consequences
(14) Consent of Independent Auditors
<PAGE>
PILGRIM MIDCAP VALUE FUND
PROXY FOR A SPECIAL MEETING OF SHAREHOLDERS ON ________ ___, 2001
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoint(s) Robert W. Stallings and James M. Hennessy or
any one or more of them, proxies, with full power of substitution, to vote all
shares of the Pilgrim MidCap Value Fund (the "Fund") which the undersigned is
entitled to vote at the Special Meeting of Shareholders of the Fund to be held
at the offices of the Fund at 7337 East Doubletree Ranch Road, Scottsdale,
Arizona 85258 on ________ ___, 2001 at ______ a.m., local time, and at any
adjournment thereof.
This proxy will be voted as instructed. If no specification is made, the proxy
will be voted "FOR" the proposals.
Please vote, date and sign this proxy and return it promptly in the enclosed
envelope.
Please indicate your vote by an "x" in the appropriate box below.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSAL:
1. To approve an Agreement and Plan of Reorganization providing for the
acquisition of all of the assets of Pilgrim MidCap Value Fund by Pilgrim
MagnaCap Fund in exchange for shares of common stock of Pilgrim MagnaCap
Fund and the assumption by Pilgrim MagnaCap Fund of all of the liabilities
of Pilgrim MidCap Value Fund.
For [ ] Against [ ] Abstain [ ]
This proxy must be signed exactly as your name(s) appears hereon. If as an
attorney, executor, guardian or in some representative capacity or as an officer
of a corporation, please add titles as such. Joint owners must each sign.
---------------------------- --------------------------
Signature Date
---------------------------- --------------------------
Signature (if held jointly) Date
<PAGE>
PILGRIM LARGECAP LEADERS FUND
PROXY FOR A SPECIAL MEETING OF SHAREHOLDERS ON ________ ___, 2001
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoint(s) Robert W. Stallings and James M. Hennessy or
any one or more of them, proxies, with full power of substitution, to vote all
shares of the Pilgrim LargeCap Leaders Fund (the "Fund") which the undersigned
is entitled to vote at the Special Meeting of Shareholders of the Fund to be
held at the offices of the Fund at 7337 East Doubletree Ranch Road, Scottsdale,
Arizona 85258 on ________ ___, 2001 at ______ a.m., local time, and at any
adjournment thereof.
This proxy will be voted as instructed. If no specification is made, the proxy
will be voted "FOR" the proposals.
Please vote, date and sign this proxy and return it promptly in the enclosed
envelope.
Please indicate your vote by an "x" in the appropriate box below.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSAL:
1. To approve an Agreement and Plan of Reorganization providing for the
acquisition of all of the assets of Pilgrim LargeCap Leaders Fund by
Pilgrim MagnaCap Fund in exchange for shares of common stock of Pilgrim
MagnaCap Fund and the assumption by Pilgrim MagnaCap Fund of all of the
liabilities of Pilgrim LargeCap Leaders Fund.
For [ ] Against [ ] Abstain [ ]
This proxy must be signed exactly as your name(s) appears hereon. If as an
attorney, executor, guardian or in some representative capacity or as an officer
of a corporation, please add titles as such. Joint owners must each sign.
---------------------------- --------------------------
Signature Date
---------------------------- --------------------------
Signature (if held jointly) Date
