-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Grfi0V+GF8Veu6ftsjEURcgQqL7dBAkwRlvZb/tZiY42C4FU+Be3TXxCwQ+dvlHR hXd6h/1jaNunY2YugkQ5zg== 0000950147-01-500122.txt : 20010125 0000950147-01-500122.hdr.sgml : 20010125 ACCESSION NUMBER: 0000950147-01-500122 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20010124 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PILGRIM INVESTMENT FUNDS INC/MD CENTRAL INDEX KEY: 0000061448 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 136066974 STATE OF INCORPORATION: MD FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 497 SEC ACT: SEC FILE NUMBER: 333-50844 FILM NUMBER: 1514173 BUSINESS ADDRESS: STREET 1: TWO RENAISSANCE SQUARE 40 N CENTRAL STREET 2: STE 1200 CITY: PHOENIX STATE: AZ ZIP: 85004-4424 BUSINESS PHONE: 6024178100 MAIL ADDRESS: STREET 1: TWO RENAISSANCE SQ STREET 2: 40 N CENTRAL STE 1200 CITY: PHOENIX STATE: AZ ZIP: 85004-4424 FORMER COMPANY: FORMER CONFORMED NAME: PILGRIM INVESTMENT FUNDS INC DATE OF NAME CHANGE: 19950503 FORMER COMPANY: FORMER CONFORMED NAME: PILGRIM MAGNACAP FUND INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MAGNACAP FUND INC DATE OF NAME CHANGE: 19850701 497 1 e-6036.txt 497(B) Pilgrim MidCap Value Fund and Pilgrim LargeCap Leaders Fund 7337 East Doubletree Ranch Road Scottsdale, Arizona 85258 (800) 992-0180 January 17, 2001 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 2:00 p.m., local time, on February 23, 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 recommends 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 FEBRUARY 22, 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, /s/ Robert W. Stallings Robert W. Stallings, President 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 FEBRUARY 23, 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 February 23, 2001 at 2:00 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 each class 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 each class 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 December 26, 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 /s/ James M. Hennessy James M. Hennessy, Secretary January 17, 2001 TABLE OF CONTENTS INTRODUCTION...................................................................1 SUMMARY........................................................................2 INVESTMENT OBJECTIVES AND POLICIES.............................................4 Comparison Of Investment Objectives and Strategies..........................4 Comparison of Portfolio Characteristics.....................................6 Relative Performance........................................................7 Performance Of MagnaCap Fund................................................7 Comparison of Investment Techniques and Risks of Investing in the Funds.....9 COMPARISON OF FEES AND EXPENSES................................................9 General Information........................................................13 ADDITIONAL INFORMATION ABOUT MAGNACAP FUND....................................13 Investment Personnel.......................................................13 INFORMATION ABOUT THE REORGANIZATION..........................................13 ADDITIONAL INFORMATION ABOUT THE FUNDS........................................15 GENERAL INFORMATION ABOUT THE PROXY STATEMENT.................................18 Solicitation Of Proxies....................................................18 Voting Rights..............................................................18 Other Matters to Come Before the Meeting...................................19 Shareholder Proposals......................................................19 Reports to Shareholders....................................................19 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 PROXY STATEMENT/PROSPECTUS SPECIAL MEETING OF SHAREHOLDERS SCHEDULED FOR FEBRUARY 23, 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.) (COLLECTIVELY THE "FUNDS," EACH A "FUND") 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") (each of which may be called a "Disappearing Fund" or, collectively, the "Disappearing Funds") to Pilgrim MagnaCap Fund ("MagnaCap Fund" or "Surviving Fund") in exchange for shares of MagnaCap Fund. Each Disappearing Fund will then distribute to its shareholders their portion of the shares of MagnaCap Fund it receives in the Reorganizations. The result will be a liquidation of each of the Disappearing Funds. You will receive shares of MagnaCap Fund having an aggregate value equal to the aggregate value of the shares you hold 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 ("SAI") 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. A Statement of Additional Information dated November 28, 2000, containing additional information about the Reorganization and the parties thereto, has been filed with the Securities and Exchange Commission (the "SEC") and is incorporated by reference into this Proxy Statement/Prospectus. A copy of the Statement of Additional Information relating to the Reorganization is available upon request and without charge by calling (800) 992-0180. You can copy and review information about each Fund (including the SAI) at the SEC's Public Reference Room in Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-202-942-8090. Reports and other information about the Fund are available on the EDGAR Database on the SEC's Internet site at http://www.sec.gov. You may obtain copies of this information, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the Commission's Public Reference Section, Washington, D.C. 20549-0102. 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 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 Appendices 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 February 26, 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, will become a shareholder of the same Class of MagnaCap Fund. Each shareholder will 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 certain respects, however, certain important differences are highlighted below. * 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. Thus, the average market capitalization of companies in the MagnaCap Fund and Disappearing Funds may be different. For example, as of June 30, 2000, the market capitalization of companies in the MidCap Value Fund was $5.2 billion, whereas the average market capitalization of companies in the LargeCap Leaders Fund was $95.9 billion, and the average market capitalization of companies in the MagnaCap Fund was $62.6 billion. 2 * 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: * 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 Reorganizations (assuming that both Reorganizations are consummated) (PRO FORMA) 1.27% - ---------- (1) Reflects contractual agreements effective July 26, 2000 to lower advisory fees of each Disappearing Fund to 0.85% from 1.00% 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 INVESTMENT OBJECTIVES AND POLICIES COMPARISON OF INVESTMENT OBJECTIVES AND STRATEGIES
MIDCAP VALUE FUND LARGECAP LEADERS FUND MAGNACAP FUND ----------------- --------------------- ------------- INVESTMENT OBJECTIVE * Long-term capital * Long-term capital * Growth of capital, appreciation. appreciation. with dividend income as a secondary consideration. PRIMARY INVESTMENT * Normally invests at least * Normally invests at least * Normally invests at least STRATEGIES 80% of its assets in 65% of its total assets 65% of assets in equity equity securities of in equity securities of securities of companies medium-sized U.S. large U.S. companies that are included in the companies with a market believed by the adviser largest 500 U.S. capitalization between $1 to be leaders in their companies, that are billion and $8 billion. industries. The Fund selected using the seeks companies with a following "disciplined * Normally invests at least sustainable competitive criteria": 65% of its assets in edge. equity securities of U.S. * CONSISTENT DIVIDENDS - companies using the * Emphasizes a value Paid or had the financial following "disciplined approach and seeks capability from its criteria": securities whose prices operations to pay a in relation to projected dividend in eight out of * CONSISTENT DIVIDENDS earnings are believed to the last 10 years. - Paid or had the be reasonable in financial capability comparison to the market. * SUBSTANTIAL DIVIDEND from its operations INCREASES - Increased to pay a dividend in * Normally invests in dividends or had the its last five fiscal equity securities of financial capability from years. companies with market operations to have capitalization of over $5 increased dividends at * STRONG BALANCE SHEET billion. least 100% over the past - If has rated debt, 10 years. must be rated * May invest to a limited investment grade by degree in companies that * REINVESTED EARNINGS - a nationally have a market Dividend pay out must be recognized rating capitalization between $1 less than 65% of current agency. If debt is billion and $5 billion earnings. not rated, long-term debt to * Normally invests at least * STRONG BALANCE SHEET - capitalization ratio 80% in equity securities Long-term debt should be must be below 25%. no more than 25% of total capitalization or bonds * REINVESTED EARNINGS must be rated at least A- - Must pay out in or A-3. dividends less than 65% of current * ATTRACTIVE PRICE - earnings, or less Current share price than the dividend should be in the lower payout as a half of the stock's percentage of price/earnings ratio current earnings of range for the past 10 at least half of the years, or the ratio of medium-sized the share price to companies in similar anticipated earnings must industries. be an attractive value in relation to the average * ATTRACTIVE PRICE - for its industry peer
4
MIDCAP VALUE FUND LARGECAP LEADERS FUND MAGNACAP FUND ----------------- --------------------- ------------- Ratio of stock price group or that of the to next fiscal S&P's 500 Composite Price fiscal year's Index. ("S&P 500 Index"). anticipated earnings must be less than * May invest up to 35% in the corresponding equity securities that ratio for at least have growth potential half of the because they represent an medium-sized attractive value. companies in similar industries. * 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 ADVISER * ING Pilgrim Investments * ING Pilgrim Investments * ING Pilgrim Investments PORTFOLIO MANAGERS * G. David Underwood * G. David Underwood * G. David Underwood
As you can see from the chart above, the investment objectives and strategies of the Funds are similar. 5 COMPARISON OF PORTFOLIO CHARACTERISTICS The following table compares certain characteristics of the portfolios of the Funds as of June 30, 2000:
MIDCAP VALUE FUND LARGECAP LEADERS FUND MAGNACAP FUND ----------------- --------------------- ------------- Net Assets $31,415,470 $37,807,986 $417,667,984 Number of Holdings 56 70 77 Ratio of net income (loss) -0.98% -0.83% 0.24% to average net assets (Class A)(1) 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% N/A 91.50% Short-Term Debt Investments 10.29% 5.59% 3.22% 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 Computer 16.39% Computer 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, Inc. 2.13% Aflac, Inc. 2.75% (as a % of net assets) Mallinckrodt, Inc 2.77% PepsiCo, Inc. 1.78% Johnson & Johnson 2.56% Convergys Corp. 2.56% Abbott Laboratories 1.76% McDonald's Corp. 2.37% Republic Services, Inc. 2.48% General Electric 1.72% General Electric 2.34% American Power Tyco Int'l Ltd 1.72% Tellabs, Inc. 2.34% Conversion 2.30% Safeway, Inc. 1.66% Baxter Int'l 2.31% Bausch & Lomb, Inc. 2.22% Johnson & Johnson 1.71% Automatic Data Charter One Financial, Walgreen Co. 1.68% Processing 2.13% Inc. 2.20% Colgate-Palmolive 1.66% Intel Corp. 2.03% Crown Castle Int'l Corp. 2.03% Pfizer 1.65% PepsiCo, Inc. 2.02% Starwood Hotels &Resorts 2.03% American Int'l Group 1.96% Andrew Corp. 2.03%
- ---------- (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 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(3) INDEX(4) VALUE INDEX(5) ------------ ------- ------- ------- -------- -------------- 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 MagnaCap Fund commenced operations on July 3, 1969. (4) The S&P 500 Index is an unmanaged index that measures the performance of securities of approximately 500 large-capitalization U.S. companies. (5) 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. 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. 7 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 1999, 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, an unmanaged 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 below assumes the deduction of the maximum sales charge in all cases. 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 A commenced operations on July 3, 1969. 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% N/A MagnaCap Fund - Class B 11.46% N/A N/A 18.99% MagnaCap Fund - Class M 11.67% N/A N/A 19.28% - ---------- (1) Class A commenced operations on July 3, 1969. Class B and Class M commenced operations on July 17, 1995. 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. Additional information about MidCap Value Fund and LargeCap Leaders Fund is included in the Pilgrim Prospectus dated November 1, 2000. 8 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, although the Funds may be subject to varying degrees of risk. For example, the MidCap Value Fund may invest in medium-sized companies which may be more susceptible to price swings than the larger companies in which the MagnaCap Fund and LargeCap Leaders Fund invest. 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. 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. PORTFOLIO TURNOVER. The MidCap Value Fund may engage in frequent and active trading of portfolio securities to achieve its investment objectives. A high portfolio turnover rate involves greater expenses to a Fund, including brokerage commission and other transaction costs and is likely to generate more taxable short-term gains for shareholders, which may have an adverse effect on the performance of a Fund. 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. 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 9 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 FEES. 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 SERVICES 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. ANNUAL FUND OPERATING EXPENSES (UNAUDITED) (expenses that are deducted from Fund assets, shown as a ratio of expenses to average daily net assets) (1)
DISTRIBUTION (12b-1) AND TOTAL FUND MANAGEMENT SHAREHOLDER OTHER OPERATING FEE WAIVER NET FUND FEES SERVICING FEES(2) EXPENSES EXPENSES BY ADVISER(3) EXPENSES ---- ----------------- -------- -------- ------------- -------- 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%
10
DISTRIBUTION (12b-1) AND TOTAL FUND MANAGEMENT SHAREHOLDER OTHER OPERATING FEE WAIVER NET FUND FEES SERVICING FEES(2) EXPENSES EXPENSES BY ADVISER(3) EXPENSES ---- ----------------- -------- -------- ------------- -------- 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%
- ---------- (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 an expense limitation agreement 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. 11 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.
MIDCAP VALUE FUND LARGECAP LEADERS FUND -------------------------------------------- -------------------------------------------- 1 3 5 10 1 3 5 10 YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS ---- ----- ----- ----- ---- ----- ----- ----- Class A $ 741 $1,089 $1,460 $ 2,499 $ 737 $1,077 $1,440 $ 2,458 Class B 751 1,073 1,521 2,632* 747 1,061 1,501 2,591* Class C 351 773 1,321 2,816 347 761 1,301 2,776 Class M 568 1,023 1,503 2,825 564 1,011 1,483 2,785 Class Q 176 545 939 2,041 172 533 918 1,998 PRO FORMA: MAGNACAP FUND THE FUNDS COMBINED -------------------------------------------- -------------------------------------------- 1 3 5 10 1 3 5 10 YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS ---- ----- ----- ----- ---- ----- ----- ----- Class A $ 699 $ 960 $1,242 $ 2,042 $ 697 $ 955 $1,232 $ 2,021 Class B 702 924 1,273 2,136* 700 918 1,262 2,115* Class C 302 624 1,073 2,317 300 618 1,062 2,296 Class M 521 879 1,261 2,330 519 873 1,251 2,309 Class Q 126 393 681 1,500 124 387 670 1,477
- ---------- * 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. You would pay the following expenses if you did not redeem your shares:
MIDCAP VALUE FUND LARGECAP LEADERS FUND -------------------------------------------- -------------------------------------------- 1 3 5 10 1 3 5 10 YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS ---- ----- ----- ----- ---- ----- ----- ----- Class A $ 741 $1,089 $1,460 $ 2,499 $ 737 $1,077 $1,440 $ 2,458 Class B 251 773 1,321 2,632* 247 761 1,301 2,591* Class C 251 773 1,321 2,816 247 761 1,301 2,776 Class M 568 1,023 1,503 2,825 564 1,011 1,483 2,785 Class Q 176 545 939 2,041 172 533 918 1,998 PRO FORMA: MAGNACAP FUND THE FUNDS COMBINED -------------------------------------------- -------------------------------------------- 1 3 5 10 1 3 5 10 YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS ---- ----- ----- ----- ---- ----- ----- ----- Class A $ 699 $ 960 $1,242 $ 2,042 $ 697 $ 955 $1,232 $ 2,021 Class B 202 624 1,073 2,136* 200 618 1,062 2,120* Class C 202 624 1,073 2,317 200 618 1,062 2,296 Class M 521 879 1,261 2,330 519 873 1,251 2,309 Class Q 126 393 681 1,500 124 387 670 1,477
- ---------- * 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. 12 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 not be subject to an initial sales charge, but 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. 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 Reorganizations 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 on new investments. TRANSACTION FEES ON NEW INVESTMENT (fees paid directly from your investment)
CLASS A CLASS B CLASS C CLASS M CLASS Q ------- ------- ------- ------- ------- 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
- ---------- (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 G. David Underwood is the Portfolio Manager of the MagnaCap Fund. Mr. Underwood serves as Senior Vice President and 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 Pittsburgh where he served as Director of Research and Senior Portfolio Manager. INFORMATION ABOUT THE REORGANIZATION 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. 13 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. 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 Fund 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; (4) whether the Reorganizations would dilute the interests of the Disappearing Funds' current shareholders; 14 (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; (7) the costs to be borne by the MidCap Value Fund, LargeCap Leaders Fund, MagnaCap Fund and ING Pilgrim Investments; and (8) 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. 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. 15 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 tables show 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. The first table presents this information assuming that the Reorganizations with both the MidCap Value Fund and the LargeCap Leaders Fund are consummated. The second table presents the capitalization of each Fund assuming that the Reorganization with the MidCap Value Fund into the MagnaCap Fund is consummated, but not the Reorganization with the LargeCap Leaders Fund. The third table presents the capitalization of each Fund assuming that the Reorganization with the LargeCap Leaders Fund into the MagnaCap Fund in consummated, but not the Reorganization with the MidCap Value Fund. The second and third tables 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. TABLE I: PROPOSED REORGANIZATIONS OF BOTH MIDCAP VALUE FUND AND LARGECAP LEADERS FUND INTO MAGNACAP FUND
NET ASSET SHARES NET ASSETS VALUE 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
16 TABLE II: PROPOSED REORGANIZATION OF MIDCAP VALUE FUND INTO MAGNACAP FUND (ASSUMES THAT THE REORGANIZATION WITH THE LARGECAP LEADERS FUND DOES NOT OCCUR)
NET ASSET SHARES NET ASSETS VALUE 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 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 Class A $ 312,738,292 $ 15.84 19,743,579 Class B $ 103,006,914 $ 15.44 6,671,432 Class C $ 6,348,413 $ 15.44 411,167 Class M $ 16,922,819 $ 15.64 1,082,022 Class Q $ 10,067,016 $ 15.84 635,544 TABLE III: PROPOSED REORGANIZATION OF LARGECAP LEADERS FUND INTO MAGNACAP FUND (ASSUMES THAT THE REORGANIZATION WITH THE MIDCAP VALUE FUND DOES NOT OCCUR) NET ASSET SHARES NET ASSETS VALUE PER SHARE OUTSTANDING ---------- --------------- ----------- 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 LARGECAP LEADERS FUND Class A $ 313,887,665 $ 15.84 19,816,140 Class B $ 108,710,488 $ 15.44 7,040,835 Class C $ 5,024,011 $ 15.44 325,389 Class M $ 17,726,978 $ 15.64 1,133,438 Class Q $ 10,126,828 $ 15.84 639,320
17 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 January 17, 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 Special 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 Special Meeting. VOTING RIGHTS Shareholders of the Disappearing Funds are entitled to one vote for each full 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 December 26, 2000 (the "Record Date") will be entitled to be present and give voting instructions for their respective Funds at the Special Meeting with respect to their shares owned as of that Record Date. As of the Record Date, 2,703,906 shares of the MidCap Value Fund were outstanding and entitled to vote and 2,609,296 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 Funds. 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 presence in person or by proxy of the holders of one-third of the shares of stock of each class required to vote shall constitute a quorum. In the absence of a quorum, the stockholders present at such meeting may, without further notice, adjourn the Special Meeting from time to time to a date not more than 120 days after the original record date. If a shareholder abstains from voting as to any matter, or if a broker returns a "non-vote" proxy, indicating a lack of authority to vote on a matter, the shares represented by the abstention or non-vote will be deemed present at the Special Meeting for purposes of determining a quorum. However, abstentions and broker non-votes will not be deemed represented at the Special Meeting for purposes of calculating the vote on any matter. As a result, an abstention or broker non-vote will have the same effect as a vote against the Reorganizations. The Disappearing Funds expect that, before the Special Meeting, broker-dealer firms holding 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 18 broker-dealers that are the members of the New York Stock Exchange may vote on items to be considered at the Special Meeting on behalf of their customers and beneficial owners under the rules of the New York Stock Exchange. To the knowledge of 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 Special Meeting other than those described in this Proxy Statement/Prospectus. If other business should properly come before the Special Meeting, the proxyholders will vote thereon in accordance with their best judgment. SHAREHOLDER PROPOSALS Pilgrim Advisory Funds is not required to hold regular annual meetings and, in order to minimize its 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 by calling (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. /s/ James M. Hennessy James M. Hennessy, Secretary January 17, 2001 7337 East Doubletree Ranch Road Scottsdale, Arizona 85258 19 APPENDIX A 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 (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 A-1 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. CLASSES A, B, C AND M PILGRIM MAGNACAP FUND PILGRIM MAGNACAP FUND CLASS A WITH SALES CHARGE CLASS A WITHOUT SALES CHARGE S&P 500 Index ------------------------- ---------------------------- ------------- 6/30/90 $ 10,000 $ 10,000 $ 10,000 6/91 9,912 10,521 10,739 6/92 11,095 11,777 12,180 6/93 12,006 12,744 13,840 6/94 13,102 13,907 14,035 6/95 15,803 16,774 17,693 6/96 19,170 20,348 22,294 6/97 25,077 26,619 30,029 6/98 30,225 32,083 39,087 6/99 35,039 37,192 47,982 6/30/00 34,914 37,060 51,458 AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED JUNE 30, 2000
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 ------ ------- -------- ------- ------ 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%
- ---------- (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. A-2 (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. CLASS Q PILGRIM MAGNACAP FUND CLASS Q S&P 500 Index ------------ ------------- 11/22/99 $10,000 $10,000 6/30/00 9,820 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 graphs and tables above illustrate 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 APPENDIX B FORM OF AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of this 2nd day of November, 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 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 B-1 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, as defined in paragraph 2.1, (collectively, "Liabilities"). On or as soon as practicable prior to the Closing Date, the Acquired Fund will declare and pay to its shareholders of record one or more dividends and/or other distributions so that it will have distributed substantially all (and in no event less than 98%) of its investment company taxable income (computed without regard to any deduction for dividends paid) and realized net capital gain, if any, for the current taxable year through the Closing Date. 1.4 Immediately after the transfer of assets provided for in paragraph 1.1, the Acquired Fund will distribute to the Acquired Fund's shareholders of record with respect to each class of its shares, determined as of immediately after the close of business on the Closing Date (the "Acquired Fund Shareholders"), on a pro rata basis within that class, the Acquiring Fund Shares of the same class received by the Acquired Fund pursuant to paragraph 1.1, and will completely liquidate. Such distribution and liquidation will be accomplished, with respect to each class of the Acquired Fund's shares, by the transfer of the Acquiring Fund Shares then credited to the account of the Acquired Fund on the books of the Acquiring Fund to open accounts on the share records of the Acquiring Fund in the names of the Acquired Fund Shareholders. The aggregate net asset value of Class A, Class B, Class C, 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 information with respect to the Acquiring Fund, and valuation procedures established by the Acquiring Fund's Board of Directors. 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. B-2 2.4 All computations of value shall be made by the Acquired Fund's designated record keeping agent and shall be subject to 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 February 26, 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. 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-3 (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; (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 B-4 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; (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' B-5 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; (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; B-6 (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; (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. B-7 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. 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 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; B-8 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. 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 B-9 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 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. B-10 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. 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. B-11 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 Attest: of its Pilgrim MagnaCap Fund series By: - ----------------------------------- ------------------------------------- SECRETARY Its: ------------------------------------ Pilgrim Advisory Funds, Inc. on behalf Attest: of its Pilgrim MidCap Value Fund series By: - ----------------------------------- ------------------------------------- SECRETARY Its: ------------------------------------ B-12 APPENDIX B-1 FORM OF AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of this 2nd day of November, 2000, 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 manner and as of the time and date set forth in paragraph 2.2; and (ii) to assume all liabilities of the Acquired Fund, as set forth in paragraph 1.3. Such transactions shall take place at the closing provided for in paragraph 3.1 (the "Closing"). 1.2 The assets of the Acquired Fund to be acquired by the Acquiring Fund shall consist of all assets and property, including, without limitation, all cash, securities, commodities and futures interests and dividends or interests receivable that are owned by the Acquired Fund, and any deferred or prepaid expenses shown as an asset on the books of the Acquired Fund on the closing date provided for in paragraph 3.1 (the "Closing Date") (collectively, "Assets"). B-1-1 1.3 The Acquired Fund will endeavor to discharge all of its known liabilities and obligations prior to the Closing Date. The Acquiring Fund shall also assume all of the liabilities of the Acquired Fund, whether accrued or contingent, known or unknown, existing at the Valuation Date, as defined in paragraph 2.1, ("collectively, "Liabilities"). On or as soon as practicable prior to the Closing Date, the Acquired Fund will declare and pay to its shareholders of record one or more dividends and/or other distributions so that it will have distributed substantially all (and in no event less than 98%) of its investment company taxable income (computed without regard to any deduction for dividends paid) and realized net capital gain, if any, for the current taxable year through the Closing Date. 1.4 Immediately after the transfer of assets provided for in paragraph 1.1, the Acquired Fund will distribute to the Acquired Fund's shareholders of record with respect to each class of its shares, determined as of immediately after the close of business on the Closing Date (the "Acquired Fund Shareholders"), on a pro rata basis within that class, the Acquiring Fund Shares of the same class received by the Acquired Fund pursuant to paragraph 1.1, and will completely liquidate. Such distribution and liquidation will be accomplished, with respect to each class of the Acquired Fund's shares, by the transfer of the Acquiring Fund Shares then credited to the account of the Acquired Fund on the books of the Acquiring Fund to open accounts on the share records of the Acquiring Fund in the names of the Acquired Fund Shareholders. The aggregate net asset value of Class A, Class B, Class C, 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. 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. B-1-2 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 February 26, 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. 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-1-3 (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; (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 B-1-4 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; (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' B-1-5 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; (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; B-1-6 (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; (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. B-1-7 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. 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 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; B-1-8 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. 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 B-1-9 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 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. B-1-10 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. 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. B-1-11 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 Attest: of its Pilgrim MagnaCap Fund series By: - ----------------------------------- ------------------------------------- SECRETARY Its: ------------------------------------ Pilgrim Advisory Funds, Inc. on behalf of its Pilgrim LargeCap Value Fund Attest: series By: - ----------------------------------- ------------------------------------- SECRETARY Its: ------------------------------------ B-1-12 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 Reorganizations will be the same as those that apply to the Disappearing Fund shares held by you immediately prior to the Reorganizations, 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 Reorganizations 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.
CLASS A CLASS B CLASS C CLASS M CLASS Q ------- ------- ------- ------- ------- 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
- ---------- (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 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 Reorganizations with respect to Class A shares of Disappearing Funds that were subject to a CDSC at the time of the Reorganizations, 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. 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 C-2 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 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. C-3 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 as described in the Prospectus, up to a maximum of 12% per year of a shareholder's account value based on the value of the account at the time the plan is established and annually thereafter, provided all dividends and distributions are reinvested and the total redemptions do not exceed 12% annually. 3) The CDSC also will be waived in the case of mandatory distributions from a tax-deferred retirement plan or an IRA. If you think you may be eligible for a CDSC waiver, contact the Shareholder Servicing Agent at (800) 992-0180. REINSTATEMENT PRIVILEGE. Class B and Class C shareholders who have redeemed their shares in any open-end Pilgrim Fund may reinvest some or all of the proceeds in the same share Class within 90 days without a sales charge. Reinstated Class B and Class C shares will retain their original cost and purchase date for purposes of the CDSC. This privilege can be used only once per calendar year. See the Statement of Additional Information for the Fund for details or contact the Shareholder Servicing Agent at (800) 992-0180 for more information. RULE 12b-1 PLAN. The Fund has a distribution plan pursuant to Rule 12b-1 under the 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 C-4 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. 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, for short-term debt securities, and for situations where market quotations are deemed unreliable. The NAV per share of each Class of the Fund will fluctuate in response to changes in market conditions and other factors. Portfolio securities for which market quotations are readily available are stated at market value. Short-term debt securities having a maturity of 60 days or less are valued at amortized cost, unless the amortized cost does not approximate market value. Securities prices may be obtained from automated pricing services. When market quotations are not readily available or are deemed unreliable, securities are valued at their fair value as determined in good faith under the supervision of the Board of 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) 992-0180. RETIREMENT PLANS. The Fund has available prototype qualified retirement plans for both corporations and for self-employed individuals. Also available are prototype IRA, Roth IRA and Simple IRA plans (for both individuals and employers), Simplified Employee Pension Plans, Pension and Profit Sharing Plans and Tax Sheltered Retirement Plans for employees of public educational institutions and certain non-profit, tax-exempt organizations. State Street Bank and Trust Company ("SSB") acts as the custodian under these plans. For further information, contact the Shareholder Servicing Agent at (800) 992-0180. SSB currently receives a $12 custodian fee annually for the maintenance of such accounts. C-5 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 in the Fund's Prospectus under "Purchase of Shares" have been completed. If you purchase by wire, however, the order will be deemed to be in proper form after the telephone notification and the federal funds wire have been received. If you purchase by wire, you must submit an application form in a timely fashion. If an order or payment by wire is received after the close of regular trading on the New York Stock Exchange (normally 4:00 p.m. Eastern Time), the shares will not be credited until the next business day. You will receive a confirmation of each new transaction in your account, which also will show you the number of shares of the Fund you own including the number of shares being held in safekeeping by the Transfer Agent for your account. You may rely on these confirmations in lieu of certificates as evidence of your ownership. Certificates representing shares of the Fund will not be issued unless you request them in writing. TELEPHONE ORDERS. The Fund and its Transfer Agent will not be responsible for the authenticity of phone instructions or losses, if any, resulting from unauthorized shareholder transactions if they reasonably believe that such instructions were genuine. The Fund and its Transfer Agent have established reasonable procedures to confirm that instructions communicated by telephone are genuine. These procedures include recording telephone instructions for exchanges and expedited redemptions, requiring the caller to give certain specific identifying information, and providing written confirmation to shareholders of record not later than five days following any such telephone transactions. If the Fund and its Transfer Agent do not employ these procedures, they may be liable for any losses due to unauthorized or fraudulent telephone instructions. Telephone redemptions may be executed on all accounts other than retirement accounts. EXCHANGE PRIVILEGES AND RESTRICTIONS An exchange privilege is available. Exchange requests may be made in writing to the Transfer Agent or by calling the Shareholder Servicing Agent at (800) 992-0180. There is no specific limit on exchange frequency; however, the Fund is intended for long term investment and not as a trading vehicle. 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. 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. C-6 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. 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 C-7 transaction that is in excess of the amount another broker would have charged if ING Pilgrim Investments determines in good faith that the amount of commission is reasonable in relation to the value of the brokerage and research services provided by the broker. In addition, ING Pilgrim Investments may place securities transactions with brokers that provide certain services to the Fund. ING Pilgrim Investments also may consider a broker's sale of Fund shares if ING Pilgrim Investments is satisfied that the Fund would receive best execution of the transaction from that broker. DIVIDENDS, DISTRIBUTIONS AND TAXES DIVIDENDS AND DISTRIBUTIONS. The Fund generally distributes most or all of its net earnings in the form of dividends. 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-8 FINANCIAL HIGHLIGHTS PILGRIM MAGNACAP FUND - -------------------------------------------------------------------------------- The information in the table below has been audited by KPMG LLP, independent auditors.
CLASS A CLASS B ------------------------------------------------ ------------------------------------------ JULY YEAR ENDED JUNE 30, YEAR ENDED JUNE 30, 17,1995 (1) ------------------------------------------------ --------------------------------- TO JUNE 30, 2000 1999 1998 1997 1996 2000 1999 1998 1997 1996 ----------- ------- ------- ------- ------- ------ ------- ------ ------ ------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 17.69 17.07 15.92 16.69 14.03 17.36 16.86 15.81 16.59 14.22 Income from investment operations: Net investment income (loss) $ 0.07 0.07 0.04 0.10 0.09 (0.05) (0.04) (0.04) -- 0.06 Net realized and unrealized gains on investments $ (0.08) 2.37 3.02 4.16 2.87 (0.08) 2.32 2.97 4.13 2.61 Total from investment operations $ (0.01) 2.44 3.06 4.26 2.96 (0.13) 2.28 2.93 4.13 2.67 Less distributions from: Net investment income $ 0.05 0.04 0.06 0.12 0.06 -- -- 0.03 -- 0.06 Net realized gains on investments $ 1.79 1.78 1.85 4.91 0.24 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 15.44 17.36 16.86 15.81 16.59 TOTAL RETURN(2): % (0.36) 15.93 20.53 30.82 21.31 (1.11) 15.12 19.76 29.92 18.98 RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 303,864 368,508 348,759 290,355 235,393 87,167 116,227 77,787 37,427 10,509 Ratios to average net assets: Expenses(3) % 1.29 1.35 1.37 1.46 1.68 1.99 2.05 2.07 2.16 2.38 Net investment income (loss)(3) % 0.41 0.41 0.29 0.64 0.54 (0.29) (0.29) (0.41) (0.04) 0.07 Portfolio turnover rate % 26 48 53 77 15 26 48 53 77 15
C-9
CLASS C CLASS M CLASS Q ----------------- ------------------------------------------- ------- JUNE 1, JULY 17, YEAR 1999(1) 1995(1) NOV. 22, ENDED TO YEAR ENDED JUNE 30, TO 1999(1) TO JUNE 30, JUNE 30, ------------------------------- JUNE 30, JUNE 30, 2000 1999 2000 1999 1998 1997 1996 2000 ----- ----- ----- ----- ----- ----- ----- ----- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period 17.37 16.69 17.51 16.95 15.87 16.63 14.22 16.26 Income from investment operations: Net investment income (loss) (0.10) -- (0.01) (0.01) -- 0.02 0.08 0.05 Net realized and unrealized gains on investments (0.04) 0.68 (0.06) 2.35 2.98 4.16 2.63 (0.47) Total from investment operations (0.14) 0.68 (0.07) 2.34 2.98 4.18 2.71 (0.42) 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 15.84 TOTAL RETURN(2): (1.17) 4.07 (0.71) 15.41 20.00 30.26 19.26 (2.58) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) 3,660 601 13,050 16,351 14,675 6,748 1,961 9,928 Ratios to average net assets: Expenses(3) 1.99 1.12 1.74 1.80 1.82 1.91 2.13 1.24 Net investment income (loss)(3) (0.29) 0.42 (0.04) (0.04) (0.16) 0.22 0.32 0.46 Portfolio turnover rate 26 48 26 48 53 77 15 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-10 APPENDIX D The following is a list of the Pilgrim Funds and ING Funds, which are managed by an affiliate of ING Pilgrim Investments, and the classes of shares of each fund that are expected to be offered at or shortly after the Reorganizations: 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 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:
% OF CLASS BEFORE % OF FUND BEFORE % OF FUND AFTER NAME AND ADDRESS CLASS REORGANIZATIONS REORGANIZATIONS REORGANIZATIONS ---------------- ----- --------------- --------------- --------------- PaineWebber FBO Steven Class C 19.68% 0.83% 0.05% and Cindy Friedman JTWROS Record Holder 27655 Middlebelt Farmington Hills, MI 48334
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 PART B PILGRIM INVESTMENT FUNDS, INC. ------------------------------------------------------------------- Statement of Additional Information December 28, 2000 -------------------------------------------------------------------
Acquisition of the Assets and Liabilities of By and in Exchange for Shares of Pilgrim MidCap Value Fund Pilgrim MagnaCap Fund (a series of Pilgrim Advisory Funds, Inc.) (a series of Pilgrim Investment 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
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 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 January 17, 2001 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 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)
MagnaCap MagnaCap LargeCap MidCap Pro Forma Fund Fund Leaders Value Adjustments (Pro Forma) ------------ ----------- ----------- ----------- ------------ 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
(A) Reflects new shares issued, net of retired shares of the Fund. (Calculation: Net Assets / NAV per share) 3 STATEMENTS OF OPERATIONS (UNAUDITED)
MagnaCap MagnaCap LargeCap MidCap Pro Forma Fund Fund Leaders Value Adjustments (Pro Forma) ---------- ---------- ---------- ----------- ---------- 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 ------------ ----------- ----------- ------------ ------------ 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) ============ =========== =========== ============ ============
(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
PORTFOLIO OF INVESTMENTS* AS OF JUNE 30, 2000 - -------------------------------------------------------------------------------- LargeCap MidCap MagnaCap MagnaCap Leaders Value (Pro Forma) Shares Shares Shares Shares ------ ------ ------ ------ 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 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 ------------- ------------ ------------ -------------
5 PORTFOLIO OF INVESTMENTS* AS OF JUNE 30, 2000 - --------------------------------------------------------------------------------
LargeCap MidCap MagnaCap MagnaCap Leaders Value (Pro Forma) Shares Shares Shares Shares ------ ------ ------ ------ 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 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 ------------- ------------ ------------ -------------
6 PORTFOLIO OF INVESTMENTS* AS OF JUNE 30, 2000 - --------------------------------------------------------------------------------
LargeCap MidCap MagnaCap MagnaCap Leaders Value (Pro Forma) Shares Shares Shares Shares ------ ------ ------ ------ 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 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 ============ =========== =========== ============
@ Non-income producing security @@ Foreign Issuer ADR American Depository Receipt * No adjustments are shown to the unaudited PRO FORMA combined portfolios of investments because it is expected that upon consummation of the Reorganizations, no securities would need to be sold in order for the MagnaCap Fund to comply with its Prospectus requirements and SEC and IRS guidelines and restrictions. However, the MidCap Value Fund, the LargeCap Leaders Fund or the MagnaCap Fund may purchase or sell any securities in the ordinary course of business as a mutual fund, and following the Reorganizations, certain holdings of the MidCap Value Fund and LargeCap Leaders Fund that are transferred to the MagnaCap Fund may be expected to be sold. 7 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 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 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 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 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 -----END PRIVACY-ENHANCED MESSAGE-----