497 1 e-6041.txt FORM 497 OF PILGRIM ADVISORY FUNDS, INC. Pilgrim SmallCap Asia Growth Fund, Inc. 7337 East Doubletree Ranch Road Scottsdale, Arizona 85258 1-800-992-0180 January 25, 2001 Dear Shareholder: Your Board of Directors has called a Special Meeting of Shareholders of the Pilgrim SmallCap Asia Growth Fund 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 Pilgrim SmallCap Asia Growth Fund into Pilgrim Asia-Pacific Equity Fund, each of which is managed by ING Pilgrim Investments, Inc., ("ING Pilgrim Investments") and is part of the Pilgrim Funds (the "Reorganization"). If approved by shareholders, you will become a shareholder of Asia-Pacific Equity Fund on the date that the Reorganization occurs. Asia-Pacific Equity Fund has investment objectives and policies that are similar in many respects to those of SmallCap Asia Growth Fund, and the Reorganization is expected to result in operating expenses that are lower for shareholders. You are being asked to vote to approve an Agreement and Plan of Reorganization. The accompanying document describes the proposed transaction and compares the policies and expenses of each of the funds for your evaluation. After careful consideration, the Board of Directors of SmallCap Asia Growth Fund unanimously approved this proposal and recommended shareholders vote "FOR" the proposal. A Proxy Statement/Prospectus that describes the Reorganization is enclosed. We hope that you can attend the Special Meeting in person; however, we urge you in any event to vote your shares by completing and returning the enclosed proxy 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. SmallCap Asia Growth Fund is using Shareholder Communications Corporation, a professional proxy solicitation firm, to assist shareholders in the voting process. As the date of the Special 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 SmallCap Asia Growth Fund, Inc. 7337 East Doubletree Ranch Road Scottsdale, Arizona 85258 1-800-992-0180 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF PILGRIM SMALLCAP ASIA GROWTH FUND SCHEDULED FOR FEBRUARY 23, 2001 To the Shareholder: A Special Meeting of Shareholders of the Pilgrim SmallCap Asia Growth Fund ("Special Meeting") is 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. To approve an Agreement and Plan of Reorganization providing for the acquisition of all of the assets and liabilities of Pilgrim SmallCap Asia Growth Fund by Pilgrim Asia-Pacific Equity Fund; and 2. To transact such other business as may properly come before the Special Meeting of Shareholders or any adjournments thereof. Shareholders of record at the close of business on 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 25, 2001 TABLE OF CONTENTS INTRODUCTION............................................................... 1 SUMMARY.................................................................... 2 INVESTMENT OBJECTIVES AND POLICIES......................................... 4 Comparison of Investment Objectives and Strategies...................... 4 Comparison of Portfolio Characteristics................................. 5 Relative Performance.................................................... 6 Performance of Asia-Pacific Equity Fund................................. 7 Comparison of Investment Techniques and Risks of Investing in the Funds................................................. 8 COMPARISON OF FEES AND EXPENSES............................................ 9 General Information..................................................... 12 ADDITIONAL INFORMATION ABOUT ASIA-PACIFIC EQUITY FUND...................... 13 Investment Personnel.................................................... 13 INFORMATION ABOUT THE REORGANIZATION....................................... 14 ADDITIONAL INFORMATION ABOUT THE FUNDS..................................... 16 GENERAL INFORMATION ABOUT THE PROXY STATEMENT.............................. 17 Solicitation of Proxies................................................. 17 Voting Rights........................................................... 17 Other Matters to Come Before the Meeting................................ 18 Shareholder Proposals................................................... 18 Reports to Shareholders................................................. 18 APPENDIX A................................................................. A-1 APPENDIX B................................................................. B-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 SMALLCAP ASIA GROWTH FUND Relating to the Reorganization into PILGRIM ASIA-PACIFIC EQUITY FUND a series of Pilgrim Advisory Funds, Inc. (COLLECTIVELY, THE "FUNDS," AND EACH, A "FUND") INTRODUCTION This Proxy Statement/Prospectus provides you with information about a proposed transaction. This transaction involves the transfer of all the assets and liabilities of Pilgrim SmallCap Asia Growth Fund ("SmallCap Asia Growth Fund"), a series of Pilgrim SmallCap Asia Growth Fund, Inc. (formerly, Lexington Small Cap Asia Growth Fund) to Pilgrim Asia-Pacific Equity Fund ("Asia-Pacific Equity Fund" or "Surviving Fund"), a series of Pilgrim Advisory Funds, Inc., in exchange for shares of Asia-Pacific Equity Fund (the "Reorganization"). SmallCap Asia Growth Fund will then distribute to its shareholders their portion of the shares of Asia-Pacific Equity Fund it receives in the Reorganization. The result will be a liquidation of SmallCap Asia Growth Fund. You will receive shares of Asia-Pacific Equity Fund having an aggregate value equal to the aggregate value of the shares you hold of SmallCap Asia Growth Fund, as of the close of business on the business day of the closing of the Reorganization. You are being asked to vote on the Agreement and Plan of Reorganization through which these transactions would be accomplished. Because you, as a shareholder of SmallCap Asia Growth Fund, are being asked to approve a transaction that will result in your holding of shares of Asia-Pacific Equity Fund, this Proxy Statement also serves as a Prospectus for Asia-Pacific Equity Fund. This Proxy Statement/Prospectus, which you should retain for future reference, contains important information about Asia-Pacific Equity 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") and the Statement of Additional Information ("SAI") for Pilgrim Funds dated November 1, 2000, which may be obtained, without charge, by calling 1-800-992-0180. Each of the Funds also provides periodic reports to its shareholders which highlight certain important information about the Funds, including investment results and financial information. The annual report for Asia-Pacific Equity Fund dated October 31, 2000, is incorporated herein by reference. You may receive a copy of the most recent annual report for either of the Funds and a copy of any more recent semi-annual report, without charge, by calling 1-800-992-0180. An SAI dated January 19, 2001, containing additional information about the Reorganization and the parties thereto, has been filed with the Securities and Exchange Commission ("SEC") and is incorporated by reference into this Proxy Statement/Prospectus. A copy of the SAI relating to the Reorganization is available upon request and without charge by calling 1-800-992-0180. You can copy and review information about each Fund (including each SAI) at the SEC's Public Reference Room in Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-202-942-8090. Reports and other information about each Fund are available on the EDGAR Database on the SEC's Internet site at http://www.sec.gov. You may obtain copies of this information, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Section, Washington, D.C. 20549-0102. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. SUMMARY You should read this entire Proxy Statement/Prospectus carefully. For additional information, you should consult the Pilgrim Prospectus, and the Agreement and Plan of Reorganization, which is attached hereto as Appendix B. THE PROPOSED REORGANIZATION. On November 2, 2000, the Board of Directors of Pilgrim SmallCap Asia Growth Fund, Inc. approved an Agreement and Plan of Reorganization (the "Reorganization Agreement"). Subject to shareholder approval, the Reorganization Agreement provides for: * the transfer of all of the assets of SmallCap Asia Growth Fund to Asia-Pacific Equity Fund, in exchange for shares of Asia-Pacific Equity Fund; * the assumption by Asia-Pacific Equity Fund of all of the liabilities of SmallCap Asia Growth Fund; * the distribution of Asia-Pacific Equity Fund shares to the shareholders of SmallCap Asia Growth Fund; and * the complete liquidation of SmallCap Asia Growth Fund (the "Reorganization"). The Reorganization is expected to be effective upon the close of business on February 23, 2001, or on a later date as the parties may agree (the "Closing"). As a result of the Reorganization, each shareholder of Class A and Class B shares of SmallCap Asia Growth Fund will become a shareholder of the same Class of Asia-Pacific Equity Fund. Each shareholder will hold, immediately after the Closing, shares of the corresponding Class of Asia-Pacific Equity Fund having an aggregate value equal to the aggregate value of the shares of that same Class of SmallCap Asia Growth Fund held by that shareholder as of the close of business on the business day of the Closing. The Reorganization is one 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. Another reason for this Reorganization is that both SmallCap Asia Growth Fund and Asia-Pacific Equity Fund are relatively small funds, and by combining, the surviving fund will be a larger, more viable fund. 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; * Both Funds invest in the securities of Asian companies. Although the SmallCap Asia Growth Fund invests in "Asia Region" companies, while the Asia-Pacific Equity Fund invests in a somewhat different group of "Asia-Pacific" companies, the principal difference between the Asia-Pacific Equity Fund and the SmallCap Asia Growth Fund is the size of the companies in which each Fund normally invests. The Asia-Pacific Equity Fund normally invests at least 65% of its total assets in Asian companies of any size, whereas the SmallCap Asia Growth Fund normally invests at least 65% of its total assets in "small-cap" Asian companies with market capitalizations of under $1 billion; 2 * The SmallCap Asia Growth Fund is very small. As of October 31, 2000, it had net assets of only $4,638,058. The sub-adviser to the Fund has ended its service to the Fund effective January 2, 2001. The Reorganization offers shareholders of that Fund the opportunity to participate in the larger, more viable Asia-Pacific Equity Fund, with net assets of $18,934,629 as of October 31, 2000, and participate in stocks from the same region; * The proposed Reorganization is expected to result in a reduction in operating expenses for shareholders of the SmallCap Asia Growth Fund. For example, the operating expenses, expressed as a percentage of net asset value per share for Class A shares, are as follows: * Expenses of SmallCap Asia Growth Fund(1) - before expense reimbursement from management: 3.18% * Expenses of SmallCap Asia Growth Fund - after expense reimbursement from management: 2.75% * Expenses of Asia-Pacific Equity Fund - before expense reimbursement from management based on the 12 month period ended June 30, 2000): 2.55% * Expenses of Asia-Pacific Equity Fund - after expense reimbursement from management based on the 12 month period ended June 30, 2000): 2.11% * Estimated expenses of Asia-Pacific Equity Fund after the Reorganization - before expense reimbursement from management (PRO FORMA): 2.39% * Estimated expenses of Asia-Pacific Equity Fund after the Reorganization - after expense reimbursement from management (PRO FORMA): 2.11% AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF PILGRIM SMALLCAP ASIA GROWTH FUND UNANIMOUSLY APPROVED THE PROPOSED REORGANIZATION. THE BOARD RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSED REORGANIZATION. Approval of the Reorganization Agreement requires the affirmative vote of a majority of the outstanding shares of SmallCap Asia Growth Fund. ---------- (1) Based on the 12 month period ended June 30, 2000, as adjusted for current expenses of contracts and the 12b-1 plan which became effective when ING Pilgrim Investments became adviser to the Fund on July 26, 2000. 3 INVESTMENT OBJECTIVES AND POLICIES COMPARISON OF INVESTMENT OBJECTIVES AND STRATEGIES
-------------------------------------------------------------------------------------------------------------------- SMALLCAP ASIA GROWTH FUND ASIA-PACIFIC EQUITY FUND -------------------------------------------------------------------------------------------------------------------- INVESTMENT OBJECTIVE Seeks long-term capital appreciation. Seeks long-term capital appreciation. -------------------------------------------------------------------------------------------------------------------- PRIMARY INVESTMENT * Normally invests at least 65% of total * Normally invests at least 65% of total STRATEGIES assets in equity securities of companies assets in equity securities listed on in the "Asia Region" having market stock exchanges in countries in the capitalizations of less than $1 billion. "Asia-Pacific" region or issued by companies of all sizes based in this * May invest 35% of its total assets in: region. companies with market capitalizations of $1 billion or more; companies outside * Asia-Pacific countries include: China; the Asia Region (e.g., Australia or New Hong Kong; Indonesia; Korea; Malaysia; Zealand); debt securities; and other Philippines; Singapore; Taiwan and investments. Thailand; but not Japan and Australia. * Asia Region countries include: * Does not consider Japan or Australia to Bangladesh; China; Hong Kong; India; be Asia-Pacific countries Indonesia; Korea; Malaysia; Pakistan; The Philippines; Singapore; Sri Lanka; Vietnam; Taiwan; and Thailand. * Does not intend to invest in Japanese securities. * During times that the investment adviser or sub-adviser believes that stocks of smaller companies present undue risk, the Fund may adopt a defensive investment posture, and invest in equity securities of medium and large companies in the Asia region. -------------------------------------------------------------------------------------------------------------------- INVESTMENT ADVISER(1) ING Pilgrim Investments ING Pilgrim Investments -------------------------------------------------------------------------------------------------------------------- PORTFOLIO MANAGERS Richard T. Saler and Philip A. Schwartz Richard T. Saler and Philip A. Schwartz --------------------------------------------------------------------------------------------------------------------
---------- (1) Prior to January 2, 2001, Insinger Asset Management served as sub-adviser to SmallCap Asia Growth Fund, and HSBC Asset Management served as sub-adviser to Asia-Pacific Equity Fund. As you can see from the chart above, the investment objectives and strategies of the Funds are similar. 4 COMPARISON OF PORTFOLIO CHARACTERISTICS The following table compares certain characteristics of the portfolios of the Funds as of June 30, 2000.
----------------------------------------------------------------------------------------------------------------- SMALLCAP ASIA GROWTH FUND ASIA-PACIFIC EQUITY FUND ----------------------------------------------------------------------------------------------------------------- Net Assets $11,345,819 $27,702,380 ----------------------------------------------------------------------------------------------------------------- Number of Holdings 35 48 ----------------------------------------------------------------------------------------------------------------- Average Market Capitalization of Companies in Portfolio (dollar weighted): $1.2 billion(3) $1.3 billion ----------------------------------------------------------------------------------------------------------------- Range of Market Capitalization of Companies in Portfolio: $115.0 million to $97.5 billion $231.0 million to $78.3 billion ----------------------------------------------------------------------------------------------------------------- As a percentage of net assets: Equity Securities 90.49% 99.54% Asia-Pacific Securities (1) 90.49% 99.54% Holdings in Companies with Market Capitalizations of Under $1 Billion 17.05% 18.60% Holdings in Companies with Market Capitalizations of $1 Billion or More 73.44% 80.94% ----------------------------------------------------------------------------------------------------------------- Portfolio Turnover Rate(2) 144.82% 138.00% ----------------------------------------------------------------------------------------------------------------- Top 5 Industries Telecommunications 14.30% Semiconductors 15.64% (as a % of net assets) Internet 10.91% Electric 13.34% Semiconductors 10.51% Banks 11.79% Banks 8.90% Telecommunications 10.82% Holding Companies - Holding Companies - Diversified 6.95% Diversified 8.06% ----------------------------------------------------------------------------------------------------------------- Top 10 Countries Hong Kong 36.38% Hong Kong 31.30% (as a % of net assets) Taiwan 20.41% Taiwan 25.03% South Korea 16.32% South Korea 20.17% Singapore 11.07% Singapore 12.08% Malaysia 6.31% Malaysia 5.69% Thailand 3.23% China 1.00% Indonesia 0.77% Philippines 0.26% ----------------------------------------------------------------------------------------------------------------- Top 10 Holdings Samsung Electronics Co. 4.13% Samsung Electronics 8.60% (as a % of net assets) Hutchison Whampoa Ltd. 4.00% Cheung Kong Hldg. 4.79% HSBC Holdings PLC 3.83% DBS Group Hldg Ltd. 4.64% Cheung Kong Holdings 3.59% China Mobile Ltd. 4.49% Bank of East Asia 3.59% Hutchison Whampoa 4.34% China Unicom 3.58% Korea Telecom 3.44% SK Corp. 3.48% Taiwan Semiconductor Korea Telecom 2.33% Mfg Co., Ltd. 3.41% Apt Satellite Hldg 2.16% H&CB 3.03% Asia World Online 1.24% Korea Electric Power Corp. 2.80% Pacific Century CyberWorks Ltd. 1.78% -----------------------------------------------------------------------------------------------------------------
---------- (1) As defined in the chart entitled "Comparison of Investment Objectives and Strategies." (2) For the 12 month period ended June 30, 2000. (3) During this period, the Fund's average market capitalization was over $1 billion due to the Fund investing in larger companies as a defensive measure. 5 RELATIVE PERFORMANCE The following table shows, for each calendar year since 1995 and the period January 1, 2000 to September 30, 2000, the average annual total return for: (a) Class A shares of SmallCap Asia Growth Fund; (b) Class A shares of Asia-Pacific Equity Fund; and (c) the Morgan Stanley Capital International Far East Free ex-Japan ("MSCI Far East Free ex-Japan") Index. Performance of the Funds in the table does not reflect the deduction of sales loads, and would be lower if they did. The index has inherent performance advantages over the Funds 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. 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.
MSCI FAR EAST CALENDAR YEAR/ SMALLCAP ASIA ASIA-PACIFIC FREE EX-JAPAN PERIOD ENDED GROWTH FUND(2) EQUITY FUND(3) INDEX(4) ------------ -------------- -------------- -------- 12/31/96 25.50% 9.46% 8.90% 12/31/97 -42.32% -43.73% -45.48% 12/31/98 -19.41% -15.51% -7.39% 12/31/99 57.29% 74.41% 59.40% 1/1/00 - 9/30/00(1) -23.69% -38.07% -28.70%
---------- (1) Not annualized. (2) SmallCap Asia Growth Fund Class A commenced operations on July 3, 1995. Prior to July 26, 2000, the Fund was advised by Lexington Management Corporation, which was acquired by the parent to ING Pilgrim Investments on July 26, 2000. ING Pilgrim Investments became the adviser on that same date. (3) Asia-Pacific Equity Fund commenced operations on September 1, 1995. For more information about the performance of Asia-Pacific Equity Fund, see "Additional Information About Asia-Pacific Equity Fund." (4) The MSCI Far East Free ex-Japan Index is an unmanaged index that measures the performance of securities listed on exchanges in the Far East markets excluding Japan. This index is used to measure performance with respect to both Funds. NOTE: CHANGE IN PORTFOLIO MANAGEMENT FOR BOTH FUNDS: As discussed more fully below, effective January 2, 2001, Insinger Asset Management no longer serves as sub-adviser to the SmallCap Asia Growth Fund. Effective January 2, 2001, HSBC Asset Management no longer serves as sub-adviser to the Asia-Pacific Equity Fund. ING Pilgrim Investments has assumed the day-to-day management of both Funds. 6 PERFORMANCE OF ASIA-PACIFIC EQUITY FUND The bar chart and table that follow provide an indication of the risks of investing in Asia-Pacific Equity Fund by showing (on a calendar year basis) changes in Asia-Pacific Equity Fund's annual total return from year to year and by showing (on a calendar year basis) how Asia-Pacific Equity Fund's average annual returns since inception compare to those of the MSCI Far East Free ex-Japan Index. The information in the bar chart is based on the performance of the Class A shares of Asia-Pacific Equity 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 Asia-Pacific Equity Fund's past performance is not necessarily an indication of how the Fund will perform in the future. Total returns include reinvestment of dividends and capital gains distributions, if any. All indices are unmanaged. CALENDAR YEAR -BY-YEAR RETURNS (1)(2) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999(3) ---- ---- ---- ---- ---- ---- ---- ---- ---- ------- 9.46% -43.73% -15.51% 74.41% ---------- (1) During the period shown in the chart, the Fund's best quarterly performance was 39.92% for the quarter ended June 30, 1999, and the Fund's worst quarterly performance was -33.11% for the quarter ended December 31, 1997. (2) The Fund's year-to-date total return as of September 30, 2000 was -38.07%. (3) Returns in 1999 were primarily achieved during unusually favorable conditions in the market, particularly for Asia-Pacific region companies. (See "Comparison of Investment Techniques and Risks of Investing in the Funds" below.) You should not expect that such favorable returns can consistently be achieved. The table below shows what the average annual total returns of Asia-Pacific Equity Fund would equal if you averaged out actual performance over various lengths of time, compared to the MSCI Far East Free ex-Japan Index. The MSCI Far East Free ex-Japan Index has inherent performance advantages over Asia-Pacific Equity 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. Asia-Pacific Equity Fund's performance reflected in the table below assumes the deduction of the maximum sales charge in all cases. 7 -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS for the periods ended December 31, 1999(1) -------------------------------------------------------------------------------- SINCE 1 YEAR INCEPTION ------ --------- Asia-Pacific Equity Fund - Class A(2) 64.46% -3.80% Asia-Pacific Equity Fund - Class B(3) 68.00% -3.72% MSCI Far East Free ex-Japan Index(4) 59.40% -2.14% ---------- (1) The Fund commenced operations on September 1, 1995. (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) The MSCI Far East Free ex-Japan Index is an unmanaged index that measures the performance of securities listed on exchanges in the Far East markets, excluding Japan. The table below shows the performance of Asia-Pacific Equity Fund if sales charges are not reflected. -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS for the period ended December 31, 1999 -------------------------------------------------------------------------------- SINCE 1 YEAR INCEPTION ------ --------- Asia-Pacific Equity Fund - Class A 74.41% -2.48% Asia-Pacific Equity Fund - Class B 73.00% -3.27% For a discussion by the former adviser regarding the performance of the Asia-Pacific Equity Fund for the year ended October 31, 2000, see Appendix A to this Proxy Statement/Prospectus. Additional information about Asia-Pacific Equity Fund is included in Appendix C to this Proxy Statement/Prospectus. 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 Asia-Pacific Equity Fund are similar to the risks of investing in SmallCap Asia Growth Fund, although the Funds may be subject to varying degrees of risk. A principal risk of an investment in either Fund is that you may lose money on your investment. Each Fund's shares may go up or down, sometimes rapidly and unpredictably. The value of each Fund's investments may fall as the prices of its investments go up or down. Market conditions, financial conditions of issuers represented in the portfolio, investment policies, portfolio management, and other factors affect such fluctuations. EQUITY SECURITIES. Equity securities face market, issuer and other risks, and their values may go up or down, sometimes rapidly and unpredictably. Market risk is the risk that securities may decline in value due to factors affecting securities markets generally or particular industries. Issuer risk is the risk that the value of a security may decline for reasons relating to the issuer, such as changes in the financial condition of the issuer. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. In particular, the SmallCap Asia Growth Fund (and, to some degree, the Asia-Pacific Equity Fund) may invest in small companies, which may be more susceptible to price swings than larger companies, because they may have fewer financial resources, more limited product and market diversification and many are dependent on a few key managers. RISKS OF THE ASIA-PACIFIC REGION. The Asia-Pacific region includes countries in various stages of economic development, including emerging market countries. In 1997 and 1998, securities markets in Asian countries suffered significant downturns and volatility, and currencies lost value in relation to the U.S. dollar. Currency devaluation in any one country may have a significant 8 effect on the entire region. Political or social unrest in some or all Asian countries could cause further economic and market uncertainty. Moreover, because each Fund concentrates on a single region of the world, their performance may be more volatile than that of a fund that invests globally. If Asia-Pacific securities fall out of favor, it may cause the Funds to underperform funds that focus on other types of stocks. Investment in any foreign investments may be riskier than U.S. investments for many reasons, including changes in currency exchange rates, unstable political and economic conditions, a lack of adequate company information, differences in the way securities markets operate, less secure foreign banks or securities depositories than those in the U.S., and foreign controls on investment. To the extent the Funds invest in emerging market countries, the risks may be greater, partly because emerging market countries may be less politically and economically stable than other countries. It may also be more difficult to buy and sell securities in emerging market countries INABILITY TO SELL SECURITIES. Securities of smaller and emerging market companies trade in lower volume and may be less liquid than securities of companies in larger, more established markets. The Funds could lose money if they cannot sell a security at the time and price that would be most beneficial to them. CHANGE IN PORTFOLIO MANAGEMENT. The Asia-Pacific Equity Fund has undergone a change in portfolio management at or around January 2, 2001. HSBC Asset Management, Inc., HSBC Asset Management (Hong Kong) Limited and HSBC Asset Management (Europe) Limited (collectively, "HSBC") no longer serves as sub-adviser to the Asia-Pacific Equity Fund. As of January 2, 2001, ING Pilgrim Investments manages the Asia-Pacific Equity Fund directly. Shareholders bear the risk that the new portfolio managers will not be able to sustain the Asia-Pacific Equity Fund's historical relative performance. With the assumption of portfolio management duties by ING Pilgrim Investments, portfolio turnover, discussed below, may be higher than usual in connection with the potential restructuring of the holdings of the Asia-Pacific Equity Fund to reflect the management style of ING Pilgrim Investments. Such potential restructuring may result in transactional costs to the Fund and may result in accelerated capital gain distribution as a result of the turnover. PORTFOLIO TURNOVER. The Funds may engage in frequent and active trading of portfolio securities to achieve their investment objectives. A higher 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. TEMPORARY DEFENSIVE STRATEGIES. For both Funds, when the Adviser or sub-adviser to the Fund anticipates unusual market or other conditions, the Fund may temporarily depart from its principal investment strategies as a defensive measure. To the extent a Fund is engaged in temporary defensive investments, it will not be pursuing its investment objective. Beginning in 1998, SmallCap Asia Growth Fund has, from time to time, invested significantly in equity securities of large companies. 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 Asia-Pacific Equity Fund, see "Appendix C: Additional Information Regarding Pilgrim Asia-Pacific Equity Fund." TOTAL OPERATING EXPENSES. After management subsidies, the operating expenses of Asia-Pacific Equity Fund, expressed as a ratio of expenses to average daily net assets ("expense ratio"), were lower than those of SmallCap Asia Growth Fund. For the 12 month period ended June 30, 2000, after management subsidies, the net expenses for Class A shares of Asia-Pacific Equity Fund were 2.11%, lower than those of the same Class of SmallCap Asia Growth Fund, which were 2.75%. Without the expense limitation agreement, the total operating expenses for Class A shares of the Asia-Pacific Equity Fund would have been higher. 9 The operating expenses for SmallCap Asia Growth Fund are based upon expenses incurred by the Fund for the 12 month period ended June 30, 2000, adjusted for current expenses of contracts and distribution plans which became effective when ING Pilgrim Investments became adviser to the Fund on July 26, 2000. EXPENSE LIMITATION ARRANGEMENTS. Expense limitation arrangements are in place for SmallCap Asia Growth Fund and Asia-Pacific Equity Fund. Under the terms of the SmallCap Asia Growth Fund expense limitation agreement, ING Pilgrim Investments has agreed to limit the expenses of the Fund, excluding interest, taxes, brokerage and extraordinary expenses, subject to possible reimbursement to ING Pilgrim Investments within three years. The current expense limitation agreement for the SmallCap Asia Growth Fund provides that it will remain in effect through at least July 26, 2002. There is no assurance that the expense limitation agreement will be continued after that date. The expense limitations for Classes A and B of SmallCap Asia Growth Fund are 2.75% and 3.50%, respectively. Under the terms of the Asia-Pacific Equity Fund expense limitation agreement, ING Pilgrim Investments has agreed to limit the expenses of the Fund, excluding interest, taxes, brokerage and extraordinary and other expenses, subject to possible reimbursement to ING Pilgrim Investments within three years. The current expense limitation agreement for the Asia-Pacific Equity Fund provides that it will remain in effect through at least October 31, 2001. There is no assurance that the expense limitation agreement will be continued after that date. The expense limitations for Classes A and B of Asia-Pacific Equity Fund are 2.00% and 2.75%, respectively. This information and similar information for the other Classes is shown in the table below entitled "Annual Fund Operating Expenses." It is expected that the expense ratios of the Asia-Pacific Equity Fund after the Reorganization will be 2.11% and 2.86% for Classes A and B, respectively, after reimbursement of expenses. MANAGEMENT FEES. Asia-Pacific Equity Fund and SmallCap Asia Growth Fund both have an annual management fee of 1.25% of the Fund's average daily net assets. DISTRIBUTION AND SERVICE FEES. The distribution (12b-1) and service fees of SmallCap Asia Growth Fund are the same as those of Asia-Pacific Equity Fund. EXPENSE TABLE. The current expenses of each of the Funds and estimated PRO FORMA expenses giving effect to the proposed Reorganization are shown in the following table. Expenses for the Funds are annualized based upon the operating expenses incurred by Class A and Class B shares of the Fund for the period ended June 30, 2000. The operating expenses of SmallCap Asia Growth Fund are adjusted for current expenses of contracts and 12b-1 plans which became effective when ING Pilgrim Investments became adviser to the Fund on July 26, 2000. PRO FORMA fees show estimated fees of Asia-Pacific Equity Fund after giving effect to the proposed Reorganization. PRO FORMA numbers are estimated in good faith and are hypothetical, and reflect adjustments in contractual charges. 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(3) EXPENSES EXPENSES BY ADVISER(4) EXPENSES ---- ----------------- -------- -------- ------------- -------- CLASS A Asia-Pacific Equity Fund 1.25% 0.25% 1.05% 2.55% -0.44% 2.11% SmallCap Asia Growth Fund 1.25% 0.25% 1.68% 3.18% -0.43% 2.75% Surviving Fund after Reorganization (PRO FORMA) 1.25% 0.25% 0.89% 2.39% -0.28% 2.11% CLASS B(2) Asia-Pacific Equity Fund 1.25% 1.00% 1.05% 3.30% -0.44% 2.86% SmallCap Asia Growth Fund 1.25% 1.00% 1.68% 3.93% -0.43% 3.50% Surviving Fund after Reorganization (PRO FORMA) 1.25% 1.00% 0.89% 3.14% -0.28% 2.86%
10 ---------- (1) Currently, Asia-Pacific Equity Fund's fiscal year-end is October 31, whereas SmallCap Asia Growth Fund's fiscal year-end is December 31. Formerly, Asia-Pacific Equity Fund's fiscal year-end was June 30. Expenses of the Funds on a PRO FORMA basis are estimated based upon expenses incurred by each Fund for the 12 month period ended June 30, 2000, as adjusted for estimated contractual operating expenses; PRO FORMA expenses are adjusted for anticipated contractual changes. Expenses of SmallCap Asia Growth Fund are based upon expenses incurred by the Fund for the 12 month period ended June 30, 2000, adjusted for current expenses of contracts and 12b-1 plans which became effective when ING Pilgrim Investments became adviser to the Fund on July 26, 2000. (2) Because Class B shares of SmallCap Asia Growth Fund were not offered during the period ended December 31, 1999, their expenses are estimated based on Class A expenses. (3) 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. (4) ING Pilgrim Investments has entered into expense limitation agreements that limit expenses (excluding interest, taxes, brokerage and extraordinary expenses) for each of the Funds. The current expense limitation agreement for the SmallCap Asia Growth Fund provides that it will remain in effect through at least July 26, 2002. There is no assurance that the expense limitation agreement will be continued after that date. The expense limitations for Classes A and B of SmallCap Asia Growth Fund are 2.75% and 3.50%, respectively. The current expense limitation agreement for the Asia-Pacific Equity Fund provides that it will remain in effect through at least October 31, 2001. There is no assurance that the expense limitation agreement will be continued after that date. The expense limitations for Classes A and B of Asia-Pacific Equity Fund are 2.00% and 2.75%, respectively. Following the Reorganization and in the ordinary course of business as a mutual fund, certain holdings of SmallCap Asia Growth Fund that are transferred to Asia-Pacific Equity Fund in connection with the Reorganization may be sold. Such sales may result in increased transaction costs for Asia-Pacific Equity Fund, and the realization of taxable gains or losses for Asia-Pacific Equity Fund. EXAMPLES. The examples are intended to help you compare the cost of investing in the 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 and in the combined Fund after the Reorganization for the time periods indicated. The examples also assume that your investment has a 5% return each year and that each Fund's operating expenses remain the same. The 5% return is an assumption and is not intended to portray past or future investment results. Based on the above assumptions, you would pay the following expenses if you redeem your shares at the end of each period shown. Because this is an estimate, your actual costs may be higher or lower. 11 ASIA-PACIFIC EQUITY FUND SMALLCAP ASIA GROWTH FUND ---------------------------------- ---------------------------------- 1 3 5 10 1 3 5 10 YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS ---- ----- ----- ----- ---- ----- ----- ----- CLASS A $ 777 $1,283 $1,815 $3,263 $ 837 $1,461 $2,108 $3,832 CLASS B $ 789 $1,275 $1,884 $3,394* $ 853 $1,459 $2,183 $3,960* PRO FORMA - THE FUNDS COMBINED** --------------------------------- 1 3 5 10 YEAR YEARS YEARS YEARS ---- ----- ----- ----- CLASS A $ 777 $ 1,252 $1,753 $3,124 CLASS B $ 789 $ 1,242 $1,820 $3,255* ---------- * The ten year calculations for Class B shares assume conversion of the Class B shares to Class A shares at the end of the eighth year following the date of purchase. ** Estimated. You would pay the following expenses if you did not redeem your shares: ASIA-PACIFIC EQUITY FUND SMALLCAP ASIA GROWTH FUND ---------------------------------- ---------------------------------- 1 3 5 10 1 3 5 10 YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS ---- ----- ----- ----- ---- ----- ----- ----- CLASS A $ 777 $1,283 $1,815 $3,263 $ 837 $1,461 $2,108 $3,832 CLASS B $ 289 $ 975 $1,684 $3,394* $ 353 $1,159 $1,983 $3,960* PRO FORMA - THE FUNDS COMBINED** ---------------------------------- 1 3 5 10 YEAR YEARS YEARS YEARS ---- ----- ----- ----- CLASS A $ 777 $1,252 $1,753 $3,124 CLASS B $ 289 $ 942 $1,620 $3,255* ---------- * The ten year calculations for Class B shares assume conversion of the Class B shares to Class A shares at the end of the end of the eighth year following the date of purchase. ** Estimated. GENERAL INFORMATION Class A and Class B shares of Asia-Pacific Equity Fund issued to a shareholder in connection with the Reorganization 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 SmallCap Asia Growth Fund held by that shareholder immediately prior to the Reorganization. In addition, the period that the shareholder held shares of SmallCap Asia Growth Fund will be included in the holding period of Asia-Pacific Equity Fund shares for purposes of calculating any contingent deferred sales charge. Similarly, Class B shares of Asia-Pacific Equity Fund issued to a shareholder in connection with the Reorganization will convert to Class A shares eight years after the date that the Class B shares of SmallCap Asia Growth Fund were purchased by the shareholder. Asia-Pacific Equity Fund and SmallCap Asia Growth Fund are each subject to the sales load structure described in the table below on new investments. 12 TRANSACTION FEES ON NEW INVESTMENTS (fees paid directly from your investment) CLASS A CLASS B ------- ------- Maximum sales charge (load) imposed on purchases (as a percentage of offering price) 5.75%(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) Reduced for purchases of $50,000 and over. See "Class A Shares: Initial Sales Charge Alternative" in Appendix C. (2) A contingent deferred sales charge of no more than 1.00% may be assessed on redemptions of Class A shares that were purchased without an initial sales charge as part of an investment of $1 million or more. See "Class A Shares: Initial Sales Charge Alternative" in Appendix C. (3) Imposed upon redemptions within 6 years of purchase. The fee has scheduled reductions after the first year. See "Class B Shares: Deferred Sales Charge Alternative" in Appendix C and "Deferred Sales Charges" in the Pilgrim Prospectus. Neither Asia-Pacific Equity Fund nor SmallCap Asia Growth Fund have any redemption fees, exchange fees or sales charges on reinvested dividends. ADDITIONAL INFORMATION ABOUT ASIA-PACIFIC EQUITY FUND INVESTMENT PERSONNEL NOTE: CHANGE IN PORTFOLIO MANAGEMENT FOR BOTH FUNDS. Effective January 2, 2001, Insinger Asset Management no longer serves as sub-adviser to the SmallCap Asia Growth Fund. Effective January 2, 2001, HSBC Asset Management no longer serves as sub-adviser to the Asia-Pacific Equity Fund. ING Pilgrim Investments has assumed the day-to-day management of both Funds. The fees payable to ING Pilgrim Investments for serving as investment adviser will not change. Effective January 2, 2001, Richard T. Saler and Philip A. Schwartz assumed and share responsibility for the day-to-day management of the SmallCap Asia Growth Fund and the Asia-Pacific Equity Fund. Mr. Saler has over 13 years of experience in international investments. He is Senior Vice President and Director of International Equity Investment Strategy of ING Pilgrim and held similar positions with Lexington Management Corporation ("LMC") prior to that firm's acquisition by the parent company of ING Pilgrim in July, 2000. Mr. Saler is a member of an investment management team that manages the Pilgrim Global Corporate Leaders Fund, Lexington Emerging Markets Fund, Pilgrim Emerging Countries Fund, Pilgrim Worldwide Emerging Markets Fund and Pilgrim International Fund. Mr. Saler has focused on international markets since joining LMC in 1986. Mr. Schwartz has over 13 years experience in international investments. He is Senior Vice President and Director of International Equity Investment Strategy of ING Pilgrim, and held the same positions with LMC prior to that firm's recent acquisition. He is also a Chartered Financial Analyst and a member of the New York Society of Security Analysts. Mr. Schwartz is a member of an investment management team that manages the Pilgrim Global Corporate Leaders Fund, Lexington Emerging Markets Fund, Pilgrim Emerging Countries Fund, Pilgrim Worldwide Emerging Markets Fund and Pilgrim International Fund. Prior to joining LMC in 1993, he was Vice President of European Research Sales with Cheuvreux De Virieu in Paris and New York, serving the institutional market. Prior to Cheuvreux, Mr. Schwartz was affiliated with Olde and Co. and Kidder, Peabody as a stockbroker. 13 INFORMATION ABOUT THE REORGANIZATION THE REORGANIZATION AGREEMENT. The Reorganization Agreement provides for the transfer of all of the assets and liabilities of SmallCap Asia Growth Fund to Asia-Pacific Equity Fund in exchange for shares of Asia-Pacific Equity Fund. SmallCap Asia Growth Fund will distribute the shares of Asia-Pacific Equity Fund received in the exchange to the shareholders of SmallCap Asia Growth Fund and then SmallCap Asia Growth Fund will be liquidated. After the Reorganization, each shareholder of SmallCap Asia Growth Fund will own shares in Asia-Pacific Equity Fund having an aggregate value equal to the aggregate value of each respective Class of shares in SmallCap Asia Growth Fund held by that shareholder as of the close of business on the business day of the Closing. Shareholders of each Class of shares of SmallCap Asia Growth Fund will receive shares of the corresponding Class of Asia-Pacific Equity Fund. In the interest of economy and convenience, shares of Asia-Pacific Equity Fund generally will not be represented by physical certificates, unless requested in writing. Until the Closing, shareholders of SmallCap Asia Growth Fund will continue to be able to redeem their shares. Redemption requests received after the Closing will be treated as requests received by Asia-Pacific Equity Fund for the redemption of its shares received by the shareholder in the Reorganization. The obligations of the Funds under the Reorganization Agreement are subject to various conditions, including approval of the shareholders of SmallCap Asia Growth Fund. The Reorganization Agreement also requires that each of the Funds take, or cause to be taken, all action, and do or cause to be done, all things reasonably necessary, proper or advisable to consummate and make effective the transactions contemplated by the Reorganization Agreement. The Reorganization Agreement may be terminated by mutual agreement of the parties or on certain other grounds. Please refer to Appendix B to review the terms and conditions of the Reorganization Agreement. REASONS FOR THE REORGANIZATION. The Reorganization is one of 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. Another reason for this Reorganization is that both SmallCap Asia Growth Fund and Asia-Pacific Equity Fund are relatively small funds, and by combining, the surviving fund will be a larger, more viable fund. The proposed Reorganization was approved by the Board of Directors of Pilgrim SmallCap Asia Growth Fund, Inc. 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 SmallCap Asia Growth Fund, Inc. determined that the interests of the shareholders of SmallCap Asia Growth Fund will not be diluted as a result of the proposed Reorganization, and that the proposed Reorganization is in the best interests of SmallCap Asia Growth Fund and its shareholders. The Reorganization will allow SmallCap Asia Growth Fund's 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 Asia-Pacific Equity 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 Pilgrim Funds and ING Funds and Classes available after the Reorganization is contained in Appendix D. 14 BOARD CONSIDERATIONS. The Board of Directors of Pilgrim SmallCap Asia Growth Fund in recommending the proposed transaction, considered a number of factors, including the following: (1) The plans of management to reduce the overlap in funds in the Pilgrim Fund complex; (2) expense ratios and information regarding fees and expenses of SmallCap Asia Growth Fund and Asia-Pacific Equity Fund, including the expense limitation arrangements offered by ING Pilgrim Investments for each Fund; (3) the small size of the SmallCap Asia Growth Fund; (4) estimates that show that combining the Funds is expected to result in lower expense ratios because of economies of scale expected to result from an increase in the asset size of the reorganized Fund; (5) whether the Reorganization would dilute the interests of SmallCap Asia Growth Fund's and Asia-Pacific Equity Fund's current shareholders; (6) the relative investment performance and risks of Asia-Pacific Equity Fund as compared to SmallCap Asia Growth Fund; (7) the similarity of Asia-Pacific Equity Fund's investment objectives, policies and restrictions with those of SmallCap Asia Growth Fund; (8) the costs to be borne by SmallCap Asia Growth Fund, Asia-Pacific Equity Fund, and ING Pilgrim Investments; and (9) the tax-free nature of the Reorganization to SmallCap Asia Growth Fund and Asia-Pacific Equity Fund and their shareholders. THE DIRECTORS OF PILGRIM SMALLCAP ASIA GROWTH FUND RECOMMEND THAT SHAREHOLDERS APPROVE THE REORGANIZATION WITH ASIA-PACIFIC EQUITY FUND. TAX CONSIDERATIONS. The Reorganization is intended to qualify for Federal income tax purposes as a tax-free reorganization under Section 368 of the Internal Revenue Code of 1986, as amended. Accordingly, pursuant to this treatment, neither SmallCap Asia Growth Fund nor its shareholders nor Asia-Pacific Equity Fund is expected to recognize any gain or loss for federal income tax purposes from the transactions contemplated by the Reorganization Agreement. As a condition to the Closing of the Reorganization, the Funds will receive an opinion from the law firm of Dechert to the effect that the Reorganization will qualify as a tax-free reorganization for Federal income tax purposes. That opinion will be based in part upon certain assumptions and upon certain representations made by Pilgrim Advisory Funds, Inc. and Pilgrim SmallCap Asia Growth Fund, Inc. Immediately prior to the Reorganization, SmallCap Asia Growth Fund will pay a dividend or dividends which, together with all previous dividends, will have the effect of distributing to its shareholders all of SmallCap Asia Growth Fund's investment company taxable income for taxable years ending on or prior to the Reorganization (computed without regard to any deduction for dividends paid) and all of its net capital gain, if any, realized in taxable years ending on or prior to the Reorganization (after reduction for any available capital loss carryforward). Such dividends will be included in the taxable income of SmallCap Asia Growth Fund's shareholders. As of October 31, 2000, SmallCap Asia Growth Fund had accumulated capital loss carryforwards in the amount of approximately $9,778,022. As of October 31, 2000, Asia-Pacific Equity Fund had accumulated capital loss carryforwards in the amount of approximately $23,797,507. After the Reorganization, these loss carryforwards generally will be available to Asia-Pacific Equity Fund to offset its capital gains. Also, after the Reorganization, the losses of SmallCap Asia Growth Fund will be available to Asia-Pacific Equity Fund to offset its capital gains, although a portion of the amount of these losses which may offset Asia-Pacific Equity Fund's capital gains in any given year will be limited. As a result of this limitation, it is possible that Asia-Pacific Equity Fund may not be able to use its losses as rapidly as it might have had the Reorganization not occurred, and part of these losses may not be useable at all. The ability of 15 Asia-Pacific Equity Fund to absorb losses in the future depends on a variety of factors, many of which cannot be known in advance, including the existence of capital gains against which these losses may be offset. In addition, the benefits of any of Asia-Pacific Equity Fund's capital loss carryforwards currently are available only to pre-Reorganization shareholders of that Fund. After the Reorganization, however, these benefits will inure to the benefit of all post-Reorganization shareholders of Asia-Pacific Equity Fund. EXPENSES OF THE REORGANIZATION. 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, including but not limited to, the costs of solicitation of voting instructions and any necessary filings with the SEC. Of the Reorganization expenses allocated to the Funds, each Fund will bear a ratable portion based on their relative net asset values immediately before Closing. ADDITIONAL INFORMATION ABOUT THE FUNDS FORM OF ORGANIZATION. Asia-Pacific Equity Fund is a series of Pilgrim Advisory Funds, Inc., which is a Maryland Corporation. Pilgrim SmallCap Asia Growth Fund, Inc. is a Maryland Corporation. Pilgrim SmallCap Asia Growth Fund and Pilgrim Advisory Funds, Inc. are each governed by a Board of Directors. The Board of Directors of both Funds has the same eleven members. DISTRIBUTOR. ING Pilgrim Securities, Inc. (the "Distributor"), whose address is 7337 East Doubletree Ranch Road, Scottsdale, Arizona 85258, is the principal distributor for both of the Funds. The Asia-Pacific Equity Fund also offers other shares, which may have different sales charges and other expenses that may affect their performance. You can obtain more information about these other share Classes by calling 1-800-992-0180. DIVIDENDS AND OTHER DISTRIBUTIONS. Each Fund pays dividends from net investment income and net capital gains, if any, on an annual basis. Dividends, and distributions of each of the Funds are automatically reinvested in additional shares of the respective Class of the particular Fund, unless the shareholder elects to receive distributions in cash. If the Reorganization Agreement is approved by SmallCap Asia Growth Fund's shareholders, then as soon as practicable before the Closing, SmallCap Asia Growth Fund will pay its shareholders a cash distribution of substantially all undistributed net investment income and undistributed realized net capital gains. CAPITALIZATION. The following table shows on an unaudited basis the capitalization of the SmallCap Asia Growth Fund and the Asia-Pacific Equity Fund as of June 30, 2000, and on a PRO FORMA basis as of June 30, 2000, giving effect to the Reorganization:
NET ASSET VALUE SHARES NET ASSETS PER SHARE OUTSTANDING ---------- --------- ----------- SMALLCAP ASIA GROWTH FUND Class A $11,345,819 $8.01 1,417,153 Class B -- N/A N/A ASIA-PACIFIC EQUITY FUND Class A $11,725,688 $7.23 1,621,404 Class B $12,227,613 $6.97 1,753,705 Class M $ 3,749,079 $7.04 532,713 PRO FORMA - ASIA-PACIFIC EQUITY FUND INCLUDING SMALLCAP ASIA GROWTH FUND Class A $23,071,507 $7.23 3,191,080 Class B $12,227,613 $6.97 1,753,705 Class M $ 3,749,079 $7.04 532,713
16 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 25, 2001. Shareholders of SmallCap Asia Growth Fund whose shares are held by nominees, such as brokers, can vote their proxies by contacting their respective nominee. In addition to the solicitation of proxies by mail, employees of ING Pilgrim Investments and its affiliates, without additional compensation, may solicit proxies in person or by telephone, telegraph, facsimile, or oral communication. SmallCap Asia Growth Fund has retained Shareholder Communications Corporation, a professional proxy solicitation firm, to assist with any necessary solicitation of proxies. Shareholders of SmallCap Asia Growth Fund may receive a telephone call from the professional proxy solicitation firm asking the shareholder to vote. A shareholder may revoke the accompanying proxy at any time prior to its use by filing with SmallCap Asia Growth Fund, a written revocation or duly executed proxy bearing a later date. In addition, any shareholder who attends the Special Meeting in person may vote by ballot at the Special Meeting, thereby canceling any proxy previously given. The persons named in the accompanying proxy will vote as directed by the proxy, but in the absence of voting directions in any proxy that is signed and returned, they intend to vote "FOR" the Reorganization proposal and may vote in their discretion with respect to other matters not now known to the Board of Directors of SmallCap Asia Growth Fund that may be presented at the Special Meeting. VOTING RIGHTS Shareholders of SmallCap Asia Growth Fund are entitled to one vote for each share held as to any matter on which they are entitled to vote and each fractional share shall be entitled to a proportionate fractional vote. Shares have no preemptive or subscription rights. Shareholders of SmallCap Asia Growth Fund at the close of business on December 26, 2000 (the "Record Date") will be entitled to be present and give voting instructions for SmallCap Asia Growth Fund at the Special Meeting with respect to their shares owned as of that Record Date. As of the Record Date, 659,617 shares of SmallCap Asia Growth Fund were outstanding and entitled to vote. Approval of the Reorganization requires the affirmative vote of a majority of the outstanding shares of SmallCap Asia Growth Fund. The holders of one-third of the outstanding shares shall constitute a quorum. If less than a quorum is present, the stockholders present in person or by proxy, by majority vote and without notice other than by announcement at the Special Meeting, may adjourn the Special Meeting from time to time, but not for a period exceeding 120 days after the Record Date until a quorum shall attend. 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 Reorganization. The 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 broker-dealers that are members of the New York Stock Exchange may vote on the items to be considered at the Special Meeting on behalf of their customers and beneficial owners under the rules of the New York Stock Exchange. 17 To the knowledge of Pilgrim SmallCap Asia Growth Fund, Inc., as of November 1, 2000, no current Director owned 1% or more of the outstanding shares of SmallCap Asia Growth Fund, and the officers and Directors owned as a group, less than 1% of the shares of SmallCap Asia Growth Fund. Appendix E hereto lists the persons that, as of January 1, 2001, owned beneficially or of record 5% or more of the outstanding shares of any Class of SmallCap Asia Growth Fund. As of January 1, 2001, no person owned beneficially or of record 5% or more of the outstanding shares of any Class of the Asia-Pacific Equity Fund. OTHER MATTERS TO COME BEFORE THE MEETING Pilgrim SmallCap Asia Growth Fund 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 SmallCap Asia Growth Fund 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 SmallCap Asia Growth Fund's management. Therefore it is not practicable to specify a date by which shareholder proposals must be received in order to be incorporated in an upcoming proxy statement for an annual meeting. REPORTS TO SHAREHOLDERS ING Pilgrim Investments will furnish, without charge, a copy of the most recent Annual Report regarding SmallCap Asia Growth Fund 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 1-800-992-0180. IN ORDER THAT THE PRESENCE OF A QUORUM AT THE MEETING MAY BE ASSURED, PROMPT EXECUTION AND RETURN OF THE ENCLOSED PROXY CARD IS REQUESTED. A SELF-ADDRESSED, POSTAGE-PAID ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. /s/ James M. Hennessy James M. Hennessy, Secretary January 25, 2001 7337 East Doubletree Ranch Road Scottsdale, Arizona 85258 18 APPENDIX A Set forth below is an excerpt from Pilgrim Asia-Pacific Equity Fund's Annual Report dated October 31, 2000, regarding the fund's performance. PORTFOLIO MANAGEMENT TEAM: David Stuart, Regional CIO, Asia Pacific; Marcus Pakenham, Director; Sam Lau, Director; Richard Wong, Associate Director; Leilani Lam, Associate Director; Simon Yap, Associate Director; Seng-Keong Wan, Senior Investment Manager; Vernon Yu, Senior Investment Manager; Losa Mak, Investment Manager; Krista Yue, Investment Manager; Tytus Michalski, Investment Manager; Martha Wang, Executive; HSBC Asset Management (Americas), Inc., HSBC Asset Management (Hong Kong) Limited and HSBC Asset Management (Europe) Limited. GOAL: The Fund seeks long-term capital appreciation by investing in equity securities listed on stock exchanges in the Asia-Pacific region or issued by companies based in this region. MARKET OVERVIEW: For the period ended October 31, 2000, Asian markets were weak with the exception of Hong Kong and Malaysia. Rallies in the US and NASDAQ helped equities performances before 2000, but concerns on interest rate hikes and high valuations of tech companies erased much of the gains subsequently. Higher oil prices and profit warnings of tech companies in the US and Europe did not help. Hong Kong (+12.36%) performed well due to its safe haven status in addition to positive economic news, China's WTO entry, and hope of peaking interest rates. Massive fund raising activities and bearish property market outlook undermined the market. Malaysia edged up 1.28% on improving fundamentals and MSCI's re-inclusion. Profit taking took place on market's outperformance and amid uncertainties over bank mergers and slow corporate restructuring. The index was held up by local funds. Singapore eased 2.69% as funds moved out of the country on MSCI changes. Allowing foreign strategic investment in Singtel was positive. Political uncertainties clouded Taiwan, Thailand, Indonesia and the Philippines. Taiwan dropped 28.06% on rising margins position, cross strait tension, and financial scandals. Softer than expected demand for PCs also sidelined investors. Thailand weakened 31.28% due to disappointing debt restructuring, banks' capital raising activities, and lower 2000 GDP forecasts. Better-than-expected corporate earnings and steady economic recovery failed to lift sentiment. Indonesia fell 31.74%, affected by MSCI-related asset re-allocation, the removal of Indonesia from the FTSE Index and a weakening currency. The Philippines declined 36.75% in the absence of any major reform progress. Disappointing economic and fiscal data as well as negative corporate interim results hurt market sentiment. Korea plunged 32.28% due to weakened outlook on semiconductors and asset sale failure despite improved sentiment after the historical meeting between the North and South Korea, government measures for normalising liquidity flows and encouraging financial sector reform. PERFORMANCE: For the year ended October 31, 2000, the Fund's Class A shares excluding sales charges declined 28.30% compared to a decline of 21.38% for the MSCI Far East Free ex-Japan Index, a performance measurement of Far East markets excluding Japan. PORTFOLIO SPECIFICS: Asset allocation was overall positive although being overweight Korea and Taiwan was a slight drag. For stock selection, the main drag came from Taiwan where premium of GDR collapsed and the Fund does not have QFII status. Our current strategy is defensive increasing allocation to cash. We are likely to become less defensive over the next few months and build up positions in the preferred North Asian markets. MARKET OUTLOOK: The global backdrop for Asian equities remains difficult. There are signs of slowing growth in the US, Europe and Asia. We expect global growth of 3% in 2001 after 4% in 2000. Credit spreads have also widened for lower quality credits and in emerging markets. The earnings downgrades of US technology companies have also adversely affected Asian markets. In Asia, more sustainable growth levels are expected after two years of fast recovery from the Asian crisis. Our forecast growth rates for 2001 are reasonable, which should allow interest rates to remain reasonably stable. Earnings growth will be lower in 2001 but still robust. Share price declines have been heavy in some markets. We believe many of these falls were overdone. We believe Asia offers moderate economic growth in 2001, a reasonably stable interest rate environment and attractive market valuations. A-1
7/3/95 10/95 10/96 10/97 10/98 10/99 10/31/00 ------ ----- ----- ----- ----- ----- -------- Pilgrim SmallCap Asia Growth Fund Class A With Sales Charge $ 9,425 $ 9,152 $10,129 $ 8,185 $ 5,038 $ 7,051 $ 5,406 Pilgrim SmallCap Asia Growth Fund Class A Without Sales Charge $10,000 $ 9,710 $10,747 $ 8,684 $ 5,345 $ 7,481 $ 5,736 MSCI Far East Free ex-Japan Index $10,000 $ 9,693 $10,652 $ 6,969 $ 5,361 $ 8,151 $ 6,409 MSCI EAFE Index $10,000 $10,147 $11,243 $11,796 $12,970 $16,001 $15,575
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIOD ENDED OCTOBER 31, 2000 SINCE INCEPTION 1 YEAR 5 YEAR 09/01/95 ------ ------ -------- Including Sales Charge: Class A(1) -32.38% -13.72% -13.51% Class B(2) -32.44% -13.76% -13.39% Class M(3) -31.21% -13.84% -13.63% Excluding Sales Charge: Class A -28.30% -12.70% -12.51% Class B -28.89% -13.41% -13.22% Class M -28.68% -13.22% -13.04% MSCI Far East Free ex-Japan Index(4) -21.38% -7.94% -7.66% ---------- (1) Reflects deduction of the maximum Class A sales charge of 5.75%. (2) Reflects deduction of the Class B deferred sales charge of 5%, 2% and 2%, respectively, for the 1 year, 5 year and since inception returns. (3) Reflects deduction of the Class M deferred sales charge of 3.50% for the 1 year return. (4) The MSCI Far East Free ex-Japan Index measures performance of securities listed on exchanges in the Far East markets excluding Japan. Based on a $10,000 initial investment, the graph and table above illustrate the total return of Pilgrim Asia-Pacific Equity Fund against the MSCI Far East Free ex-Japan Index. The Index has an inherent performance advantage over the Fund since it has no cash in its portfolio, imposes no sales charges and incurs no operating expenses. An investor cannot invest directly in an index. The Fund's performance is shown both with and without the imposition of sales charges. Total returns reflect the fact that the Investment Adviser has contractually agreed to waive or defer its management fee and to pay other operating expenses otherwise payable by the Fund, subject to possible later reimbursement during a three-year period. Total returns would have been lower had there been no deferral to the Fund. PERFORMANCE DATA REPRESENTS PAST PERFORMANCE AND IS NO ASSURANCE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT IN THE FUND WILL FLUCTUATE. SHARES, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THIS LETTER CONTAINS STATEMENTS THAT MAY BE "FORWARD-LOOKING" STATEMENTS. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE "FORWARD-LOOKING" STATEMENTS. A-2 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): Price volatility and other risks that accompany an investment in foreign equities and in securities of issuers in a single region. Sensitive to currency exchange rates, international political and economic conditions and other risks that affect foreign securities. 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 Advisory Funds, Inc., a Maryland corporation (the "Acquiring Company"), with its principal place of business at 7337 E. Doubletree Ranch Road, Scottsdale, Arizona 85258, on behalf of its series, Pilgrim Asia-Pacific Equity Fund (the "Acquiring Fund"), and Pilgrim SmallCap Asia Growth Fund, Inc., a Maryland corporation (the "Acquired Company") with its principal place of business at 7337 E. Doubletree Ranch Road, Scottsdale, Arizona 85258, on behalf of its sole series, Pilgrim SmallCap Asia Growth Fund (the "Acquired Fund"). This Agreement is intended to be and is adopted as a plan of reorganization and liquidation within the meaning of Section 368(a)(1) of the United States Internal Revenue Code of 1986, as amended (the "Code"). The reorganization (the "Reorganization") will consist of the transfer of all of the assets of the Acquired Fund to the Acquiring Fund in exchange solely for Class A and Class B shares of common stock ($1.00 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 the Acquiring Company have determined that the exchange of all of the assets of the Acquired Fund for Acquiring Fund Shares and the assumption of all liabilities of the Acquired Fund by the Acquiring Fund is in the best interests of the Acquiring Fund and its shareholders and that the interests of the existing shareholders of the Acquiring Fund would not be diluted as a result of this transaction; and WHEREAS, the Directors of the Acquired Company, have determined that the exchange of all of the assets of the Acquired Fund for Acquiring Fund Shares and the assumption of all liabilities of the Acquired Fund by the Acquiring Fund is in the best interests of the Acquired Fund and its shareholders and that the interests of the existing shareholders of the Acquired Fund would not be diluted as a result of this transaction; 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 and Class B Acquiring Fund Shares determined by dividing the value of the Acquired Fund's net assets with respect to each class, computed in the manner and as of the time and date set forth in paragraph 2.1, by the net asset value of one Acquiring Fund Share of the same class, computed in the manner and as of the time and date set forth in paragraph 2.2; and (ii) to assume all liabilities of the Acquired Fund, as set forth in paragraph 1.3. Such transactions shall take place at the closing provided for in paragraph 3.1 (the "Closing"). 1.2. The assets of the Acquired Fund to be acquired by the Acquiring Fund shall consist of all assets and property, including, without limitation, all cash, securities, commodities and futures interests and dividends or interests receivable, that are owned by the Acquired Fund, and any deferred or prepaid expenses shown as an asset on the books of the Acquired Fund on the closing date provided for in paragraph 3.1 (the "Closing Date") (collectively, "Assets"). B-1 1.3. The Acquired Fund will endeavor to discharge all of its known liabilities and obligations prior to the Closing Date. The Acquiring Fund shall also assume all of the liabilities of the Acquired Fund, whether accrued or contingent, known or unknown, existing at the Valuation Date, as defined in paragraph 2.1 (collectively, "Liabilities"). On or as soon as practicable prior to the Closing Date, the Acquired Fund will declare and pay to its shareholders of record one or more dividends and/or other distributions so that it will have distributed substantially all (and in no event less than 98%) of its investment company taxable income (computed without regard to any deduction for dividends paid) and realized net capital gain, if any, for the current taxable year through the Closing Date. 1.4. Immediately after the transfer of assets provided for in paragraph 1.1, the Acquired Fund will distribute to the Acquired Fund's shareholders of record with respect to each class of its shares, determined as of immediately after the close of business on the Closing Date (the "Acquired Fund Shareholders"), on a pro rata basis within that class, the Acquiring Fund Shares of the same class received by the Acquired Fund pursuant to paragraph 1.1, and will completely liquidate. Such distribution and liquidation will be accomplished, with respect to each class of the Acquired Fund's shares, by the transfer of the Acquiring Fund Shares then credited to the account of the Acquired Fund on the books of the Acquiring Fund to open accounts on the share records of the Acquiring Fund in the names of the Acquired Fund Shareholders. The aggregate net asset value of Class A and Class B Acquiring Fund Shares to be so credited to Class A and Class B 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 and Class B 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 and Class B 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 and Class B Acquiring Fund Share shall be the net asset value per share computed with respect to that class as 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 and Class B 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 and Class B 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 23, 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 Brown Brothers Harriman & Co., 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 Acquired Fund's portfolio securities and instruments deposited with a securities depository, as defined in Rule 17f-4 under the Investment Company Act of 1940, as amended (the "1940 Act"), shall direct the Custodian to deliver as of the Closing Date by book entry in accordance with the customary practices of such depositories and the custodian for Acquiring Fund. The cash to be transferred by the Acquired Fund shall be delivered by wire transfer of federal funds on the Closing Date. 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 and Class B 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 Acquired Company, the Acquired Company on behalf of the Acquired Fund represents and warrants to the Acquiring Company as follows: (a) The Acquired Fund is duly organized as a series of the Acquired Company, which is a corporation duly organized, validly existing and in good standing under the laws of the State of Maryland with power under the Acquired Company's 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) The Acquired Company is a registered investment company classified as a management company of the open-end type, and its registration with the Commission as an investment company under the 1940 Act, and the registration of 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 Acquired Company's Articles of Incorporation or By-Laws or of any agreement, indenture, instrument, contract, lease or other undertaking to which the Acquired Company 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 Acquired Company 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 the Acquiring Company 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 Acquired Company 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 December 31, 1999, 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 December 31, 1999, there has not been any material adverse change in the Acquired Fund's financial condition, assets, liabilities or business, other than changes occurring in the ordinary course of business, or any incurrence by the Acquired Fund of indebtedness maturing more than one year from the date such indebtedness was incurred, except as otherwise disclosed to B-4 and accepted by the Acquiring Fund. For the purposes of this subparagraph (j), a decline in net asset value per share of the Acquired Fund due to declines in market values of securities in the Acquired Fund's portfolio, the discharge of Acquired Fund liabilities, or the redemption of Acquired Fund Shares by shareholders of the Acquired Fund shall not constitute a material adverse change; (k) On the Closing Date, all Federal and other tax returns, dividend reporting forms, and other tax-related reports of the Acquired Fund required by law to have been filed by such date (including any extensions) shall have been filed and are or will be correct in all material respects, and all Federal and other taxes shown as due or required to be shown as due on said returns and reports shall have been paid or provision shall have been made for the payment thereof, and to the best of the Acquired Fund's knowledge, no such return is currently under audit and no assessment has been asserted with respect to such returns; (l) For each taxable year of its operation (including the taxable year ending on the Closing Date), the Acquired Fund has met (or will meet) the requirements of Subchapter M of the Code for qualification as a regulated investment company, has been (or will be) eligible to and has computed (or will compute) its federal income tax under Section 852 of the Code, and will have distributed all of its investment company taxable income and net capital gain (as defined in the Code) that has accrued through the Closing Date, and before the Closing Date will have declared dividends sufficient to distribute all of its investment company taxable income and net capital gain for the period ending on the Closing Date; (m) All issued and outstanding shares of the Acquired Fund are, and on the Closing Date will be, duly and validly issued and outstanding, fully paid and non-assessable by the Acquired Company and have been offered and sold in every state and the District of Columbia in compliance in all material respects with applicable registration requirements of the 1933 Act and state securities laws. 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 the Acquired Company on behalf of the Acquired Fund, and, subject to the approval of the shareholders of the Acquired Fund, this Agreement will constitute a valid and binding obligation of the Acquired Fund, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights and to general equity principles; (o) The information to be furnished by the Acquired Fund for use in registration statements, proxy materials and other documents filed or to be filed with any federal, state or local regulatory authority (including the National Association of Securities Dealers, Inc.), which may be necessary in connection with the transactions contemplated hereby, shall be accurate and complete in all material respects and shall comply in all material respects with Federal securities and other laws and regulations thereunder applicable thereto; and (p) The proxy statement of the Acquired Fund (the "Proxy Statement") to be included in the Registration Statement referred to in paragraph 5.6, insofar as it relates to the Acquired Fund, will, on the effective date of the Registration Statement and on the Closing Date (i) not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which such statements were made, not materially misleading provided, however, that the representations and warranties in this subparagraph (p) shall not apply to statements in or omissions from the Proxy Statement and the Registration Statement made in reliance upon and in conformity with information that was furnished by the Acquiring Fund for use therein, and (ii) comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder. 4.2. Except as has been disclosed to the Acquired Fund in a written statement executed by an officer of the Acquiring Company on behalf of the Acquiring Fund, the Acquiring Company represents and warrants to the Acquired Company as follows: B-5 (a) The Acquiring Fund is duly organized as a series of the Acquiring Company, which is a corporation duly organized, validly existing and in good standing under the laws of the State of Maryland with power under the Acquiring Company's Articles of Incorporation to own all of its properties and assets and to carry on its business as it is now being conducted; (b) The Acquiring Company is a registered investment company classified as a management company of the open-end type, and its registration with the Commission as an investment company under the 1940 Act and the registration of 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 the Acquiring Company's Articles of Incorporation or By-Laws or of any agreement, indenture, instrument, contract, lease or other undertaking to which the Acquiring Company 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 Acquiring Company 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 the Acquired Company on behalf of the Acquired Fund, no litigation or administrative proceeding or investigation of or before any court or governmental body is presently pending or, to its knowledge, threatened against the Acquiring Company on behalf of the Acquiring Fund or any of the Acquiring Fund's properties or assets that, if adversely determined, would materially and adversely affect the Acquiring Fund's financial condition or the conduct of the Acquiring Fund's business. The Acquiring Company on behalf of the Acquiring Fund knows of no facts which might form the basis for the institution of such proceedings and is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body which materially and adversely affects its business or its ability to consummate the transactions herein contemplated; (h) The Statement of Assets and Liabilities, Statements of Operations and Changes in Net Assets and 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 B-6 decline in net asset value per share of the Acquiring Fund due to declines in market values of securities in the Acquiring Fund's portfolio, the discharge of Acquiring Fund liabilities, or the redemption of Acquiring Fund Shares by shareholders of the Acquiring Fund, shall not constitute a material adverse change; (j) On the Closing Date, all Federal and other tax returns, dividend reporting forms, and other tax-related reports of the Acquiring Fund required by law to have been filed by such date (including any extensions) shall have been filed and are or will be correct in all material respects, and all Federal and other taxes shown as due or required to be shown as due on said returns and reports shall have been paid or provision shall have been made for the payment thereof, and to the best of the Acquiring Fund's knowledge no such return is currently under audit and no assessment has been asserted with respect to such returns; (k) For each taxable year of its operation (including the taxable year including the Closing Date), the Acquiring Fund has met (or will meet) the requirements of Subchapter M of the Code for qualification as a regulated investment company has been eligible to and has computed (or will compute) its federal income tax under Section 852 of the Code, and has distributed all of its investment company taxable income and net capital gain (as defined in the Code) for periods ending prior to the Closing Date; (l) All issued and outstanding Acquiring Fund Shares are, and on the Closing Date will be, duly and validly issued and outstanding, fully paid and non-assessable 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 the Acquiring Company on behalf of the Acquiring Fund and this Agreement will constitute a valid and binding obligation of the Acquiring Fund, enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights and to general equity principles; (n) The Class A and Class B 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 the Acquiring Company on behalf of the Acquiring Fund for use in the registration statements, proxy materials and other documents that may be necessary in connection with the transactions contemplated hereby shall be accurate and complete in all material respects and shall comply in all material respects with Federal securities and other laws and regulations applicable thereto; and (p) That insofar as it relates to the Acquiring 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. B-7 5.2. The Acquired Fund will call a meeting of the shareholders of the Acquired Fund to consider and act upon this Agreement and to take all other action necessary to obtain approval of the transactions contemplated herein. 5.3. The Acquired Fund covenants that the Class A and Class B 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 and Class B Acquiring Fund Shares received at the Closing. 5.8. The Acquiring Fund and the Acquired Fund shall each use its reasonable best efforts to fulfill or obtain the fulfillment of the conditions precedent to effect the transactions contemplated by this Agreement as promptly as practicable. 5.9. The Acquired Company 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 the Acquiring Company on behalf of the Acquiring Fund may reasonably deem necessary or desirable in order to vest in and confirm (a) the Acquired Company's, on behalf of the Acquired Fund's, title to and possession of the Acquiring Fund's Shares to be delivered hereunder, and (b) the Acquiring Company's, on behalf of the Acquiring Fund's, title to and possession of all the assets, and 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 the Acquired Company on behalf of the Acquired Fund to consummate the transactions provided for herein shall be subject, at the Acquired Company's election, to the performance by the Acquiring Company 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 the Acquiring Company 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; B-8 6.2. The Acquiring Company shall have delivered to the Acquired Company a certificate executed in its name by its President or Vice President and its Treasurer or Assistant Treasurer, in a form reasonably satisfactory to the Acquired Company and dated as of the Closing Date, to the effect that the representations and warranties of the Acquiring Company 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 the Acquired Company shall reasonably request; 6.3. The Acquiring Company 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 the Acquiring Company 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 the Acquiring Company on behalf of the Acquiring Fund to complete the transactions provided for herein shall be subject, at the Acquiring Company's election, to the performance by the Acquired Company 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 the Acquired Company 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 Acquired Company shall have delivered to the Acquiring Fund a statement of the Acquired Fund's assets and liabilities, as of the Closing Date, certified by the Treasurer of the Acquired Company; 7.3. The Acquired Company shall have delivered to the Acquiring Fund on the Closing Date a certificate executed in its name by its President or Vice President and its Treasurer or Assistant Treasurer, in form and substance satisfactory to the Acquiring Company and dated as of the Closing Date, to the effect that the representations and warranties of the Acquired Company 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 Acquiring Company shall reasonably request; 7.4. The Acquired Company 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 Acquired Company on behalf of the Acquired Fund on or before the Closing Date; 7.5. The Acquired Fund and the Acquiring Fund shall have agreed on the number of full and fractional Acquiring Fund Shares of each Class to be issued in connection with the Reorganization after such number has been calculated in accordance with paragraph 1.1; and 7.6. The Acquired Fund shall have declared and paid a distribution or distributions prior to the Closing that, together with all previous distributions, shall have the effect of distributing to its shareholders (i) all of its investment company taxable income and all of its net realized capital gains, if any, for the period from the close of its last fiscal year to 4:00 p.m. Eastern time on the Closing; and (ii) any undistributed investment company taxable income and net realized capital gains from any period to the extent not otherwise already distributed. B-9 8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND AND THE ACQUIRED FUND If any of the conditions set forth below have not been satisfied on or before the Closing Date with respect to the Acquired Company on behalf of the Acquired Fund or the Acquiring Company 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 the Acquired Company's Articles of Incorporation, By-Laws, applicable Maryland law and the 1940 Act, and certified copies of the resolutions evidencing such approval shall have been delivered to the Acquiring Company. Notwithstanding anything herein to the contrary, neither the Acquiring Company nor the Acquired Company may waive the conditions set forth in this paragraph 8.1; 8.2. On the Closing Date, no action, suit or other proceeding shall be pending or, to its knowledge, threatened before any court or governmental agency in which it is sought to restrain or prohibit, or obtain damages or other relief in connection with, this Agreement or the transactions contemplated herein; 8.3. All consents of other parties and all other consents, orders and permits of Federal, state and local regulatory authorities deemed necessary by the Acquiring Company or the Acquired Company 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 the Acquired Company and the Acquiring Company substantially to the effect that, based upon certain facts, assumptions, and representations, the transaction contemplated by this Agreement shall constitute a tax-free reorganization for Federal income tax purposes. The delivery of such opinion is conditioned upon receipt by Dechert of representations it shall request of the Acquiring Company and the Acquired Company. Notwithstanding anything herein to the contrary, neither the Acquiring Company nor the Acquired Company may waive the condition set forth in this paragraph 8.5. 9. BROKERAGE FEES AND EXPENSES 9.1. The Acquired Company on behalf of the Acquired Fund and the Acquiring Company on behalf of the Acquiring 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 the 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 B-10 party as a "regulated investment company" within the meaning of Section 851 of the Code. 10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES 10.1. The Acquiring Company and the Acquired Company agree that neither party has made any representation, warranty or covenant not set forth herein and that this Agreement constitutes the entire agreement between the parties. 10.2. The representations, warranties and covenants contained in this Agreement or in any document delivered pursuant hereto or in connection herewith shall survive the consummation of the transactions contemplated hereunder. The covenants to be performed after the Closing shall survive the Closing. 11. TERMINATION This Agreement and the transactions contemplated hereby may be terminated and abandoned by resolution of the Board of Directors of the Acquired Fund or the Board of Directors of the Acquiring Company 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 the Acquired Company and the Acquiring Company; provided, however, that following the meeting of the shareholders of the Acquired Fund called by the Acquired Fund pursuant to paragraph 5.2 of this Agreement, no such amendment may have the effect of changing the provisions for determining the number of the Class A and Class B 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 the Acquiring Company or to the Acquired Company, 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. Attest: PILGRIM ADVISORY FUNDS, INC. on behalf of its PILGRIM ASIA-PACIFIC EQUITY series ____________________________ By:__________________________________________ SECRETARY Title:_______________________________________ Attest: PILGRIM SMALLCAP ASIA GROWTH FUND, INC. ____________________________ By:__________________________________________ SECRETARY Title:_______________________________________ B-12 APPENDIX C ADDITIONAL INFORMATION REGARDING PILGRIM ASIA-PACIFIC EQUITY FUND (THE "FUND") SHAREHOLDER GUIDE PILGRIM PURCHASE OPTIONSTM This Proxy Statement/Prospectus relates to two separate classes of the Fund, Class A and Class B, each of which represents an identical interest in the Fund's investment portfolio, but are offered with different sales charges and distribution fee (Rule 12b-1) arrangements. As described below and elsewhere in this Proxy Statement/Prospectus, the contingent deferred sales load structure and conversion characteristics of the Fund shares that will be issued to you in the Reorganization will be the same as those that apply to SmallCap Asia Growth Fund shares held by you immediately prior to the Reorganization, and the period that you held shares of SmallCap Asia Growth Fund will be included in the holding period of the Fund for purposes of calculating contingent deferred sales charges and determining conversion rights. Purchases of the shares of the Fund after the Reorganization will be subject to the sales load structure and conversion rights discussed below. The sales charges and fees for each class of shares of the Fund are shown and contrasted in the chart below. CLASS A CLASS B ------- ------- Maximum Initial Sales Charge on Purchases 5.75%(1) None Contingent Deferred Sales Charge ("CDSC") None(2) 5.00%(3) Annual Distribution (12b-1) and Service Fees (4) 0.25% 1.00% Maximum Purchase Unlimited $250,000 Automatic Conversion to Class A N/A 8 Years(5) ---------- (1) 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. See "Class A Shares: Initial Sales Charge Alternative" in this Appendix C. (3) Imposed upon redemption within 6 years from purchase. Fee has scheduled reductions after the first year. See "Class B Shares: Deferred Sales Charge Alternative" in this Appendix C. (4) Annual asset-based distribution charge. (5) Class B shares of the Fund issued to shareholders of SmallCap Asia Growth Fund in the Reorganization will convert to Class A shares in the eighth year from the original date of purchase of the Class B shares of SmallCap Asia Growth Fund. The relative impact of the initial sales charges and ongoing annual expenses will depend on the length of time a share is held. Orders for Class B shares in excess of $250,000 will be accepted as orders for Class A shares or declined. CLASS A SHARES: INITIAL SALES CHARGE ALTERNATIVE. Class A shares of the Fund are sold at the net asset value ("NAV") per share in effect plus a sales charge as described in the following table. For waivers or reductions of the Class A shares sales charges, see "Special Purchases without a Sales Charge" and "Reduced Sales Charges" below. C-1 AS A % OF THE AS A % OF YOUR INVESTMENT OFFERING PRICE NAV --------------- -------------- --- Less than $50,000 5.75% 6.10% $50,000 - $99,999 4.50% 4.71% $100,000 - $249,999 3.50% 3.63% $250,000 - $499,999 2.50% 2.56% $500,000 - $1,000,000 2.00% 2.04% There is no initial sales charge on purchases of $1,000,000 or more. However, the shares will be subject to a CDSC if they are redeemed within one or two years of purchase, depending on the amount of the purchase, as follows: PERIOD DURING YOUR INVESTMENT CDSC WHICH CDSC APPLIES --------------- ---- ------------------ $1,000,000 - $2,499,999 1.00% 2 years $2,500,000 - $4,999,999 0.50% 1 year $5,000,000 and over 0.25% 1 year Class A shares of the Fund issued in connection with the Reorganization with respect to Class A shares of SmallCap Asia Growth Fund that were subject to a CDSC at the time of the Reorganization, will be subject to a CDSC of up to 1% from the date of purchase of the original shares of SmallCap Asia Growth Fund. REDUCED SALES CHARGES. An investor may immediately qualify for a reduced sales charge on a purchase of Class A shares of the Fund or other open-end funds in the Pilgrim Funds which offer Class A shares, or shares with front-end sales charges ("Participating Funds") by completing the Letter of Intent section of an Application to purchase Fund shares. Executing the Letter of Intent expresses an intention to invest during the next 13 months a specified amount, which, if made at one time, would qualify for a reduced sales charge. An amount equal to the Letter 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 1-800-992-0180 for more information. A sales charge may also be reduced by taking into account the current value of your existing holdings in the Fund or any other open-end funds in the Pilgrim 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 1-800-992-0180 for more information. For the purposes of Rights of Accumulation and the Letter of Intent Privilege, shares held by investors in the Pilgrim Funds 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 1-800-992-0180, 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 fee at an annual rate of 1.00% of the average daily net assets of the Class, which is higher than the distribution fees of Class A shares. The higher distribution fees mean a higher expense ratio, so Class B shares pay correspondingly lower dividends and may have a lower NAV than Class A shares. 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 C-2 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 SmallCap Asia Growth Fund will convert to Class A shares eight years after the purchase of the original shares of SmallCap Asia Growth Fund. For additional information on the CDSC and the conversion of Class B, see the Fund's Statement of Additional Information. 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 1-800-992-0180. REINSTATEMENT PRIVILEGE. Class B 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 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 1-800-992-0180 for more information. RULE 12B-1 PLAN. The Fund has a distribution plan pursuant to Rule 12b-1 under the Investment Company Act of 1940 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 and Class B 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): C-3 SERVICING FEE DISTRIBUTION FEE ------------- ---------------- Class A 0.25% None Class B 0.25% 0.75% Fees paid under the Rule 12b-1 Plan may be used to cover the expenses of the Distributor from the sale of Class A and Class B 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. 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 a pre-authorized retirement plan is $100, plus monthly investments of at least $100. The Fund and the Distributor reserve the right to reject any purchase order. Please note cash, travelers checks, third party checks, money orders and checks drawn on non-U.S. banks (even if payment may be effected through a U.S. bank) will not be accepted. ING Pilgrim Investments, Inc. 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 reliable. 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 1-800-992-0180. RETIREMENT PLANS. The Fund has available prototype qualified retirement plans for both corporations and for self-employed individuals. Also available are prototype IRA, Roth IRA and Simple IRA plans (for both individuals and C-4 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 - Kansas City ("SSB") acts as the custodian under these plans. For further information, contact the Shareholder Servicing Agent at 1-800-992-0180. SSB currently receives a $12 custodian fee annually for the maintenance of such accounts. EXECUTION OF REQUESTS. Purchase and sale requests are executed at the next NAV determined after the order is received in proper form by the Transfer Agent or Distributor. A purchase order will be deemed to be in proper form when all of the required steps set forth 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 1-800-992-0180. There is no specific limit on exchange frequency; however, the Fund is intended for long term investment and not as a trading vehicle. ING Pilgrim Investments reserves the right to prohibit excessive exchanges (more 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 exchange policies at any time, upon 60 days' written notice to shareholders. Shares of one 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 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 C-5 same class of any other open-end Pilgrim Fund. This exchange privilege may be modified at any time or terminated upon 60 days' written notice to shareholders. SMALL ACCOUNTS. Due to the relatively high cost of handling small investments, the Fund reserves the right upon 30 days' written notice to redeem, at NAV, the shares of any shareholder whose account (except for IRAs) has a value of less than $1,000, other than as a result of a decline in the NAV per share. HOW TO REDEEM SHARES Shares of the Fund will be redeemed at the NAV (less any applicable CDSC and/or federal income tax withholding) next determined after receipt of a redemption request in good form on any day the New York Stock Exchange is open for business. SYSTEMATIC WITHDRAWAL PLAN. You may elect to have monthly, quarterly, semi-annual or annual payments in any fixed amount 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. For additional information, contact the Shareholder Servicing Agent at 1-800-992-0180, 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 C-6 brokerage and research services provided by a broker to ING Pilgrim Investments or its affiliates, and the Fund may pay a commission for effecting a securities transaction that is in excess of the amount another broker would have charged if ING Pilgrim Investments determines in good faith that the amount of commission is reasonable in relation to the value of the brokerage and research services provided by the broker. In addition, ING Pilgrim Investments may place securities transactions with brokers that provide certain services to the Fund. ING Pilgrim Investments also may consider a broker's sale of Fund shares if ING Pilgrim Investments is satisfied that the Fund would receive best execution of the transaction from that broker. DIVIDENDS, DISTRIBUTIONS AND TAXES DIVIDENDS AND DISTRIBUTIONS. The Fund generally distributes most or all of its net earnings in the form of dividends. The Fund pays dividends and capital gains, if any, annually. Dividends and distributions will be determined on a Class basis. 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 or B account in the Fund invested into a Pilgrim Fund or ING Fund which offers the same Class of 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-7 FINANCIAL HIGHLIGHTS PILGRIM ASIA-PACIFIC EQUITY FUND -------------------------------------------------------------------------------- The four months ended October 31, 2000 have been audited by PricewaterhouseCoopers LLP. Periods ending prior to October 31, 2000 have been audited by other independent accountants.
CLASS A ---------------------------------------------------------------------------- FOUR MONTHS YEAR ENDED JUNE 30, SEPTEMBER 1, ENDED ------------------------------------------- 1995(1) TO OCTOBER 31, JUNE 30, 2000(5) 2000 1999 1998 1997 1996 ------- ---- ---- ---- ---- ---- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 7.23 7.22 4.46 10.93 10.35 10.00 Income from investment operations: Net investment income (loss) $ 0.08 (0.05) -- 0.03 0.02 0.03 Net realized and unrealized gain (loss) on investments $ (2.32) 0.06 2.76 (6.50) 0.58 0.34 Total from investment operations $ (2.24) 0.01 2.76 (6.47) 0.60 0.37 Less distributions: In excess of net investment income $ -- -- -- -- -- (0.02) Tax return of capital $ -- -- -- -- (0.02) -- Total distributions $ -- -- -- -- (0.02) (0.02) Net asset value, end of period $ 4.99 7.23 7.22 4.46 10.93 10.35 TOTAL RETURN(2): % (30.98) 0.14 61.88 (59.29) 5.78 3.76 RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 8,471 11,726 14,417 11,796 32,485 18,371 Ratios to average net assets: Net expenses after expense reimbursement(3)(4) % 2.05 2.11 2.00 2.00 2.00 2.00 Gross expenses prior to expense reimbursement(3) % 2.71 2.55 2.98 2.80 2.54 3.47 Net investment income (loss) after expense reimbursement(3)(4) % 4.28 (0.56) 0.01 0.38 0.00 0.33 Portfolio turnover % 13 138 111 81 38 15
C-8
CLASS B --------------------------------------------------------------------------- FOUR MONTHS SEPTEMBER 1, ENDED YEAR ENDED JUNE 30, 1995(1) TO OCTOBER 31, ------------------------------------------ JUNE 30, 2000(5) 2000 1999 1998 1997 1996 ------- ---- ---- ---- ---- ---- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 6.97 7.02 4.37 10.83 10.31 10.00 Income from investment operations: Net investment income (loss) $ 0.07 (0.11) (0.04) (0.03) (0.07) (0.01) Net realized and unrealized gain (loss) on investments $ (2.24) 0.06 2.69 (6.43) 0.59 0.32 Total from investment operations $ (2.17) (0.05) 2.65 (6.46) 0.52 0.31 Less distributions: In excess of net investment income $ -- -- -- -- -- -- Tax return of capital $ -- -- -- -- -- -- Total distributions $ -- -- -- -- -- -- Net asset value, end of period $ 4.80 6.97 7.02 4.37 10.83 10.31 TOTAL RETURN(2): % (31.13) (0.71) 60.64 (59.65) 5.04 3.19 RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 7,678 12,228 12,959 9,084 30,169 17,789 Ratios to average net assets: Net expenses after expense reimbursement(3)(4) % 2.80 2.86 2.75 2.75 2.75 2.75 Gross expenses prior to expense reimbursement(3) % 3.45 3.30 3.73 3.55 3.29 4.10 Net investment income (loss) after expense reimbursement(3)(4) % 3.48 (1.31) (0.74) (0.39) (0.79) (0.38) Portfolio turnover % 13 138 111 81 38 15
C-9
CLASS M ------------------------------------------------------------------------- FOUR MONTHS SEPTEMBER 1, ENDED YEAR ENDED JUNE 30, 1995(1) TO OCTOBER 31, ---------------------------------------- JUNE 30, 2000(5) 2000 1999 1998 1997 1996 ------- ---- ---- ---- ---- ---- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 7.04 7.07 4.40 10.86 10.32 10.00 Income from investment operations: Net investment income (loss) $ 0.07 (0.11) (0.02) -- (0.05) -- Net realized and unrealized gain (loss) on investments $ (2.26) 0.08 2.69 (6.46) 0.59 0.33 Total from investment operations $ (2.19) (0.03) 2.67 (6.46) 0.54 0.33 Less distributions: In excess of net investment income $ -- -- -- -- -- (0.01) Total distributions $ -- -- -- -- -- (0.01) Net asset value, end of period $ 4.85 7.04 7.07 4.40 10.86 10.32 TOTAL RETURN(2): % (31.11) (0.42) 60.68 (59.48) 5.26 3.32 RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 2,711 3,749 5,184 4,265 11,155 6,476 Ratios to average net assets: Net expenses after expense reimbursement(3)(4) % 2.53 2.61 2.50 2.50 2.50 2.50 Gross expenses prior to expense reimbursement(3) % 3.18 3.05 3.48 3.30 3.04 3.88 Net investment income (loss) after expense reimbursement(3)(4) % 3.72 (1.06) (0.49) (0.07) (0.55) (0.16) Portfolio turnover % 13 138 111 81 38 15
---------- (1) Commencement of operations. (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. (4) The Investment Manager has agreed to limit expenses excluding interest, taxes, brokerage and extraordinary expenses, subject to possible reimbursement to ING Pilgrim Investments, Inc. within three years. (5) The Fund changed its fiscal year-end from June 30 to October 31. 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 Reorganization: FUND CLASSES OFFERED ---- --------------- 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 and 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 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 D-1 APPENDIX E As of January 1, 2001, no persons owned beneficially or of record 5% or more of the outstanding shares of the specified Class of Asia-Pacific Equity Fund. As of January 1, 2001, the following persons owned beneficially or of record 5% or more of the outstanding shares of Class A shares of SmallCap Asia Growth Fund.
% OF CLASS % OF FUND % OF FUND CLASS AND TYPE BEFORE BEFORE AFTER FUND ADDRESS OF OWNERSHIP REORGANIZATION REORGANIZATION REORGANIZATION ---- ------- ------------ -------------- -------------- -------------- Pilgrim SmallCap National Investor Services FBO Asia Growth Fund Acct #454-00698-14 Class A 55 Water Street, 32nd Floor Beneficial New York, NY 10041 Owner 5.64% 5.64% 1.05%
E-1 PART B PILGRIM ADVISORY FUNDS, INC. -------------------------------------------------------------------------------- Statement of Additional Information January 19, 2001 -------------------------------------------------------------------------------- Acquisition of the Assets and Liabilities By and in Exchange for Shares of of Pilgrim SmallCap Asia Growth Fund Pilgrim Asia-Pacific Equity Fund 7337 East Doubletree Ranch Road (a series of Pilgrim Advisory Funds) Scottsdale, Arizona 85258 7337 East Doubletree Ranch Road Scottsdale, Arizona 85258 This Statement of Additional Information is available to the Shareholders of Pilgrim SmallCap Asia Growth Fund in connection with a proposed transaction whereby all of the assets and liabilities of Pilgrim SmallCap Asia Growth Fund will be transferred to Pilgrim Asia-Pacific Equity Fund, a series of Pilgrim Advisory Funds, Inc. in exchange for shares of Pilgrim Asia-Pacific Equity Fund. This Statement of Additional Information of Pilgrim Advisory 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 Asia-Pacific Equity Fund dated November 1, 2000, as filed on November 1, 2000, and the Statement of Additional Information for Pilgrim SmallCap Asia Growth Fund dated November 1, 2000, as filed on November 1, 2000. 2. The Financial Statements of Pilgrim Asia-Pacific Equity Fund are included in the Annual Report of Pilgrim Advisory Funds, Inc. dated October 31, 2000, as filed on January 10, 2001. 3. The Financial Statements of Pilgrim SmallCap Asia Growth Fund are included in the Annual Report of Pilgrim SmallCap Asia Growth Fund dated October 31, 2000, as filed on January 10, 2001. This Statement of Additional Information is not a prospectus. A Proxy Statement/Prospectus dated January 25, 2001 relating to the reorganization of Pilgrim SmallCap Asia Growth Fund may be obtained, without charge, by writing to ING Pilgrim Investments, Inc. at 7337 East Doubletree Ranch Road, Scottsdale, Arizona 85258 or calling 1-800-992-0180. This Statement of Additional Information should be read in conjunction with the Proxy Statement/Prospectus. 1 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 Portfolio of Investments (unaudited) for each Fund 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)
ASIA-PACIFIC ASIA SMALLCAP PRO FORMA EQUITY FUND PACIFIC ASIA GROWTH ADJUSTMENTS (PRO FORMA) ------------ ------------ ------------ ------------ ASSETS: Investments in securities at market value* $ 27,574,363 $ 10,266,792 $ 37,841,155 Foreign currency** -- 84,863 84,863 Cash -- 674,904 674,904 Receivables: Fund shares sold 280,549 182,500 463,049 Dividends and interest 39,207 29,024 68,231 Investment securities sold 288,184 167,246 455,430 Due from affiliate -- 83,518 83,518 Prepaid expenses 15,814 480 16,294 ------------ ------------ ------------ ------------ Total Assets 28,198,117 11,489,327 -- 39,687,444 ------------ ------------ ------------ ------------ LIABILITIES: Payable for fund shares redeemed 134,352 16,055 150,407 Payable to affiliate 26,659 -- 26,659 Payable to custodian 219,881 -- 219,881 Other accrued expenses and liabilities 114,845 127,453 242,298 ------------ ------------ ------------ ------------ Total Liabilities 495,737 143,508 -- 639,245 ------------ ------------ ------------ ------------ NET ASSETS $ 27,702,380 $ 11,345,819 $ -- $ 39,048,199 ============ ============ ============ ============ NET ASSETS CONSIST OF: Paid-in capital $ 48,397,703 $ 20,141,769 $ 68,539,472 Accumulated net investment loss (74,696) (74,696) Accumulated net realized gain (loss) on investments (23,718,357) (9,817,134) (33,535,491) Net unrealized appreciation (depreciation) of investments 3,023,034 1,095,880 4,118,914 ------------ ------------ ------------ ------------ Net Assets $ 27,702,380 $ 11,345,819 $ -- $ 39,048,199 ============ ============ ============ ============ CLASS A: Net Assets $ 11,725,688 11,345,819 $ 23,071,507 Shares outstanding 1,621,404 1,417,153 152,523 (A) 3,191,080 Net asset value and redemption price per share $ 7.23 $ 8.01 $ 7.23 Maximum offering price per share $ 7.67 $ 8.01 $ 7.67 CLASS B: Net Assets $ 12,227,613 N/A $ 12,227,613 Shares outstanding 1,753,705 N/A 1,753,705 Net asset value and redemption price per share $ 6.97 N/A $ 6.97 Maximum offering price per share $ 6.97 N/A $ 6.97 CLASS M: Net Assets $ 3,749,079 N/A $ 3,749,079 Shares outstanding 532,713 N/A 532,713 Net asset value and redemption price per share $ 7.04 N/A $ 7.04 Maximum offering price per share $ 7.30 N/A $ 7.30 *Cost of securities $ 24,528,219 $ 9,170,853 $ 33,699,072 **Cost of foreign currency $ -- $ 84,918 $ 84,918
---------- (A) Reflects new shares issued, net of retired shares of the SmallCap Asia Fund. See Accompanying Notes to Unaudited Proforma Financial Statements 2 STATEMENTS OF OPERATIONS (UNAUDITED)
ASIA-PACIFIC ASIA SMALLCAP PRO FORMA EQUITY FUND PACIFIC ASIA GROWTH ADJUSTMENTS (PRO FORMA) ------------ ------------ ------------ ----------- YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED 30-JUN 30-JUN 30-JUN 30-JUN 2000 2000 2000 2000 ------------ ------------ ------------ ----------- INVESTMENT INCOME: Dividends, net of foreign taxes $ 429,859 $ 122,968 $ 552,827 Interest 74,595 17,757 92,352 ------------ ------------ ------------ ----------- Total investment income 504,454 140,725 -- 645,179 ------------ ------------ ------------ ----------- EXPENSES: Investment management fees 413,123 163,677 576,800 Distribution expenses -- Class A 34,682 -- 33,069 (A) 67,751 Class B 138,885 -- 138,885 Class M 39,665 -- 39,665 Transfer agent and registrar fees 119,865 47,791 167,656 Shareholder reporting 11,979 21,487 33,466 Registration and filing fees 36,084 16,764 (8,382) (B) 44,466 Recordkeeping and pricing fees 5,738 -- 3,536 (B) 9,274 Professional fees 4,847 39,285 (31,428) (B) 12,704 Custodian fees 126,026 42,510 168,536 Shareholder servicing fee 6,210 -- 6,210 Directors' fees 2,183 105,861 (100,000) (B) 8,044 Insurance 2,068 -- 2,068 Miscellaneous 2,043 13,474 15,517 Interest and credit facility fee 4,822 -- 4,822 Accounting expenses -- 9,341 (9,341) (C) -- Computer processing fees -- 10,703 (10,703) (C) -- Organization expense 27,603 17,134 44,737 ------------ ------------ ------------ ----------- Total expenses 975,823 488,027 (123,249) 1,340,601 ------------ ------------ ------------ ----------- Less waived and reimbursed fees 145,502 160,554 (70,971) (C) 235,085 ------------ ------------ ------------ ----------- Net expenses 830,321 327,473 (52,278) 1,105,516 ------------ ------------ ------------ ----------- Net investment income (loss) (325,867) (186,748) 52,278 (460,337) ------------ ------------ ------------ ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) from: Investments 7,546,867 3,584,537 11,131,404 Foreign currency transactions (47,823) (87,516) (135,339) Net change in unrealized appreciation of: Investments (5,418,615) (2,535,669) (7,954,284) Translation of other assets, liabilities and forward contracts denominated in foreign currencies 305,601 (1,496) 304,105 ------------ ------------ ------------ ----------- Net gain from investments 2,386,030 959,856 -- 3,345,886 ------------ ------------ ------------ ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,060,163 $ 773,108 $ 52,278 $ 2,885,549 ============ ============ ============ ===========
---------- (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 adjustment to concur with Pilgrim expense structure. See Accompanying Notes to Unaudited Proforma Financial Statements 3 PORTFOLIO OF INVESTMENTS* (UNAUDITED) As of June 30, 2000
ASIA-PACIFIC ASIA SMALLCAP EQUITY FUND PACIFIC ASIA GROWTH (PRO FORMA) SHARES SHARES SHARES ------ ------ ------ COMMON STOCK: 96.29% CHINA: 0.71% 400,000 400,000 Great Wall Technology Co. HONG KONG: 32.78% 400,000 400,000 APT Satellite Holdings, Ltd. 100,000 100,000 ASM Pacific Technology 123,100 123,100 @ # Asia World Online, Inc. 150,000 150,000 Bank of East Asia Hkd 420,000 420,000 Cable & Wireless Hong Kong Telecom, Ltd. 120,000 26,000 146,000 Cheung Kong Holdings 40,000 40,000 @ China Mobile (Hong Kong), Ltd. 2,500,000 950,000 3,450,000 China National Aviation 150,000 150,000 @ China Telecom 120,000 120,000 @ China Unicom, Ltd. 140,000 66,000 206,000 Citic Pacific, Ltd. 65,000 65,000 CLP Holdings, Ltd. 560,000 560,000 CM Telecom International, Ltd. 70,000 70,000 Dao Heng Bank Group 2,300,000 2,300,000 @ Denway Motors, Ltd. 24,000 24,000 HSBC Holdings PLC 95,700 24,200 119,900 Hutchison Whampoa 750,000 750,000 JCG Holdings, Ltd. 750,000 750,000 NG Fung Hong, Ltd. 250,000 180,000 430,000 @ Pacific Century Cyberworks, Ltd. 160,000 160,000 Shanghai Industrial Holdings, Ltd. 34,000 34,000 Swire Pacific, Ltd. "A" 60,000 60,000 Television Broadcasts, Ltd. INDONESIA: 0.54% 781,428 781,428 Matahari Putra Prima 90,000 90,000 PT Gudang Garam MALAYSIA: 5.87% 150,000 150,000 @ Arab Malaysian Finance Bhd 76,000 76,000 Commerce Asset Holding Bhd 80,000 80,000 Genting Berhad 433,000 433,000 IGB Corporation Bhd 85,000 85,000 Malayan Bank Berhad 103,000 65,000 168,000 Resorts World Berhad 90,000 90,000 Telekom Malaysia Berhad 106,000 106,000 Tenaga Nasional Berhad PHILIPPINES: 0.18% 40,000 40,000 Bank of Philippine Islands SINGAPORE: 11.79% 33,000 33,000 @ Chartered Semiconductor 100,035 100,035 DBS Group Holdings, Ltd. 179,000 179,000 GES International Ltd. 253,000 253,000 @ Neptune Orient 34,650 34,650 Oversea-Chinese Banking Corporation, Ltd. 52,000 25,000 77,000 @ Pacific Century Regional Developments, Ltd. 60,000 60,000 Singapore Airlines, Ltd. 17,000 17,000 Singapore Press Holdings, Ltd. 200,000 200,000 Singapore Telecommunication 68,000 68,000 @ ST Assembly Test Service SOUTH KOREA: 19.06% 25,000 25,000 H&CB 15,000 15,000 @ Hyundai Electronics 25,000 7,200 32,200 Korea Electric Power 20,000 3,000 23,000 Korea Telecom Corp. 8,000 8,000 LG Electronics 3,000 3,000 Pohang Iron & Steel 7,200 1,000 8,200 Samsung Electronics Co. 9,065 9,065 Samsung Fire & Marine Insurance Company 30,000 30,000 @ Shinhan Bank 1,000 15,000 16,000 SK Telecom Co., Ltd. TAIWAN: 23.69% 58,934 140,000 198,934 Acer Inc. GDR 63,000 63,000 @ Advanced Semiconductor Engineering, Inc. 85,490 46,240 131,730 Asustek Computer, Inc. GDR 21,415 21,415 China Steel Corp. GDR 91,156 91,156 Compal Electronics, Inc 25,360 100,000 125,360 @ Far Eastern Textile GDR 30,890 30,890 @ Hon Hai Precision Industry Co., Ltd. GDR 30,327 57,750 88,077 Ritek Corp. GDR 53,100 53,100 @ Siliconware Precision ADR 22,390 22,390 Synnex Technology 14,000 14,000 @ Stark Technology, Inc. 61,478 58,400 119,878 @ Taiwan Semiconductor ADR 80,000 80,000 @ United Microelectronics Corporation, Ltd. 21,550 75,000 96,550 @ Winbond Electronic Corp GDR THAILAND: 1.67% 27,500 27,500 @ Advanced Information Services 7,500 7,500 @ Siam Cement Public Co. 200,000 200,000 @ Thai Farmers Bank TOTAL COMMON STOCKS (Cost $24,195,851, $9,170,853, $33,366,704) PREFERRED STOCK: 0.54% THAILAND: 0.54% 410,000 410,000 Siam Commercial Bank TOTAL PREFERRED STOCKS (COST $332,368) WARRANTS: 0.08% THAILAND: 0.08% 274,000 274,000 @ Siam Commercial Bank TOTAL WARRANTS (COST $0) TOTAL INVESTMENTS IN SECURITIES (Cost $24,528,219, $9,170,853, $33,699,072) OTHER ASSETS AND LIABILITIES-NET NET ASSETS ASIA-PACIFIC ASIA SMALLCAP EQUITY FUND PACIFIC ASIA GROWTH (PRO FORMA) VALUE VALUE VALUE ------------ ------------ ------------ COMMON STOCK: 96.29% CHINA: 0.71% Great Wall Technology Co. $ 277,083 $ 277,083 ------------ ------------ ------------ HONG KONG: 32.78% APT Satellite Holdings, Ltd. $ 245,028 245,028 ASM Pacific Technology 374,575 374,575 Asia World Online, Inc. 325,700 325,700 Bank of East Asia Hkd 350,202 350,202 Cable & Wireless Hong Kong Telecom, Ltd. 923,995 923,995 Cheung Kong Holdings 1,327,689 287,683 1,615,372 China Mobile (Hong Kong), Ltd. 352,789 352,789 China National Aviation 455,391 173,059 628,450 China Telecom 1,322,878 1,322,878 China Unicom, Ltd. 254,778 254,778 Citic Pacific, Ltd. 732,730 345,451 1,078,181 CLP Holdings, Ltd. 302,693 302,693 CM Telecom International, Ltd. 152,661 152,661 Dao Heng Bank Group 309,794 309,794 Denway Motors, Ltd. 265,554 265,554 HSBC Holdings PLC 274,021 274,021 Hutchison Whampoa 1,203,079 304,245 1,507,324 JCG Holdings, Ltd. 375,216 375,216 NG Fung Hong, Ltd. 401,674 401,674 Pacific Century Cyberworks, Ltd. 493,875 355,611 849,486 Shanghai Industrial Holdings, Ltd. 289,415 289,415 Swire Pacific, Ltd. "A" 198,896 198,896 Television Broadcasts, Ltd. 400,231 400,231 ------------ ------------ ------------ 8,671,329 4,127,584 12,798,913 ------------ ------------ ------------ INDONESIA: 0.54% Matahari Putra Prima 66,961 66,961 PT Gudang Garam 145,501 145,501 ------------ ------------ ------------ 212,462 -- 212,462 ------------ ------------ ------------ MALAYSIA: 5.87% Arab Malaysian Finance Bhd 175,263 175,263 Commerce Asset Holding Bhd 220,000 220,000 Genting Berhad 294,737 294,737 IGB Corporation Bhd 142,434 142,434 Malayan Bank Berhad 344,473 344,473 Resorts World Berhad 281,895 177,895 459,790 Telekom Malaysia Berhad 310,263 310,263 Tenaga Nasional Berhad 345,895 345,895 ------------ ------------ ------------ 1,577,263 715,592 2,292,855 ------------ ------------ ------------ PHILIPPINES: 0.18% Bank of Philippine Islands 72,139 72,139 ------------ ------------ ------------ 72,139 -- 72,139 ------------ ------------ ------------ SINGAPORE: 11.79% Chartered Semiconductor 288,535 288,535 DBS Group Holdings, Ltd. 1,285,916 1,285,916 GES International Ltd. 177,035 177,035 Neptune Orient 234,127 234,127 Oversea-Chinese Banking Corporation, Ltd. 238,485 238,485 Pacific Century Regional Developments, Ltd. 710,596 341,242 1,051,838 Singapore Airlines, Ltd. 594,094 594,094 Singapore Press Holdings, Ltd. 265,475 265,475 Singapore Telecommunication 292,994 292,994 ST Assembly Test Service 174,823 174,823 ------------ ------------ ------------ 3,346,958 1,256,364 4,603,322 ------------ ------------ ------------ SOUTH KOREA: 19.06% H&CB 585,189 585,189 Hyundai Electronics 295,957 295,957 Korea Electric Power 775,767 223,428 999,195 Korea Telecom Corp. 967,500 264,218 1,231,718 LG Electronics 223,859 223,859 Pohang Iron & Steel 254,524 254,524 Samsung Electronics Co. 2,382,727 330,945 2,713,672 Samsung Fire & Marine Insurance Company 252,037 252,037 Shinhan Bank 282,514 282,514 SK Telecom Co., Ltd. 327,347 275,115 602,462 ------------ ------------ ------------ 5,589,011 1,852,116 7,441,127 ------------ ------------ ------------ TAIWAN: 23.69% Acer Inc. GDR 552,506 261,372 813,878 Advanced Semiconductor Engineering, Inc. 192,279 192,279 Asustek Computer, Inc. GDR 784,367 381,342 1,165,709 China Steel Corp. GDR 291,779 291,779 Compal Electronics, Inc 223,458 223,458 Far Eastern Textile GDR 318,268 124,030 442,298 Hon Hai Precision Industry Co., Ltd. GDR 772,250 772,250 Ritek Corp. GDR 241,100 230,632 471,732 Siliconware Precision ADR 491,175 491,175 Synnex Technology 481,385 481,385 Stark Technology, Inc. 186,370 186,370 Taiwan Semiconductor ADR 2,382,288 276,840 2,659,128 United Microelectronics Corporation, Ltd. 222,085 222,085 Winbond Electronic Corp GDR 619,563 216,728 836,291 ------------ ------------ ------------ 6,934,681 2,315,136 9,249,817 ------------ ------------ ------------ THAILAND: 1.67% Advanced Information Services 342,565 342,565 Siam Cement Public Co. 140,906 140,906 Thai Farmers Bank 168,475 168,475 ------------ ------------ ------------ 651,946 -- 651,946 ------------ ------------ ------------ TOTAL COMMON STOCKS (Cost $24,195,851, $9,170,853, $33,366,704) 27,332,872 10,266,792 37,599,664 ------------ ------------ ------------ PREFERRED STOCK: 0.54% THAILAND: 0.54% Siam Commercial Bank 209,317 209,317 ------------ ------------ ------------ TOTAL PREFERRED STOCKS (COST $332,368) 209,317 -- 209,317 ------------ ------------ ------------ WARRANTS: 0.08% THAILAND: 0.08% Siam Commercial Bank 32,174 32,174 ------------ ------------ ------------ TOTAL WARRANTS (COST $0) 32,174 -- 32,174 ------------ ------------ ------------ TOTAL INVESTMENTS IN SECURITIES (Cost $24,528,219, $9,170,853, $33,699,072) 96.91% 27,574,363 10,266,792 37,841,155 OTHER ASSETS AND LIABILITIES-NET 3.09% 128,017 1,079,027 1,207,044 ------ ------------ ------------ ------------ NET ASSETS 100.00% $ 27,702,380 $ 11,345,819 $ 39,048,199 ====== ============ ============ ============
---------- * No adjustments are shown to the unaudited pro forma combined portfolios of investments because it is expected that upon consummation of the Reorganization, no securities would need to be sold in order for the Pilgrim Asia-Pacific Equity Fund to comply with its Prospectus requirements and SEC and IRS guidelines and restrictions. However, the Pilgrim SmallCap Asia Growth Fund or the Pilgrim Asia-Pacific Equity Fund may purchase or sell any securities in the ordinary course of business as a mutual fund, and following the Reorganization, certain holdings of the Pilgrim SmallCap Asia Growth Fund that are transferred to the Pilgrim Asia-Pacific Equity Fund may be expected to be sold. @ Non-income producing security # Illiquid security ADR American Depository Receipt GDR Global Depository Receipt 4 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) Note 1 - Basis of Combination: On November 2, 2000, the Boards of Pilgrim Asia Pacific Fund ("Asia Pacific Fund") and Pilgrim SmallCap Asia Growth Fund ("SmallCap Asia Growth Fund"), approved an Agreement and Plan of Reorganization (the "Plan") whereby, subject to approval by the shareholders of SmallCap Asia Growth Fund, Asia Pacific Fund will acquire all the assets of SmallCap Asia Growth Fund subject to the liabilities of such Fund, in exchange for a number of shares equal to the pro rata net assets of shares of the Asia Pacific Fund (the "Merger"). The Merger will be accounted for as a tax free merger of investment companies. The unaudited pro forma combined financial statements are presented for the information of the reader and may not necessarily be representative of what the actual combined financial statements would have been had the reorganization occurred at June 30, 2000. The unaudited pro forma portfolio of investments, and unaudited statement of assets and liabilities reflect the financial position of Asia Pacific Fund and SmallCap Asia Growth Fund at June 30, 2000. The unaudited pro forma statement of operations reflects the results of operations of Asia Pacific Fund and SmallCap Asia Growth 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 Asia Pacific Fund and SmallCap Asia Growth 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 Asia Pacific Fund for pre-combination periods will not be restated. The pro forma portfolio of investments, and unaudited 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. All investments quoted in foreign currencies will be valued daily in U.S. Dollars on the basis of the foreign currency exchange rates prevailing at the time such valuation is determined by each Fund's Custodian. Securities for which market quotations are not readily available are valued at their respective fair values as determined in good faith and in accordance with policies set by the Board of Directors. Investments in securities maturing in less than 60 days are valued at cost, which, when combined with accrued interest, approximates market value. Note 3 - Foreign Currency Transactions: The books and records of the funds are maintained in U.S. dollars. Any foreign currency amounts are translated into U.S. dollars on the following basis: (1) Market value of investment securities, other assets and liabilities--at the exchange rates prevailing at the end of the day. (2) Purchases and sales of investment securities, income and expenses - at the rates of exchange prevailing on the respective dates of such transactions. Although the net assets and the market values are presented at the foreign exchange rates at the end of the day, the Funds do not isolate the portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from the changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gains or losses from the investments. Reported net realized foreign exchange gains or losses arise from sales and maturities of short-term securities, sales of foreign currencies, currency gains or losses realized between the trade and settlement on securities transactions, the difference 5 between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books, and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities other than investments in securities at fiscal year end, resulting from changes in the exchange rate. Foreign security and currency transactions may involve certain considerations and risks not typically associated with investing U.S. companies and the U.S. Government. These risks include but are not limited to re-evaluation of currencies and future adverse political and economic developments which could cause securities and their markets to be less liquid and prices more volatile than those of the comparable U.S. Government. Note 4 - Capital Shares: The unaudited pro forma net asset value per share assumes additional shares of common stock issued in connection with the proposed acquisition of SmallCap Asia Growth Fund by Asia Pacific Fund as of June 30, 2000. The number of additional shares issued was calculated by dividing the net asset value of each Class A of SmallCap Asia Growth Fund by the respective Class A net asset value per share of Asia Pacific Fund . Note 5 - Unaudited Pro Forma Adjustments: The accompanying unaudited pro forma financial statements reflect changes in fund shares as if the merger had taken place on June 30, 2000. SmallCap Asia Growth Fund expenses were adjusted assuming Asia Pacific Fund's fee structure was in effect for the year ended June 30, 2000. Note 6 - Merger Costs: Merger costs are estimated at approximately $125,000 and are not included in the unaudited pro forma statement of operations since these costs are not reccurring. These costs represent the estimated expense of both Funds carrying out their obligations under the Plan and consist of management's estimate of legal fees, accounting fees, printing costs and mailing charges related to the proposed merger. Note 7 - 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. 6