-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SXf9XJfz4lIa4Vwn7v5HWlq/kELyC9RYeQ6UzvScKFYKZg/+YCw5CVAQnr36OPZY vUXClB8siaUGhsgWYC9dag== 0000909012-02-000571.txt : 20020806 0000909012-02-000571.hdr.sgml : 20020806 20020805155430 ACCESSION NUMBER: 0000909012-02-000571 CONFORMED SUBMISSION TYPE: N-14 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20020805 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROGRESSIVE RETURN FUND INC CENTRAL INDEX KEY: 0000854580 IRS NUMBER: 510323965 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-14 SEC ACT: 1933 Act SEC FILE NUMBER: 333-97665 FILM NUMBER: 02719689 BUSINESS ADDRESS: STREET 1: C/O BEAR STEARNS FUNDS MANAGEMENT INC STREET 2: 383 MADISON AVENUE - 23RD FLOOR CITY: NEW YORK STATE: NY ZIP: 10179 BUSINESS PHONE: 2122722093 MAIL ADDRESS: STREET 1: C/O BEAR STEARNS FUNDS MANAGEMENT INC STREET 2: 383 MADISON AVENUE - 23RD FLOOR CITY: NEW YORK STATE: NY ZIP: 10179 FORMER COMPANY: FORMER CONFORMED NAME: PORTUGAL FUND INC DATE OF NAME CHANGE: 19920703 N-14 1 t24490.txt REGISTRATION STATEMENT DRAFT: FOR DISCUSSION PURPOSES ONLY As filed with the Securities and Exchange Commission on _____________, 2002 SECURITIES ACT FILE NO. 333- ________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-14 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 PROGRESSIVE RETURN FUND, INC. (Exact Name of Registrant as Specified in Charter) c/o Bear Stearns Funds Management Inc., 383 Madison Avenue, New York, New York 10179 (Address of Principal Executive Offices: Number, Street, City, State, Zip Code) (212) 272-2093 (Registrant's Area Code and Telephone Number) ------------------------------- Ralph Bradshaw, President Progressive Return Fund, Inc. c/o Bear Stearns Funds Management Inc. 383 Madison Avenue New York, New York 10179 (Name and Address of Agent for Service) with copies to: Thomas R. Westle, Esq. Spitzer & Feldman P.C. 405 Park Avenue New York, New York 10022 - -------------------------------------------------------------------------------- APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after this Registration Statement becomes effective CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933 =============================================================================== TITLE OF PROPOSED PROPOSED SECURITIES MAXIMUM MAXIMUM AMOUNT OF BEING AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION REGISTERED REGISTERED PER UNIT (1) OFFERING PRICE(1) FEE ------------------------------------------------------------------------------ Common Stock ($0.001 par value) 36,000,000 $36,000,000 $36,000,000 $3,312 (1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(f) under the Securities Act of 1933, as amended, based on the Exchange Ratio (the net asset value of Cornerstone Strategic Value Fund, Inc.) PROGRESSIVE RETURN FUND, INC. TABLE OF CONTENTS OF FORM N-14 This Registration Statement contains the following papers and documents: o Cover Sheet o Contents of Registration Statement o Form N-14 Cross Reference Sheet o Letter to Stockholders of Progressive Return Fund, Inc. o Letter to Stockholders of Cornerstone Strategic Value Fund, Inc. o Notice of Special Meeting of Stockholders of Progressive Return Fund, Inc. o Notice of Annual Meeting of Stockholders of Cornerstone Strategic Value Fund, Inc. o Part A - Proxy Statement/Prospectus o Part B - Statement of Additional Information o Part C - Other Information o Signature Page o Exhibits CROSS REFERENCE SHEET PURSUANT TO RULE 481(A) UNDER THE SECURITIES ACT OF 1933 ITEM NO. PROXY/PROSPECTUS 1. Beginning of Registration Statement and Outside Front Cover Page of Prospectus Cover Page 2. Beginning and Outside Back Cover Page of Prospectus Cover Page; Table of Contents of Prospectus 3. Fee Table, Synopsis Information and Risk Factors Synopsis; Risk Factors and Considerations; Comparison Investment Objectives and Policies 4. Information about the Transaction Synopsis; Proposed Information about the Merger; Additional Information about the Funds 5. Information about the Registrant Synopsis; Risk Factors and Considerations; Comparison of Investment Objectives and Policies; and Additional Information about the Funds 6. Information about the Company Being Acquired Synopsis; Risk Factors and Special Considerations; Comparison of Investment Objectives and Policies; and Additional Information about the Funds 7. Voting Information Notice of Meeting of Stockholders; General; Required Vote 8. Interest of Certain Persons and Experts Additional Information about the Funds 9. Additional Information Required for Reoffering by Persons Deemed to be Underwriters Not Applicable ITEM NO. STATEMENT OF ADDITIONAL INFORMATION 10. Cover Page Cover Page 11. Table of Contents Table of Contents 12. Additional Information About the Registrant Proxy Statement/Prospectus 13. Additional Information about the Company being Acquired Proxy Statement/Prospectus 14. Financial Statements Financial Statements 15 - 17 Information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C of this Registration Statement INFORMATION REQUIRED IN THE PROXY STATEMENT/PROSPECTUS PROGRESSIVE RETURN FUND, INC. c/o Bear Stearns Funds Management Inc. 383 Madison Avenue New York, New York 10179 _______, 2002 Dear Stockholder: We are pleased to invite you to the special meeting of stockholders (the "PGF Special Meeting") of Progressive Return Fund, Inc., a Maryland corporation. The Progressive Return Fund, Inc. is sometimes referred to herein as "PGF" or the "Fund." The PGF Special Meeting is scheduled to be held at ____ a.m., Eastern time, on _______________, October __, 2002, at the offices of Bear Stearns Funds Management Inc., 383 Madison Avenue, New York, New York 10179. The Board of Directors has called this Meeting to vote on a Merger Agreement and Plan of Reorganization (the "Plan" or "Merger Agreement"), whereby Cornerstone Strategic Value Fund, Inc. ("CLM") will merge with and into PGF in accordance with the Maryland General Corporation Law, and on an amendment to the Fund's Articles of Incorporation changing the name of the Fund from "Progressive Return Fund, Inc." to "Progressive Total Return Fund, Inc." The Board of Directors of the Fund believes that the Merger and name change are very important to your interest as a stockholder. The combined Fund will approximately double the size of the Fund and the Board of Directors believes that this will enable: (1) lower operating expense ratio, and (2) enhanced market liquidity. Stockholders who are unable to attend this meeting are strongly encouraged to vote by proxy, which is customary in corporate meetings of this kind. A Proxy Statement/Prospectus regarding the meeting, a proxy card(s) for your vote at the meeting and an envelope - postage prepaid - in which to return your proxy card are enclosed. At the PGF Special Meeting you will be asked to vote on two matters. The proposed merger of the funds is described in more detail in the combined Proxy Statement/Prospectus. THE BOARD OF DIRECTORS OF THE FUND BELIEVES THAT THE PROPOSED MERGER AND THE NAME CHANGE ARE IN THE BEST INTERESTS OF THE STOCKHOLDERS AND RECOMMENDS THAT YOU READ THE ENCLOSED MATERIALS CAREFULLY AND THEN VOTE "FOR" PROPOSALS 1 AND 2. Your vote is important. To approve the Merger the affirmative vote of a majority of the Fund's outstanding shares is required. Therefore, a failure to vote would amount to a vote against the Merger. PLEASE TAKE A MOMENT NOW TO SIGN AND RETURN YOUR PROXY CARD(S) IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE Respectfully, Ralph W. Bradshaw Chairman of the Board of Directors YOU ARE URGED TO SIGN THE PROXY CARD(S) AND RETURN THE CARD(S) IN THE POSTAGE-PAID ENVELOPE TO ENSURE A QUORUM AT THE MEETING. YOUR VOTE IS IMPORTANT REGARDLESS OF THE SIZE OF YOUR SHAREHOLDINGS. CORNERSTONE STRATEGIC VALUE FUND, INC. c/o Bear Stearns Funds Management, Inc. 383 Madison Avenue New York, New York 10179 _______, 2002 Dear Stockholder: We are pleased to invite you to the Annual Meeting of Stockholders (the "CLM Annual Meeting") of Cornerstone Strategic Value Fund, Inc., a Maryland corporation. Cornerstone Strategic Value Fund, Inc. is sometimes referred to hereinafter as "CLM" or the "Fund." The CLM Annual Meeting is scheduled to be held at ___ a.m., Eastern time, on _____________, October __, 2002, at the offices of Bear Stearns Funds Management Inc., 383 Madison Avenue, New York, New York 10179. First, you will be asked to vote on a Merger Agreement and Plan of Reorganization (the "Merger Agreement"), whereby CLM will merge with and into Progressive Return Fund, Inc. ("PGF") in accordance with the Maryland General Corporation Law. As a result of the merger: o CLM will no longer exist, o PGF will be the surviving corporation, and o each share of common stock of CLM will convert into an equivalent dollar amount (to the nearest one ten-thousandth of one cent) of shares and fractional shares of common stock of PGF, based on the net asset value per share of each fund on the date the Merger is consummated. The combined Fund will approximately double the size of the Fund and the Board of Directors believes that this will enable: (1) lower operating expense ratio, and (2) enhanced market liquidity. The proposed merger and the investment policies of the Funds are described in more detail in the combined Proxy Statement/Prospectus. CLM's Stockholders are also being asked to vote contgently on three additionsl proposals. Votes on these proposals will be counted and passed or defeated only in the event that the Merger is not consummated. In the event that the CLM Stockholders fail to approve the proposed merger between PGF and CLM, CLM Stockholders are being asked to vote on the following Proposals: The second Proposal that CLM Stockholders will be asked to vote on, and which will take effect only if the merger proposal is not consummated, will be the election of two (2) Class I nominees standing for re-election to CLM's Board of Directors, Messrs. Ralph W. Bradshaw and Edwin Meese III. The third Proposal that CLM Stockholders will be asked to vote on, and which will take effect only if the merger proposal is not consummated, is the ratification of the selection of Tait, Weller & Baker as the Fund's independent accountants for the year ending December 31, 2002. The fourth Proposal being submitted to CLM Stockholders and, which will take effect only if the merger proposal is not consummated, is a stockholder proposal requesting that within 90 days after the CLM Annual Meeting CLM be converted into an open-end fund. Stockholders who are unable to attend this meeting are strongly encouraged to vote by proxy, which is customary in corporate meetings of this kind. A Proxy Statement/Prospectus regarding the meeting, a proxy card(s) for your vote at the meeting and an envelope - postage prepaid - in which to return your proxy card are enclosed. At the CLM Annual Meeting you will be asked to vote on four matters. THE BOARD OF DIRECTORS OF THE FUND BELIEVES THAT THE PROPOSED MERGER IS IN THE BEST INTERESTS OF THE FUND AND ITS STOCKHOLDERS AND RECOMMENDS THAT YOUR READ THE ENCLOSED MATERIALS CAREFULLY AND THEN VOTE "FOR" PROPOSAL 1. THE BOARD OF DIRECTORS OF THE FUND BELIEVES THAT, IN THE ALTERNATIVE, IF THE PROPOSED MERGER IS NOT CONSUMMATED, THAT THE VOTE FOR CONTINGENT PROPOSALS 2, AND 3, THE RE-ELECTION OF THE TWO CLASS I DIRECTORS AND THE RATIFICATION OF THE SELECTION OF TAIT, WELLER & BAKER, ARE IN THE BEST INTERESTS OF THE FUND AND ITS STOCKHOLDERS AND RECOMMENDS THAT YOU READ THE ENCLOSED MATERIALS CAREFULLY AND THEN VOTE "FOR" PROPOSALS 2 AND 3. THE BOARD OF DIRECTORS BELIEVES THAT THE STOCKHOLDER PROPOSAL IS NOT IN THE BEST INTERESTS OF THE STOCKHOLDERS AND RECOMMENDS THAT YOU VOTE "AGAINST" PROPOSAL 4. Your vote is important. To approve the Merger the affirmative vote of a majority of the Fund's outstanding shares is required. Therefore, a failure to vote would amount to a vote against the Merger. PLEASE TAKE A MOMENT NOW TO SIGN AND RETURN YOUR PROXY CARD(S) IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE Respectfully, Ralph W. Bradshaw Chairman of the Board of Directors YOU ARE URGED TO SIGN THE PROXY CARD(S) AND RETURN THE CARD(S) IN THE POSTAGE-PAID ENVELOPE TO ENSURE A QUORUM AT THE MEETING. YOUR VOTE IS IMPORTANT REGARDLESS OF THE SIZE OF YOUR SHAREHOLDINGS. PROGRESSIVE RETURN FUND, INC. NOTICE OF SPECIAL MEETING OF STOCKHOLDERS Notice is hereby given that the Special Meeting of Stockholders (the "PGF Special Meeting") of Progressive Return Fund, Inc. ("PGF"), a Maryland corporation, will be held at the offices of Bear Stearns Funds Management Inc., 383 Madison Avenue, New York, New York 10179, on _________, October __, 2002, at ___ a.m., Eastern time, for the following purposes: 1. To consider and vote upon the approval of a Merger Agreement and Plan of Reorganization dated _______, 2002 whereby Cornerstone Strategic Value Fund, Inc. ("CLM"), a Maryland corporation, will merge with and into PGF in accordance with the Maryland General Corporation Law; and in the event that the stockholders of both PGF and CLM approve the merger proposal, then the stockholders of PGF will be asked to vote upon PGF Proposal 2: 2. To amend the Articles of Incorporation to change the name of the Fund from "Progressive Return Fund, Inc." to "Progressive Total Return Fund, Inc." The appointed proxies will vote in their discretion on any other business that may properly come before the PGF Special Meeting or any adjournments thereof. Holders of record of shares of common stock of PGF at the close of business on ______ __, 2002 (the "Record Date") are entitled to vote at the PGF Special Meeting and at any postponements or adjournments thereof. CLM stockholders must approve the merger as well. The persons named as proxies may propose one or more adjournments of the PGF Special Meeting if the necessary quorum to transact business or the vote required to approve or reject any proposal is not obtained at the meeting. Any such adjournment will require the affirmative vote of the holders of a majority of PGF's shares present in person or by proxy at the PGF Special Meeting. The persons named as proxies will vote those proxies which they are entitled to vote on any such proposal in accordance with their best judgment in the interest of PGF. The enclosed proxy is being solicited on behalf of the Board of Directors of PGF. By Order of the Board of Directors, Ralph W. Bradshaw, President IMPORTANT -- WE URGE YOU TO SIGN AND DATE THE ENCLOSED PROXY CARD(S) AND RETURN THE CARD(S) IN THE ENCLOSED ADDRESSED ENVELOPE WHICH REQUIRES NO POSTAGE AND IS INTENDED FOR YOUR CONVENIENCE. YOUR PROMPT RETURN OF THE ENCLOSED PROXY CARD(S) MAY SAVE THE NECESSITY AND EXPENSE OF FURTHER SOLICITATIONS TO ENSURE A QUORUM AT THE PGF SPECIAL MEETING. IF YOU CAN ATTEND THE PGF SPECIAL MEETING AND WISH TO VOTE YOUR SHARES IN PERSON AT THAT TIME, YOU WILL BE ABLE TO DO SO. CORNERSTONE STRATEGIC VALUE FUND, INC. NOTICE OF ANNUAL MEETING OF STOCKHOLDERS Notice is hereby given that the Annual Meeting of Stockholders (the "CLM Annual Meeting") of Cornerstone Strategic Value Fund, Inc. ("CLM"), a Maryland corporation, will be held at the offices of Bear Stearns Funds Management Inc., 383 Madison Avenue, New York, New York 10179, on _____, October ___, 2002, at ___ a.m., Eastern time, for the following purposes: 1. To consider and vote upon the approval of a Merger Agreement and Plan of Reorganization dated _______, 2002 whereby CLM will merge with and into Progressive Return Fund, Inc. ("PGF"), a Maryland corporation, in accordance with the Maryland General Corporation Law; and, in the alternative if Stockholders do not approve the merger proposal, then Stockholders will be asked to vote upon Proposals 2, 3 and 4: 2. To consider and vote upon the election of two (2) Class I nominees standing for re-election to CLM's Board of Directors, Messrs. Ralph W. Bradshaw and Edwin Meese III; 3. To ratify the selection of Tait, Weller & Baker as the Fund's independent accountants for the year ending December 31, 2002; and 4. To consider and vote upon a stockholder proposal requesting that CLM be converted into an open-end fund. The appointed proxies will vote in their discretion on any other business that may properly come before the CLM Annual Meeting or any adjournments thereof. Holders of record of shares of common stock of CLM at the close of business on ____ __, 2002 (the "Record Date") are entitled to vote at the CLM Annual Meeting and at any postponements or adjournments thereof. PGF stockholders must approve the merger as well. The persons named as proxies may propose one or more adjournments of the CLM Annual Meeting if the necessary quorum to transact business or the vote required to approve or reject any proposal is not obtained at the meeting. Any such adjournment will require the affirmative vote of the holders of a majority of CLM's shares present in person or by proxy at the CLM Annual Meeting. The persons named as proxies will vote those proxies which they are entitled to vote on any such proposal in accordance with their best judgment in the interest of CLM. The enclosed proxy is being solicited on behalf of the Board of Directors of CLM. By Order of the Board of Directors, Ralph W. Bradshaw, President IMPORTANT -- WE URGE YOU TO SIGN AND DATE THE ENCLOSED PROXY CARD(S) AND RETURN THE CARD(S) IN THE ENCLOSED ADDRESSED ENVELOPE WHICH REQUIRES NO POSTAGE AND IS INTENDED FOR YOUR CONVENIENCE. YOUR PROMPT RETURN OF THE ENCLOSED PROXY CARD(S) MAY SAVE THE NECESSITY AND EXPENSE OF FURTHER SOLICITATIONS TO ENSURE A QUORUM AT THE CLM ANNUAL MEETING. IF YOU CAN ATTEND THE CLM ANNUAL MEETING AND WISH TO VOTE YOUR SHARES IN PERSON AT THAT TIME, YOU WILL BE ABLE TO DO SO. DRAFT: FOR DISCUSSION PURPOSES ONLY INSTRUCTIONS FOR SIGNING PROXY CARDS The following general rules for signing proxy cards may be of assistance to you and avoid the time and expense to the Fund involved in validating your vote if you fail to sign your proxy card properly. 1. Individual Accounts: Sign your name exactly as it appears in the registration on the proxy card. 2. Joint Accounts: Either party may sign, but the name of the party signing should conform exactly to a name shown in the registration. 3. Other Accounts: The capacity of the individual signing the proxy card should be indicated unless it is reflected in the form of registration. For example: REGISTRATION CORPORATE ACCOUNTS VALID SIGNATURE (1) ABC Corp................................ABC Corp. (by John Doe, Treasurer) (2) ABC Corp................................John Doe, Treasurer (3) ABC Corp. c/o John Doe, Treasurer.................John Doe (4) ABC Corp. Profit Sharing Plan...........John Doe, Trustee TRUST ACCOUNTS (1) ABC Trust...............................Jane B. Doe, Trustee (2) Jane B. Doe, Trustee u/t/d/ 12/28/78.........................Jane B. Doe CUSTODIAL OR ESTATE ACCOUNTS (1) John B. Smith, Cust. f/b/o John B. Smith, Jr. UGMA...........John B. Smith (2) John B. Smith...........................John B. Smith, Jr., Executor CORNERSTONE STRATEGIC VALUE FUND, INC. 383 Madison Avenue New York, New York 10179 Tel: (212) 272-2093 TO BE MERGED WITH AND INTO PROGRESSIVE RETURN FUND, INC. 383 Madison Avenue New York, New York 10179 Tel: (212) 272-2093 COMBINED PROXY STATEMENT/PROSPECTUS This combined Proxy Statement/Prospectus is being furnished to stockholders of Progressive Return Fund, Inc. ("PGF") and Cornerstone Strategic Value Fund, Inc. ("CLM") for use at PGF's Special Meeting and CLM's Annual Meeting each to be held on ________, October __, 2002 at ___ a.m. and ___ a.m. Eastern time, respectively, and at any and all postponements or adjournments thereof. Hereinafter the PGF Special Meeting of Stockholders and the CLM Annual Meeting of Stockholders shall be collectively referred to as the "Meetings." The approximate mailing date of this Proxy Statement/Prospectus is September __, 2002. PURPOSE OF THE MEETINGS. At each of the Meetings, stockholders of each Fund will be asked to approve a Merger Agreement and Plan of Reorganization dated ______, 2002 (the "Plan") whereby CLM will merge with and into PGF, in accordance with the Maryland General Corporation Law. In addition, PGF stockholders will be asked to approve the amendment to PGF's Articles of Incorporation changing the name of the Fund in the event that the Merger is consummated. In the event that the Merger is not consummated, CLM's stockholders will be asked to contingently vote on the re-election of two nominees to CLM's Board of Directors, the ratification of Tait, Weller & Baker as the Fund's independent accountants for the year ending December 31, 2002, and a stockholder's proposal requesting that the Fund be open-ended. SPECIFICS OF THE PLAN. ---------------------- As a result of the merger: - CLM will no longer exist, - PGF will be the surviving corporation, and - each share of common stock of CLM will convert into an equivalent dollar amount (to the nearest one ten-thousandth of one cent) of shares and fractional shares of common stock of PGF, based on the net asset value per share of each Fund. In connection with the merger, PGF will issue that number of shares that have an aggregate net asset value equal to the aggregate net asset value of the outstanding shares of CLM. Each CLM stockholder, in connection with the merger, will receive shares of PGF having an aggregate net asset value equal to the aggregate net asset value of the stockholder's CLM shares on the day before the effective date of the Merger. before the merger. While the total net asset value of shares received by each CLM stockholder in the merger may be the same as before the merger, the market value of PGF shares that a CLM stockholder receives in the merger will be more or less than the market value of CLM shares that such stockholder owns immediately before the merger, depending on the current market discount levels of CLM and PGF. If the merger proposal is approved, CLM stockholders will become stockholders of a non-diversified rather than a diversified management investment company. PGF, as a non-diversified investment management company may invest a significant proportion of its assets in a single issuer or industry than CLM, as a diversified investment company can. Thus, an investment in PGF, as a non-diversified investment company may present a greater risk to an investor than an investment in CLM, as a diversified company because of the possibility of a greater concentration of assets in one issuer or industry. PGF and CLM are both registered with the Securities Exchange Commission as closed-end management investment companies and are both listed on the New York Stock Exchange ("NYSE"). PGF is classified as a non-diversified management investment company, whereas, CLM is classified as a diversified management investment company. PGF seeks total return consisting of capital appreciation and current income by investing primarily in U.S. and non-U.S. securities. CLM's investment objective is to seek long-term capital appreciation through investment in equity securities of U.S. and non-U.S. companies. The current investment objective and policies of PGF will continue unchanged if the merger occurs. The terms and conditions of the merger and related transactions are more fully described in this Proxy Statement/Prospectus and in the Plan, a copy of which is attached hereto as Exhibit A. This Proxy Statement/Prospectus serves as a prospectus for shares of PGF under the Securities Act of 1933, as amended (the "Securities Act"), in connection with the issuance of PGF common shares in the merger. Assuming the stockholders of each Fund approve the merger and that all other conditions contained in the Merger Agreement are satisfied or waived, the Funds will jointly file articles of merger (the "Articles of Merger"), with the State Department of Assessments and Taxation of Maryland (the "Department"). The merger will become effective on October __, 2002, or such other date as may result from the application of the terms of the Merger Agreement (the "Effective Date"). CLM, as soon as practicable after the Effective Date, will terminate its registration under the Investment Company Act of 1940, as amended (the "Investment Company Act"). Under Maryland law, shareholders of PGF and CLM are not entitled to any appraisal or similar rights in connection with the merger contemplated by the Plan. You should retain this Proxy Statement/Prospectus for future reference as it sets forth concisely information about PGF and CLM that you should know before voting on the proposals described below. A Statement of Additional Information (the "SAI") dated September __, 2002, which contains additional information about the merger and the Funds has been filed with the Securities and Exchange Commission (the "SEC"). The SAI and financial statements of PGF and CLM for the fiscal year ended December 31, 2001 are incorporated by reference into this Proxy Statement/Prospectus. Please note that each Fund's semi-annual reports for the period ending June 30, 2002 will be available approximately on August 31, 2002. Copies of these documents are available upon request and without charge by writing to the Secretary of the Fund c/o Bear Stearns Funds Management Inc. located at 383 Madison Avenue, 23rd Floor, New York, New York 10179, or by calling (212) 272-2093. You may ask questions about the Funds by calling (212) 272-2093. PGF has provided the information included in this Proxy Statement/Prospectus regarding that Fund and CLM has provided the information included in this Proxy Statement/Prospectus regarding that Fund. PGF's shares of common stock are listed on the NYSE under the symbol "PGF" and CLM's shares of common stock are listed on the NYSE under the symbol "CLM". After the Effective Date, shares of common stock of PGF will continue to be listed on the NYSE under the symbol "PGF". Reports, proxy materials and other information concerning each Fund may be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005. The SEC has not approved or disapproved these securities or determined if this Proxy Statement/Prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this Proxy Statement/Prospectus is September __, 2002 TABLE OF CONTENTS Page General................................................................... 6 I. MERGER PROPOSAL TO BE VOTED ON BY STOCKHOLDERS OF PGF AND CLM Proposal 1 (BOTH FUNDS): APPROVAL OF THE MERGER AGREEMENT AND PLAN OF REORGANIZATION.................................................... 9 Synopsis....................................................... 10 Expense Table.................................................. 15 Financial Highlights........................................... 16 Principal Risk Factors......................................... 16 Comparison of Investment Objectives and Policies............... 19 United States Federal Income Taxes............................. 23 Information about the Merger................................... 25 Additional Information about the Funds......................... 31 Management of the Funds........................................ 38 Experts........................................................ 45 Required Vote.................................................. 46 Legal Proceedings.............................................. 46 Legal Opinions................................................. 46 II. ADDITIONAL PROPOSAL TO BE VOTED ON BY PGF STOCKHOLDERS WHICH WILL ONLY TAKE EFFECT IN THE EVENT THAT PROPOSAL 1 IS APPROVED BY BOTH FUNDS PGF Proposal 2: RATIFICATION OF THE CHANGE IN NAME OF THE FUND TO "PROGRESSIVE TOTAL RETURN FUND, INC.".................................................. 47 III ADDITIONAL PROPOSALS TO BE VOTED ON BY CLM'S STOCKHOLDERS WHICH WILL ONLY TAKE EFFECT IN THE EVENT THAT PROPOSAL 1 IS NOT APPROVED BY BOTH FUNDS' STOCKHOLDER'S CLM Proposal 2: Election of Directors..................................... 48 CLM Proposal 3: Ratification of Selection of Independent Accountants................................................ 56 CLM Proposal 4: Shareholder proposal requesting that the Fund be converted into an Open-end Fund........................................... 57 Additional Information.................................................... 61 Exhibit A: Form of Merger Agreement....................................... A-1 Exhibit B1: Form of PGF Proxy Card........................................ B1-1 Exhibit B2: Form of CLM Proxy Card....................................... B2-1 Exhibit C: Certificate of Amendment to the Articles of Incorporation..... C-1 GENERAL This combined Proxy Statement/Prospectus is furnished to the stockholders of each Fund in connection with the solicitation of proxies on behalf of each of the Boards of Directors of the Funds. The Board of Directors of each Fund is soliciting proxies for use at each Fund's respective Meeting. The mailing address for both Funds is c/o Bear Stearns Funds Management Inc., 383 Madison Avenue, New York, New York 10179. This Proxy Statement/Prospectus, the Notices of Meeting to Stockholders and the proxy card(s) (attached hereto as Exhibit B) are first being mailed to stockholders on or about September __, 2002 or as soon as practicable thereafter. Any stockholder who gives a proxy has the power to revoke the proxy either: (i) by mail, addressed to the Secretary of the respective Fund, at the Fund's mailing address, or (ii) in person at the Meeting by executing a superseding proxy or by submitting a notice of revocation to the respective Fund. All properly executed proxies received in time for the meetings will be voted as specified in the proxy or, if no specification is made, "FOR" each proposal for that Fund, except that in the case of Proposal 4, all unspecified proxies will be voted "AGAINST" such Stockholder Proposal. Stockholders of both PGF and CLM will be asked to vote on Proposal 1 - -- the approval of the Plan. In the event that the merger proposal is approved by the stockholders of CLM and PGF, then the PGF stockholders will be asked to authorize the amendment to PGF's Articles of Incorporation changing the name of the Fund to "Progressive Total Return Fund, Inc. In the event that the Merger is not consummated, CLM Stockholders will be asked to contingently vote on Proposal 2 -- the re-election of Messrs. Ralph W. Bradshaw and Edwin Meese III to CLM's Board of Directors -- Proposal 3 -- the ratification of the selection of Tait, Weller & Baker as CLM's independent accountants for the year ending December 31, 2002; and -- Proposal 4-- a shareholder proposal requesting the shareholders to convert CLM to an open-end fund. QUORUM The presence, either in person or by proxy, of the holders of one-third of the outstanding shares of common stock entitled to vote at a meeting of a Fund, will constitute a quorum for the transaction of business by such Fund. For purposes of determining the presence of a quorum for transacting business at a meeting, abstentions and broker "non-votes" will be treated as shares that are present. Broker non-votes are proxies received by a Fund from brokers or nominees, indicating that the broker or nominee has neither received instructions from the beneficial owner or other persons entitled to vote nor has the discretionary power to vote on a particular matter. Stockholders are urged to forward their voting instructions promptly. REQUIRED VOTE Proposal 1, to be submitted at the PGF and CLM Meetings, requires the affirmative vote of a majority of the outstanding shares of common stock of each Fund. PGF Proposal 2, to be submitted at the PGF Special Meeting, requires the affirmative vote of a majority of the outstanding shares of common stock of PGF. CLM Proposals 2 and 3, to be submitted at the CLM Annual Meeting, requires the affirmative vote of a majority of the votes cast at the meeting. -1- CLM Proposal 4, to be submitted at the CLM Annual Meeting, requires the affirmative vote of a majority of the outstanding shares of common stock. Abstentions and broker non-votes will have the effect of a "no" vote for Proposal 1, PGF Proposal 2, and CLM's Proposal 4, and will have no effect on CLM's Proposal 2 and 3. Proxy solicitations will be made primarily by mail, but solicitations may also be made by telephone, telegraph or personal interviews conducted by officers or employees of the Funds, Cornerstone Advisors, Inc., the investment adviser to each of the Funds (the "Investment Adviser"), Bear Stearns Funds Management Inc., the administrator to each of the Funds (the "Administrator"), and Georgeson Shareholder Communication, Inc., a proxy solicitation firm ("Georgeson"). The Funds will bear their respective costs of solicitation. An agreement between the Funds and Georgeson provides for Georgeson to provide general solicitation services to the Funds at an estimated cost of $______, including expenses. The Funds will, upon request, bear the reasonable expenses of brokers, bank and their nominees who are holders of record of the Funds' voting securities on the record date, incurred in mailing copies of this Proxy Statement/Prospectus to the beneficial owners of the Funds' voting securities. Only stockholders of record of each Fund at the close of business on ____ __, 2002 (the "Record Date"), are entitled to vote. Each outstanding share of each Fund is entitled to one vote on all matters voted upon at a meeting of the stockholders of that Fund. As of June 30, 2002, there were approximately 4,228,516 shares of PGF outstanding, and approximately 3,832,560 shares of CLM outstanding. PGF and CLM provide periodic reports to all of their stockholders. These reports highlight relevant information including investment results and a review of portfolio changes for each Fund. You may receive a copy of the most recent annual and semi-annual reports for PGF or CLM, without charge, by calling (212) 272-2093 or writing to the Secretary of the Fund c/o Bear Stearns Funds Management Inc. located at 383 Madison Avenue, 23rd Floor, New York, New York 10179. The Boards of Directors of the Funds know of no business other than the proposals described above which will be presented for consideration at each Fund's respective Meeting. If any other matter is properly presented, it is the intention of the persons named in the enclosed proxy to vote on that matter in their discretion. -2- I. MERGER PROPOSAL TO BE VOTED ON BY STOCKHOLDERS OF PGF AND CLM. PROPOSAL 1: APPROVAL OF THE MERGER AGREEMENT AND PLAN OF REORGANIZATION (THE "PLAN") On August 2, 2002, the Boards of Directors of both Funds, including a majority of the Directors who are not "interested persons" (the "Non-interested Directors"), unanimously: (1) declared that the merger of CLM with and into PGF is in the best interest of the Funds and the stockholders, (2) approved the Plan, and (3) recommended that the stockholders of each Fund approve the Plan. Stockholders should note that the Board of Directors of the Funds are identical, therefore, the Non-interested Directors are "non-interested" with respect to each Fund s required by the Investment Company Act, they are not at arms-length with respect to the proposed Merger. The Boards suggest that stockholder carefully review the information contained in the Proxy Statement/Prospectus before casting a vote. For more information about the merger, see "Information about the Merger." The Plan is subject to the approval of the stockholders of both Funds and certain other conditions. It provides for the merger (the "Merger") of CLM with and into PGF in accordance with the Maryland General Corporation Law (the "MGCL"). As a result of the Merger: - CLM will no longer exist, - PGF will be the surviving corporation, and - each share of common stock of CLM will convert into an equivalent dollar amount (to the nearest one ten-thousandth of one cent) of shares and fractional shares of common stock of PGF, based on the net asset value per share of each Fund calculated at 4:00 p.m. (New York Time) on the business day preceding the Effective Date. A "Business Day" is any day on which the NYSE is open for trading. PGF's shares outstanding as of the Effective Date will remain issued and outstanding. A copy of the Plan is attached to this Proxy Statement/Prospectus as Exhibit A, and the description of the Plan included in this Prospectus/Proxy Statement is qualified in its entirety by reference to Exhibit A. The following provides a more detailed discussion about the Merger, each Fund and additional information that you may find helpful in deciding how to vote on the Merger. -3- SYNOPSIS This summary highlights important information included in this Proxy Statement/Prospectus. This summary is qualified by reference to the more complete information included elsewhere in this Proxy Statement/Prospectus and the Plan. Stockholders of each Fund should read this entire Proxy Statement/Prospectus carefully. THE PROPOSED MERGER. The Boards of Directors of PGF and CLM, including the Non-interested Directors of each Fund, have unanimously approved the Plan. The Plan provides for the merger of CLM with and into PGF. As a result of the Merger: - each share of common stock of CLM will convert into an equivalent dollar amount (to the nearest one ten-thousandth of one cent) of shares and fractional shares of common stock of PGF, based on the net asset value per share of each Fund calculated at 4:00 pm (New York time) on the Business Day preceding the Effective Date; - PGF stockholders will retain their shares; and - each stockholder of CLM will become a stockholder of PGF and will receive, on the Effective Date, that number of shares of common stock of PGF having an aggregate net asset value equal to the aggregate net asset value of such stockholder's shares held in CLM as of the close of business on the Business Day preceding the Effective Date. If the Merger is not consummated, each Fund will continue as a separate investment company, and the Board of Directors of each Fund will consider such other alternatives as it determines to be in the best interests of its stockholders. FORM OF ORGANIZATION. - --------------------- PGF is a closed-end, non-diversified management investment company and CLM is a closed-end, diversified management investment company, both of which are registered under the Investment Company Act. PGF and CLM were both organized as Maryland corporations in 1989 and 1987, respectively. Each Fund's Board of Directors is responsible for the management of the business and affairs of each Fund. INVESTMENT OBJECTIVES. - ---------------------- PGF seeks total return consisting of capital appreciation and current income by investing primarily in U.S. and non-U.S. securities. CLM's investment objective is to seek long-term capital appreciation through investment in equity securities of U.S. and non-U.S. companies. Each Fund's investment objectives are fundamental, and can only be changed with the approval of the holders of a majority of its outstanding voting securities as defined under the Investment Company Act. The preceding summary of each Fund's investment objectives and certain policies should be considered in conjunction with the discussion below under "Risk Factors and Special Considerations" and "Comparison of Investment Objectives and Policies." -4- NET ASSETS OF THE FUNDS - ----------------------- At June 30, 2002, PGF had net assets of $28,464,996 and CLM had net assets of $29,413,776. FEES AND EXPENSES--PGF AND CLM - ------------------------------ Cornerstone Advisors, Inc. ("Cornerstone Advisors" or "Advisor"), serves as PGF's and CLM's investment adviser. The agreements between the Advisor and each Fund are substantially identical. As compensation for its advisory services, Cornerstone Advisors is contractually entitled to receive from each Fund an annual fee of one percent (1%) of that Fund's average weekly net assets payable monthly. On June 19, 2002, Cornerstone Advisors agreed to immediately implement a voluntary expense reimbursement limitation with regard to both funds under which the Advisor voluntarily waive its management fees to each Fund to the extent that each Fund's monthly operating expenses exceed .10% of net assets calculated on a monthly basis. The expenses of the proposed Merger are not regarded as "operating expenses". The voluntary fee waiver may be changed or discontinued at any time after December 31, 2002 in the discretion of the Advisor. The voluntary expense limitation will not, however, be affected by the Merger. For the fiscal year ended December 31, 2001, Cornerstone Advisors earned $331,733 for performing its advisory services to PGF, of which Cornerstone Advisors, under a different voluntary expense limitation, waived $1,966 and $276,913 for advisory services to CLM, of which Cornerstone Advisors waived $58,679. CLM also paid $78,655 as compensation to Clemente Capital, Inc., the Fund's investment adviser from January 1, 2001 until April 18, 2001 and $26,222 to Wilmington Trust Co., the Fund's sub-investment adviser for January 1, 2001 until April 18, 2001. Bear Stearns Funds Management Inc. ("BSFM"), serves as PGF's and CLM's administrator. PGF and CLM each pay BSFM a monthly fee that is computed weekly at an annual rate of 0.10% of the respective Fund's average weekly net assets, subject to a minimum annual fee of $50,000. In addition to the fee, the Fund is required to reimburse the Administrator all out-of-pocket expenses incurred by the Administrator for attendance at any meetings (outside the New York metropolitan area) of the Board of Directors, or any committees of such Board, or any other meetings or presentations for which the Administrator is required to attend. For the fiscal year ended December 31, 2001, BSFM earned $58,976 for services performed on behalf of PGF. BSFM earned $39,658 for services performed on behalf of CLM for the period April 23, 2001 through December 31, 2001. In addition, PFPC, Inc., CLM's former administrator, earned $21,696 for the period January 1, 2001 until April 30, 2001. Based on June 30, 2002 net assets and projected expenses for the year 2002, in the absence of an expense limitation, PGF's expense ratio would be expected to be approximately 2.35% Based on similar assumptions, PGF's expense ratio after the Merger, not including the expenses of the Merger, is projected to be approximately 1.97%. So long as the voluntary expense limitation described above is in effect, PGF's expense ratio is expected to be 1.20%. The actual expense ratios for the current and fiscal years, whether or nott the Merger occurs, may be higher or lower than these projections and depend upon performance, general stock market and economic conditions, net asset levels, stock prices and other factors, as well as whether the voluntary expense limitation is continued. -5- See "Expense Table" below for the current expenses of each Fund and pro forma expenses following the Merger. DISTRIBUTION POLICIES - --------------------- In June 2002 both Funds announced distribution policies under which they would distribute fixed monthly amounts. Such amounts have been distributed in July and August and distributions have been declared by the Boards of Directors for the months of September and October. Such distributions may be treated as returns of capital, capital gain or ordinary income depending on each Fund's tax position for the year as a whole. Stockholders will be advised of the relevant treatment when the tax positions are known. It is the intention of the current Board of Directors to continue its current distribution policy after the Merger but there can be no guarantee that the policy will be continued for any specific time period. UNREALIZED CAPITAL GAINS. - ------------------------- As of July 12, 2002, PGF had approximately $7,812,761 of unrealized capital losses, representing approximately 29.6% of its net assets. As of that same date, CLM had approximately $1,711,531 of unrealized capital gains, representing approximately 6.34% of its net assets. As of July 12, 2002, PGF had approximately $11,780,944 of capital loss carryforwards. CLM had approximately $142,060 of capital loss carryforwards as of December 31, 2001. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. - ---------------------------------------------- As a condition to the closing of the Merger, both Funds will receive an opinion of Spitzer & Feldman P.C., counsel to the Funds, stating that the Merger will constitute a tax-free reorganization within the meaning of Section 368(a)(1) of the Internal Revenue Code of 1986 (the "Code"). Accordingly, neither CLM, PGF nor the stockholders of either Fund will recognize any gain or loss as a result of the Merger. The holding period and the aggregate tax basis of PGF shares (including fractional shares) received by a CLM stockholder will be the same as the holding period and aggregate tax basis of the shares of CLM previously held by the stockholder. The holding period and the aggregate tax basis of the assets received by PGF in the Merger will be the same as the holding period and the tax basis of such assets in the hands of CLM immediately before the Merger. For more information about the tax consequences of the Merger, see "Information about the Merger - Tax Considerations." The Board of Directors of each Fund considered these positions as part of their overall process of considering the proposed Merger. They also considered professional advice that they received regarding the future use of these various capital loss categories to offset future capital gains. This professional advice included the possibility that in some circumstances utilization of the capital loss carryforwards might be restricted, in part because of the Merger. The Boards also considered whether the ability to continue to utilize the capital loss carryforwards should be made a condition to the effectiveness of the Merger and concluded that it should not. The Boards concluded that in their respective judgments, under all of the facts and circumstances known to them after considering the advice of their professional advisers, the Merger is in the best interests of both Funds and their stockholders, even if as a consequence there may be "truncation" (restriction on the utilization) of the capital loss carryforwards under the Internal Revenue Code." -6- Under the Merger Agreement, the Boards of Directors do have the discretion to consummate the Merger if they are advised that an impairment of PGF's tax loss carryforwards would result. DISCOUNT FROM NET ASSET VALUE. - ------------------------------ Shares of closed-end funds frequently trade at a market price that is less than the value of the fund's net assets. The possibility that shares of PGF and CLM will trade at a discount from its net asset value is a risk separate and distinct from the risk that such Fund's net asset value will decrease. Except for limited periods of time, PGF's shares have traded in the market at a discount, and, as of August 1, 2002, the last trading day immediately before the announcement of the Merger, traded at a market price discount of ______%. Similarly, CLM shares have traded in the market at a discount and, as of that same date, traded at a market price discount of ________%. EXPENSES OF THE MERGER. - ----------------------- In evaluating the proposed Merger, Cornerstone Advisors has estimated the amount of expenses the Funds would incur as approximately $140,000, which includes, but is not limited to, NYSE fees, SEC registration fees, legal and accounting fees, proxy and distribution costs, and expenses incurred in connection with the Merger. The aggregate amount of estimated expenses of the Merger will be allocated equally between the Funds, regardless of whether the Merger is consummated, including the SEC registration fees and the fees for listing additional shares of PGF on the NYSE. The expenses of the Merger are expected to result in a reduction in net asset value per PGF share of approximately $0.06, and a reduction in net asset value per CLM share of approximately $0.02. -7-
EXPENSE TABLE SHAREHOLDER TRANSACTION EXPENSES PGF CLM PRO FORMA, POST MERGER --- --- ---------------------- Sales Load (as a percentage of offering price) N/A N/A N/A Dividend Reinvestment and Cash Purchase Plan $0 $0 $0 Fees ANNUAL EXPENSES(1) Investment Advisory Fees 1.00% 1.00% 1.00% OTHER EXPENSES(2) 1.35% 1.17 0.97% TOTAL ANNUAL EXPENSES 2.35%(3) 2.17%(3) 1.97%(3) ======== ======== ======== (1) The percentages in the above table expressing annual fund operating expenses are based on each Fund's operating expenses for the fiscal year ended December 31, 2001. (2) Other Expenses include administration, fund accounting, custody and transfer agency fees as well as legal and auditing annual expenses. These figures do not reflect the expenses of the Merger. (3) Total Annual Expenses do not reflect the effect of any expense limitation reimbursement. Assuming that the voluntary expense limitation reimbursement continues, the Total Annual Expenses would be 1.20%. Cornerstone Advisors has committed to the expense limitation through December 31, 2002. The Advisor may discontinue the expense limitation after the date, in its sole discretion.
-8- Example. The purpose of the following example is to help you understand the costs and expenses you may bear as an investor. This example is based on the level of total annual operating expenses for each Fund listed in the table above, the total expenses relating to a $1,000 investment, assuming a 5% annual return and reinvestment of all dividends and distributions. Stockholders do not pay these expenses directly, they are paid by the Funds before they distribute net investment income to Stockholders. This example should not be considered a representation of future expenses, and actual expenses may be greater or less than those shown. Federal regulations require the example to assume a 5% annual return, but actual annual returns will vary. PGF CLM PRO FORMA, POST MERGER 1 Year $238 $220 $200 3 Years $733 $679 $618 5 Years $1,255 $1,164 $1,062 10 Years $2,686 $2,503 $2,296 PERFORMANCE. - ------------ The table below provides performance data for the period beginning January 1, 2002 to June 30, 2002, for PGF and CLM based on each Fund's net asset value and market value. Past performance is not a guarantee of future results, and it is not possible to predict whether or how investment performance will be affected by the Merger. It is important to note that prior to January 1, 2001, both Funds' investment objectives were different and the investments made were not similar either to each other or to the investments made after that date. PGF CLM CUMULATIVE AVERAGE ANNUAL CUMULATIVE AVERAGE ANNUAL NET ASSET VALUE (11.62)% (11.62)% (18.66)% (18.66)% MARKET VALUE 4.04% 4.04% (17.72)% (17.72)% -9- FINANCIAL HIGHLIGHTS The information required in this portion is being incorporated by reference from each Funds Annual Report to Stockholders filed with the Commission. This information was audited, except as noted, by PricewaterhouseCoopers LLP whose reports, along with the Funds' financial statements, are incorporated herein by reference and included in the Funds' Annual Reports to Stockholders. The Annual Reports and Semi-Annual Reports may be obtained without charge, by writing to the Secretary of the Fund c/o Bear Stearns Funds Management Inc., 383 Madison Avenue, 23 Fl., New York, New York 10179, or by calling (212) 272-2093. PRINCIPAL RISK FACTORS Both PGF and CLM are closed-end management investment companies and are designed primarily for long-term investors and not as trading vehicles. STOCK MARKET VOLATILITY. Stock markets can be volatile. In other words, the prices of stocks can rise or fall rapidly in response to developments affecting a specific company or industry, or to changing economic, political or market conditions. The Funds are subject to the general risk that the value of their investments may decline if the stock markets perform poorly. There is also a risk that each Fund's investments will underperform either the securities markets generally or particular segments of the securities markets. ISSUER SPECIFIC CHANGES. Changes in the financial condition of an issuer, changes in the specific economic or political conditions that affect a particular type of security or issuer, and changes in general economic or political conditions can affect the credit quality or value of an issuer's securities. Lower-quality debt securities tend to be more sensitive to these changes than higher-quality debt securities. INTEREST RATE RISK. Debt securities have varying levels of sensitivity to changes in interest rates. In general, the price of a debt security can fall when interest rates rise and can rise when interest rates fall. Securities with longer maturities and mortgage securities can be more sensitive to interest rate changes although they usually offer higher yields to compensate investors for the greater risks. The longer the maturity of the security, the greater the impact a change in interest rates could have on the security's price. In addition, short-term and long-term interest rates do not necessarily move in the same amount or the same direction. Short-term securities tend to react to changes in short-term interest rates and long-term securities tend to react to changes in long-term interest rates. CREDIT RISKS. Fixed income securities rated B or below by S&Ps or Moody's may be purchased by either Fund. These securities have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity of those issuers to make principal or interest payments, as compared to issuers of more highly rated securities. EXTENSION RISK. Each Fund is subject to the risk that an issuer will exercise its right to pay principal on an obligation held by the Fund (such as mortgage-backed securities) later than expected. This may happen when there is a rise in interest rates. These events may lengthen the duration (i.e. interest rate sensitivity) and potentially reduce the value of these securities. -10- ILLIQUID SECURITIES.Each Fund may invest up to 15% of its respective net assets in illiquid securities. Illiquid securities may offer a higher yield than securities which are more readily marketable, but they may not always be marketable on advantageous terms. The sale of illiquid securities often requires more time and results in higher brokerage charges or dealer discounts than does the sale of securities eligible for trading on national securities exchanges or in the over-the-counter markets. A security traded in the U.S. that is not registered under the Securities Act of 1933 will not be considered illiquid if Fund management determines that an adequate investment trading market exists for that security. However, there can be no assurance that a liquid market will exist for any security at a particular time. INVESTMENT IN SMALL AND MID-CAPITALIZATION COMPANIES. Each Fund may invest in companies with mid or small sized capital structures (generally a market capitalization of $5 billion or less). Accordingly, the Fund may be subject to the additional risks associated with investment in these companies. The market prices of the securities of such companies tend to be more volatile than those of larger companies. Further, these securities tend to trade at a lower volume than those of larger more established companies. If a Fund is heavily invested in these securities and the value of these securities suddenly declines, that Fund will be susceptible to significant losses. OVER-THE-COUNTER BULLETIN BOARD MARKETS. Each Fund may invest in companies whose stock is trading on the over-the-counter Bulletin Board which have only a limited trading market. A more active trading market may never develop. Each Fund may be unable to sell its investments in these companies on any particular day due to the limited trading market. ANTI-TAKEOVER PROVISIONS. Each Fund's Charter and Bylaws include provisions that could limit the ability of other persons or entities to acquire control of the Fund or to cause it to engage in certain transactions or to modify its structure. LEVERAGE RISK. Utilization of leverage is a speculative investment technique and involves certain risks to the holders of common stock. These include the possibility of higher volatility of the net asset value of the common stock and potentially more volatility in the market value of the common stock. So long as each Fund is able to realize a higher net return on its investment portfolio than the then current cost of any leverage together with other related expenses, the effect of the leverage will be to cause holders of common stock to realize higher current net investment income than if the Fund were not so leveraged. On the other hand, to the extent that the then current cost of any leverage, together with other related expenses, approaches the net return on the Fund's investment portfolio, the benefit of leverage to holders of common stock will be reduced, and if the then current cost of any leverage were to exceed the net return on the Fund's portfolio, the Fund's leveraged capital structure would result in a lower rate of return to Common Shareholders than if the Fund were not so leveraged. There can be no assurance that each Fund's leverage strategy will be successful. NON-U.S. SECURITIES RISK. Investments in securities of non-U.S. issuers involve special risks not presented by investments in securities of U.S. issuers, including the following: less publicly available information about companies due to less rigorous disclosure or accounting standards or regulatory practices; the impact of political, social or diplomatic events; possible seizure, expropriation or nationalization of the company or its assets; and possible imposition of currency exchange controls. These risks are more pronounced to the extent that each Fund invests a significant amount of its investments in companies located in one region. -11- DEBT SECURITY RISK. In addition to interest rate risk, call risk and extension risk, debt securities are also subject to the risk that they may also lose value if the issuer fails to make principal or interest payments when due, or the credit quality of the issuer falls. COMMON STOCK RISK. While common stock has historically generated higher average returns than fixed income securities, common stock has also experienced significantly more volatility in those returns. An adverse event, such as an unfavorable earnings report or acts of terrorism, may depress the value of common stock held by the Fund. Also, the price of common stock is sensitive to general movements in the stock market. A drop in the stock market may depress the price of common stock held by the Fund. MARKET DISCOUNT FROM NET ASSET VALUE. Shares of closed end investment companies frequently trade at a discount from their net asset value. This characteristic is a risk separate and distinct from the risk that the Fund's net asset value could decrease as a result of its investment activities and may be greater for investors expecting to sell their shares in a relatively short period following completion of this offering. The net asset value of the common stock will be reduced immediately following the offering as a result of the payment of certain offering costs. Whether investors will realize gains or losses upon the sale of the common stock will depend not upon the Fund's net asset value but entirely upon whether the market price of the common stock at the time of sale is above or below the investor's purchase price for the common stock. Because the market price of the common stock will be determined by factors such as relative supply of and demand for the common stock in the market, general market and economic conditions, and other factors beyond the control of the Fund, the Fund cannot predict whether the common stocks will trade at, below or above net asset value or at, below or above the initial public offering price. In recent years, shares of both Funds have traded at a discount to their respective net asset values. NON-DIVERSIFICATION.Because PGF is classified as "non-diversified" under the Investment Company Act it can invest a greater portion of its assets in securities of a single issuer. As a result, PGF will be more susceptible than CLM, a more widely diversified fund, to any single corporate, economic, political or regulatory occurrence. COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES ORGANIZATION. - ------------- PGF is a closed-end, non-diversified management investment company registered under the Investment Company Act, and CLM is a closed-end, diversified management investment company registered under the Investment Company Act. Both Funds are organized as corporations under the laws of the State of Maryland. Each Fund is managed and advised by Cornerstone Advisors. The shares of common stock of each Fund are listed and trade on the NYSE under the symbols "PGF" and "CLM", respectively. After the Merger, PGF's shares will continue to trade on the NYSE under the symbol "PGF", while CLM's shares will be delisted and CLM will cease to exist. The shares of common stock of each Fund have equal non-cumulative voting rights and equal rights with respect to dividends, assets and dissolution. Each Fund's shares of common stock are fully paid and non-assessable and have no preemptive, conversion or other subscription rights. Fluctuations in the market price of the Fund's shares is the principal investment risk of an investment in either Fund. Portfolio management, market conditions, investment policies and other factors affect such fluctuations. Although the investment objectives, policies and restrictions of the Funds are similar, there are differences between them, as discussed below. There can be no assurance that either Fund will achieve its stated objective. -12- INVESTMENT OBJECTIVES. - ---------------------- PGF --- PGF's investment objective is to seek total return consisting of capital appreciation and current income by investing primarily in equity securities of U.S. and non-U.S. companies and U.S. dollar denominated debt securities which Fund management believes have demonstrated fundamental investment value and favorable growth prospects. In general, PGF invests in such equity securities that are traded in the United States on a securities exchange or over the counter or by ADRs, IDRs or other forms of depositary receipts. Depositary receipts are traded like common stocks in the United States, are typically issued in connection with a U.S. or foreign banks or trust companies and evidence ownership of underlying securities issued by a foreign corporation. CLM --- CLM's investment objective is to seek long-term capital appreciation through investment primarily in equity securities of U.S. and non-U.S. companies which Fund management believes have demonstrated fundamental investment value and favorable growth prospects. In general, CLM invests primarily in common stocks, preferred stocks, rights, warrants and securities convertible into common stocks that are listed on stock exchanges or traded over the counter. Each Fund's foregoing investment objective cannot be changed without the vote of a majority of the Fund's outstanding voting securities as defined in the Investment Company Act. No assurance can be given that either Fund's investment objective will be achieved. COMPARISON OF INVESTMENT POLICIES. - ---------------------------------- PGF --- PGF's portfolio, under normal market conditions, consists principally of the equity securities of large, mid and small-capitalization companies. Equity securities in which the Fund may invest include common and preferred stocks, convertible securities, warrants and other securities having the characteristics of common stocks, such as ADRs and IDRs. The Fund may, however, invest a portion of its assets in U.S. dollar denominated debt securities when Fund management believes that it is appropriate to do so in order to achieve the Fund's investment objective - for example when interest rates are high in comparison to anticipated returns on equity investments. Debt securities in which the Fund may invest include U.S. dollar denominated bank, corporate or government bonds, notes, and debentures of any maturity determined by Fund management to be suitable for investment by the Fund. The Fund may invest in the securities of issuers that it determines to be suitable for investment by the Fund regardless of their rating. The Fund may not, however, invest more than 5% of its assets in debt securities that are determined by Fund management to be rated or comparable to securities rated B or below by S&P or Moody's. PGF's management utilizes a balanced approach, including value and growth investing by seeking out companies at reasonable prices, without regard to sector or industry, that demonstrate favorable long-term growth characteristics. Valuation and growth characteristics may be considered for purposes of selecting potential investment securities. In general in the securities industry, valuation analysis is used to determine the inherent value of the company by analyzing financial information such as a company's price to book, price to sales, return on equity, and return on assets ratios and growth analysis is used to determine a company's potential for long-term dividends and earnings growth due to market-oriented factors such as growing market share, the launch of new products or services, the strength of its management and market demand. -13- PGF may also invest up to 10% of its assets in the aggregate in the securities of other investment companies and up to 5% of its assets in any one such investment company, provided that such investment does not represent more than 3% of the voting stock of the acquired investment company of which such shares are purchased. As a shareholder in any investment company, the Fund will bear its ratable share of the investment company's expenses and would remain subject to payment of the Fund's advisory and administrative fees with respect to the assets so invested. PGF may invest up to 15% of its assets in illiquid U.S. and non-U.S. securities, provided that the Fund may not invest more than 3% of the Fund's assets in the securities of companies that, at the time of investment, had less than a year of operations, including operations of predecessor companies. The Fund will invest only in such illiquid securities that, in the opinion of Fund management, present opportunities for substantial growth over a period of two to five years. PGF does not expect to trade in securities for short-term gains. Higher portfolio turnover rates resulting from more actively traded portfolio securities generally result in higher transaction costs, including brokerage commissions and related capital gains or losses. Since the Fund's investment policies emphasize long-term investment in the securities of companies, the Fund's annual portfolio turnover rate is expected to be relatively low, ranging between 50% and 75%. CLM --- CLM's portfolio, under normal market conditions, will consist principally of the equity securities of U.S. and non-U.S. companies. In general, CLM invests primarily in common stocks, preferred stocks, rights, warrants and securities convertible into common stocks that are listed on stock exchanges or traded over the counter. The Fund may, without limitation, hold cash or invest in assets in money market instruments, including U.S. and non-U.S. government securities, high grade commercial paper and certificates of deposit and bankers' acceptances issued by U.S. and non-U.S. banks having deposits of at least $500 million. In addition, CLM may engage in hedging transactions to reduce its company market and currency exchange exposure. CLM may also invest up to 10% of its assets in the aggregate in the securities of other investment companies and up to 5% of its assets in any one such investment company, provided that such investment does not represent more than 3% of the voting stock of the acquired investment company of which such shares are purchased. As a shareholder in any investment company, the Fund will bear its ratable share of the investment company's expenses and would remain subject to payment of the Fund's advisory and administrative fees with respect to the assets so invested. CLM may invest up to 15% of its assets in illiquid U.S. and non-U.S. securities, provided that the Fund may not invest more than 3% of the Fund's assets in the securities of companies that, at the time of investment, had less than a year of operations, including operations of predecessor companies. The Fund will invest only in such illiquid securities that, in the opinion of Fund management, present opportunities for substantial growth over a period of two to five years. CLM does not expect to trade in securities for short-term gains. Higher portfolio turnover rates resulting from more actively traded portfolio securities generally result in higher transaction costs, including brokerage commissions and related capital gains or losses. Since the Fund's investment policies emphasize long-term investment in the securities of companies, the Fund's annual portfolio turnover rate is expected to be relatively low, ranging between 50% and 75%. -14- Although CLM has the ability to invest a significant portion of its assets in non-U.S. companies, the Fund has maintained the investment of at least 94% of its assets in U.S. companies during the period from June 30, 2001 through June 30, 2002. Each Fund's foregoing investment policies may be changed by each Fund's respective Board of Directors without shareholder vote. CLM'S AND PGF'S NON-PRINCIPAL INVESTMENT POLICIES - ------------------------------------------------- TEMPORARY DEFENSIVE POSITIONS. Each Fund may, from time to time, take temporary defensive positions that are inconsistent with its principal investment strategies in attempting to respond to adverse market, economic, political or other conditions. Such investments include various short-term instruments. If a Fund takes a temporary defensive position at the wrong time, the position would have an adverse impact on the Fund's performance and it may not achieve its investment objective. Each Fund reserves the right to invest all of its assets in temporary defensive positions. SECURITIES LENDING. Each Fund may lend its portfolio securities to broker-dealers in amounts equal to no more than 33 1/3% of the Fund's net assets. These transactions will be fully collateralized at all times with cash and/or high quality, short-term debt obligations. These transactions involve risk to a Fund if the other party should default on its obligation and the Fund is delayed or prevented from recovering the securities lent. In the event the original borrower defaults on its obligation to return lent securities, the Fund will seek to sell the collateral, which could involve costs or delays. To the extent proceeds from the sale of collateral are less than the repurchase price, the Fund would suffer a loss and you could lose money on your investment. BORROWING.Each Fund may borrow money from banks for temporary or emergency purposes. To reduce its indebtedness, a Fund may have to sell a portion of its investments at a time when it may be disadvantageous to do so. In addition, interest paid by the Fund on borrowed funds would decrease the net earnings of the Fund REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements collateralized by the securities in which it may invest. A repurchase agreement involves the purchase by the Fund of securities with the condition that the original seller (a bank or broker-dealer) will buy back the same securities (collateral) at a predetermined price or yield. Repurchase agreements involve certain risks not associated with direct investments in securities. In the event the original seller defaults on its obligation to repurchase, the Fund will seek to sell the collateral, which could involve costs or delays. To the extent proceeds from the sale of collateral are less than the repurchase price, the Fund would suffer a loss. Under the Investment Company Act, neither Fund may: - invest more than 5% of its total assets in the securities of any one investment company, nor - acquire more than 3% of the outstanding voting securities of any such company. As a stockholder in any investment company, each Fund will bear its ratable share of that investment company's expenses, and would remain subject to payment of the company's advisory and administrative fees with respect to assets so invested. -15- UNITED STATES FEDERAL INCOME TAXES The following is a brief summary of certain United States federal income tax issues that apply to each Fund. Stockholders should consult their own tax advisers with regard to the federal tax consequences of the purchase, ownership and disposition of each Fund's shares, as well as tax consequences arising under the laws of any state, foreign country, or other taxing jurisdiction. Each Fund has qualified, and intends to continue to qualify and elect to be treated, as a regulated investment company ("RIC"), for each taxable year under Subchapter M of the Code. A RIC generally is not subject to federal income tax on income and gains distributed in a timely manner to its stockholders. Each Fund intends to distribute annually to its stockholders substantially all of its investment company taxable income. The Board of Directors of each Fund will determine annually whether to distribute any net realized long-term capital gains in excess of net realized short-term capital losses, including any capital loss carryovers. The Funds currently expect to distribute any excess annually to their stockholders. However, if either Fund retains for investment an amount equal to its net long-term capital gains in excess of its net short-term capital losses and capital loss carryovers, it will be subject to a corporate tax, currently at a rate of 35%, on the amount retained. In that event, that Fund expects to designate such retained amounts as undistributed capital gains in a notice to its stockholders who: - will be required to include in income for United States federal income tax purposes, as long-term capital gains, their proportionate shares of the undistributed amount, - will be entitled to credit their proportionate shares of the 35% tax paid by that Fund on the undistributed amount against their United States federal income tax liabilities, if any, and to claim refunds to the extent their credits exceed their liabilities, if any, and - will be entitled to increase their tax basis, for United States federal income tax purposes, in their shares by an amount equal to 65% of the amount of undistributed capital gains included in the stockholder's income. Income received by the Funds from sources within countries other than the United States may be subject to withholding and other taxes imposed by such countries, which will reduce the amount available for distribution to stockholders. If more than 50% of the value of either Fund's total assets at the close of its taxable year consists of securities of foreign corporations, that Fund will be eligible and intends to elect to "pass-through" to stockholders the amount of foreign income and similar taxes it has paid. Pursuant to this election, stockholders of the electing Fund will be required to include in gross income (in addition to the full amount of the taxable dividends actually received) their pro rata share of the foreign taxes paid by that Fund. Each such stockholder will also be entitled either to deduct (as an itemized deduction) its pro rata share of foreign taxes in computing its taxable income or to claim a foreign tax credit against its U.S. federal income tax liability, subject to limitations. No deduction for foreign taxes may be claimed by a stockholder who does not itemize deductions, but such a stockholder may be eligible to claim the foreign tax credit. The deduction for foreign taxes is not allowable in computing alternative minimum taxable income. Each stockholder will be notified within 60 days after the close of that Fund's taxable year whether the foreign taxes paid by the Fund will "pass through" for that year. -16- Generally, a credit for foreign taxes is subject to the limitation that it may not exceed the stockholder's U.S. tax attributable to his or her foreign source taxable income. For this purpose, if the pass-through election is made, the source of each Fund's income flows through to its stockholders. Any gains from the sale of securities by either Fund will be treated as derived from U.S. sources and certain currency fluctuation gains, including fluctuation gains from foreign currency-denominated debt securities, receivables and payables, will be treated as ordinary income derived from U.S. sources. The limitation on the foreign tax credit is applied separately to foreign source passive income (as defined for purposes of the foreign tax credit), including the foreign source passive income passed through by each Fund. Because of the limitation, stockholders taxable in the United States may be unable to claim a credit for the full amount of their proportionate share of the foreign taxes paid by each Fund. The foreign tax credit also cannot be used to offset more than 90% of the alternative minimum tax (as computed under the Code for purposes of this limitation) imposed on corporations and individuals. Stockholders will be notified annually by each Fund as to the United States federal income tax status of the dividends, distributions and deemed distributions made by the Fund to its stockholders. Furthermore, stockholders will also receive, if appropriate, various written notices after the close of each Fund's taxable year regarding the United States federal income tax status of certain dividends, distributions and deemed distributions that were paid, or that are treated as having been paid, by that Fund to its stockholders during the preceding taxable year. For a more detailed discussion of tax matters affecting each Fund and its stockholders, see "Taxation" in the SAI. INFORMATION ABOUT THE MERGER GENERAL. Under the Plan, CLM will merge with and into PGF on the Effective Date. As a result of the Merger and on the Effective Date: - CLM will no longer exist, and - PGF will be the surviving corporation and CLM will then: 1) deregister as an investment company under the Investment Company Act, 2) withdraw from registration under the Securities Exchange Act of 1934 (the "Exchange Act"), 3) remove its shares of common stock from listing on the NYSE, and 4) cease its separate existence under Maryland law. Each share of outstanding stock of CLM will convert into an equivalent dollar amount of shares of stock of PGF, based on the net asset value per share of each Fund calculated at 4:00 p.m. (New York time) on the Business Day preceding the Effective Date. No sales charge or fee of any kind will be charged to CLM stockholders in connection with their receipt of PGF common stock in the Merger. Under Maryland law, stockholders of a corporation whose shares are traded publicly on a national securities exchange, such as the Funds' shares, are not entitled to demand the fair value of their shares upon a merger; therefore, the stockholders of the Funds will be bound by the terms of the Merger. However, any stockholder of either Fund may sell his or her shares of common stock at any time prior to the Merger on the NYSE. -17- The Plan may be terminated and the Merger abandoned, whether before or after approval by the Funds' stockholders, at any time prior to the Effective Date: - by the mutual written consent of the Board of Directors of each Fund, or - by either Fund if the conditions to that Fund's obligations under the Plan have not been satisfied or waived. If the Merger has not been consummated by December 31, 2002, the Plan automatically terminates on that date, unless a later date is mutually agreed upon by the Board of Directors of each Fund. REASONS FOR THE MERGER. - ----------------------- The Board of Directors of each Fund considered and unanimously approved the proposed Merger at separate meetings of each Board held on August 2, 2002. For the reasons discussed below, the Board of Directors of each Fund, including Non-interested Directors of each Fund, after consideration of the potential benefits of the Merger to the stockholders of that Fund and the expenses expected to be incurred by that Fund in connection with the Merger, unanimously determined that: - the interests of the existing stockholders of that Fund will not be diluted as a result of the proposed Merger, and - the proposed Merger is in the best interests of that Fund. Three principal factors led to the Boards of Directors to reach these conclusions: (1) the Merger will create a larger Fund and, consequently, should, all other factors being equal, result in an expense ratio that is lower than the expense ratio of either Fund; (2) the larger Fund should provide better market liquidity for stockholders who want to sell their shares or add to their holdings; and (3) it has been a prime objective of each Board, through a variety of actions, to reduce the discount at which shares trade. The Boards believe that, all other things being equal, a lower expense ratio and better market liquidity for the shares should lead to a lower discount. IN THE JUDGMENT OF THE BOARD OF DIRECTORS OF EACH FUND, THE MERGER SERVES THE BEST INTERESTS OF EACH FUND AND ITS STOCKHOLDERS. Stockholders should note that the Boards of Directors of the two Funds are identical. Therefore, although the Non-interested Directors are "non-interested" with respect to each of the Funds under the Investment Company Act, they are not at arm's length with respect to the proposed Merger. -18- The Boards also considered whether a larger asset base would provide benefits in portfolio management. In addition, a larger asset size could result in a more liquid trading market for shares of PGF than either Fund currently enjoys separately, which might have a positive impact on the discount at which each Fund's shares have tended to trade. Further, the Merger itself should focus the attention of a wider circle of securities analysts on PGF, and after the Merger, may facilitate securities analysts' following of this Fund because the Merger may eliminate confusion in the marketplace that results from two funds with a similar objective, and similar policies managed by the same adviser. There can be no guarantee that any of these potential beneficial results will be realized. The Board of Directors of each Fund, in declaring advisable and recommending the proposed Merger, also considered the following: (1) the capabilities and resources of Cornerstone Advisors in the area of investment management; (2) expense ratios and information regarding fees and expenses of the Funds, both currently and on a pro forma basis; (3) the terms and conditions of the Merger and whether it would result in dilution of the interests of each Fund and its existing stockholders; (4) the compatibility of each Fund's portfolio securities, investment objective, policies and restrictions; (5) the tax consequences to each Fund and its stockholders in connection with the Merger; and (6) the anticipated expenses of the Merger. In reviewing issues relating to the structure of the Merger and the selection of the surviving corporation in the Merger, each Board also considered information provided to them by Cornerstone Advisors concerning: (1) the comparative performance records of the two Funds, (2) public and market perception of the two Funds, (3) the relative size of the two Funds, (4) the investment policies, strategies and personnel Cornerstone Advisors intends to utilize in managing the merged fund, and (5) Cornerstone Advisors' recommendation that PGF be the surviving corporation. (6) the relative tax positions of the Funds -19- Based on the factors discussed above, the Board of Directors of each Fund concluded that the expenses of the Merger are outweighed by the benefits that are anticipated to be derived from the Merger. In addition, the Boards of each Fund, including the Non-interested Directors of each Fund, have unanimously concluded that: - the Merger is in the best interests of each respective Fund, and - the interests of existing Stockholders of each respective Fund will not be diluted as a result of the transactions contemplated by the Plan. TERMS OF THE MERGER AGREEMENT. - ------------------------------ The following is a summary of the significant terms of the Plan. This summary is qualified in its entirety by reference to the Plan, attached hereto as Exhibit A. At the Effective Date, each share of common stock of CLM will convert into an equivalent dollar amount of PGF common stock, based on the net asset value per share of each Fund calculated at 4:00 p.m. (New York time) on the Business Day preceding the Effective Date. PGF will issue fractional shares to CLM stockholders. For purposes of valuing assets in connection with the Merger, the assets of CLM will be valued pursuant to the principles and procedures consistently utilized by PGF, which principles and procedures are also utilized by CLM in valuing its own assets and determining its own liabilities. As a result, it is not expected that PGF's valuation procedures as applied to CLM's portfolio securities will result in any difference from the valuation that would have resulted from the application of CLM's valuation procedures to such securities. The net asset value per share of PGF common stock will be determined in accordance with these principles and procedures, and PGF will certify the computations involved. The net asset value per share of each Fund will not be adjusted to take into account differences in unrealized gains and losses, nor will it be adjusted to take into account the potential value of tax loss carryforwards. PGF will issue separate certificates or share deposit receipts for PGF common stock to stockholders of CLM. PGF will deliver these certificates or share deposit receipts representing shares of PGF common stock to American Stock Transfer & Trust Co., as the transfer agent and registrar for PGF common stock. PGF will not permit any CLM stockholder to receive new certificates representing shares of PGF common stock until the stockholder has surrendered his or her outstanding certificates representing shares of the common stock of CLM or, in the event of lost certificates, posted adequate bond. CLM will request its stockholders to surrender their outstanding certificates representing shares of the common stock of CLM or post adequate bond therefor. Dividends payable to holders of record of shares of PGF as of any date after the Effective Date and prior to the exchange of certificates by any stockholder of CLM will be paid to such stockholder, without interest; however, such dividends will not be paid unless and until such stockholder surrenders his or her stock certificates of CLM for exchange. PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. UPON CONSUMMATION OF THE MERGER, STOCKHOLDERS OF CLM WILL BE FURNISHED WITH INSTRUCTIONS FOR EXCHANGING THEIR STOCK CERTIFICATES FOR PGF STOCK CERTIFICATES. The net asset value of the PGF shares received by CLM stockholders will be equal to the aggregate net asset value of the CLM shares exchanged. -20- The Plan provides, among other things, that the Merger will not take place without: - the requisite approval of the stockholders of PGF and CLM, and - the effectiveness of a Registration Statement on Form N-14. The Plan may be terminated at any time prior to the Effective Date by mutual agreement of each Fund's Board of Directors or by either Fund if the other has violated a condition of the Plan. The Plan will automatically terminate after December 31, 2002 if the Merger has not been consummated, unless such time is extended by mutual agreement of the Board of Directors of each Fund. The Plan may be amended, modified or supplemented by mutual agreement of CLM and PGF. However, no amendments which would have the effect of changing the provisions for determining the number of shares issued to CLM stockholders will be permitted following the meeting unless those stockholders consent to the amendment. EXPENSES OF THE MERGER. - ----------------------- In evaluating the proposed Merger, Cornerstone Advisors has estimated the amount of expenses the Funds will incur, including, but not limited to, NYSE listing fees, SEC registration fees, legal and accounting fees, proxy and distribution costs, and expenses incurred in connection with the Merger. The estimated total expenses pertaining to the Merger is approximately $140,000. For more information about the expenses of the Merger, See "Synopsis-Expenses of the Merger." The expenses of the Merger are expected to result in a reduction in net asset value per PGF share of approximately $0.06, and a reduction in net asset value per CLM share of approximately $0.02. TAX CONSIDERATIONS. - ------------------- The Plan and Merger are conditioned upon the receipt by the Funds of an opinion from Spitzer & Feldman P.C., substantially to the effect that, based upon the facts, assumptions and representations of the parties, for federal income tax purposes: - the Merger will constitute a tax-free "reorganization" within the meaning of Section 368(a)(1) of the Code, and each Fund will be "a party to a reorganization" within the meaning of Section 368(b) of the Code, - no gain or loss will be recognized by either Fund as a result of the Merger, - the basis of the assets of CLM in the hands of PGF will be the same as the basis of such assets to CLM immediately prior to the Merger, - the holding period of the assets of CLM in the hands of PGF will include the period during which such assets were held by CLM, -21- - no gain or loss will be recognized by the stockholders of CLM upon the conversion of their CLM shares into PGF common stock, - the basis of PGF shares received by the stockholders of CLM will be the same as the basis of the shares (including fractional share interests) of CLM exchanged therefor, and - the holding period of PGF shares (including fractional share interests) received by the stockholders of CLM will include the holding period during which the shares of CLM exchanged therefor were held, provided that at the time of the exchange the shares of CLM were held as capital assets in the hands of the stockholders of CLM. While CLM is not aware of any adverse state or local tax consequences of the proposed Merger, it has not requested any ruling or opinion with respect to such consequences and stockholders may wish to consult their own tax advisers with respect to such matters. The Board of Directors of each Fund considered these positions as part of their overall process of considering the proposed Merger. They also considered professional advice that they received regarding the future use of these various capital loss categories to offset future capital gains. This professional advice included the possibility that in some circumstances utilization of the capital loss carryforwards might be restricted, in part because of the Merger. The Boards also considered whether the ability to continue to utilize the capital loss carryforwards should be made a condition to the effectiveness of the Merger and concluded that it should not. The Boards concluded that in their respective judgments, under all of the facts and circumstances known to them after considering the advice of their professional advisers, the Merger is in the best interests of both Funds and their stockholders, even if as a consequence there may be "truncation" (restriction on the utilization) of the capital loss carryforwards under the Internal Revenue Code." ADDITIONAL INFORMATION ABOUT THE FUNDS DESCRIPTION OF SECURITIES TO BE ISSUED. - --------------------------------------- The authorized stock of PGF consists of One Hundred Million (100,000,000) shares of common stock, U.S. $0.001 par value. Shares of PGF entitle its holders to one vote per share. Holders of PGF's common stock are entitled to share equally in dividends authorized by the Fund's Board of Directors payable to the holders of such common stock and in the net assets of PGF available for distribution to holders of such common stock. Shares have noncumulative voting rights and no conversion, preemptive or other subscription rights, and are not redeemable. The outstanding shares of common stock of PGF are fully paid and non-assessable. In the event of liquidation, each share of common stock is entitled to its proportion of the Fund's assets after payment of debts and expenses. PGF holds stockholder meetings annually. -22- The following table shows information about the common stock of each Fund as of June 30, 2002. PGF AMOUNT AUTHORIZED AMOUNT HELD BY FUND AMOUNT OUTSTANDING ---- COMMON STOCK 100,000,000 203,900 4,228,516 CLM --- COMMON STOCK 25,000,000 2,177,440 3,832,560 The shares of common stock of PGF and CLM are listed and trade on the NYSE under the symbols "PGF" and "CLM", respectively. As of June 30, 2002, the net asset value of PGF common stock was $9.90, and the market price per share was $8.95. As of that same date, the net asset value of CLM common stock was $9.20, and the market price per share was $8.05. DISCOUNT TO NET ASSET VALUE. - ---------------------------- Shares of closed-end investment companies, such as the Funds, have frequently traded at a discount from net asset value. This characteristic is a risk separate and distinct from the risk that the Funds' net asset values may decrease, and this risk may be greater for stockholders expecting to sell their shares in a relatively short period. THE SHARES OF COMMON STOCK OF THE FUNDS SHOULD THUS BE VIEWED AS BEING DESIGNED PRIMARILY FOR LONG-TERM INVESTORS AND SHOULD NOT BE CONSIDERED A VEHICLE FOR TRADING PURPOSES. During the period since the inception of the Funds, the common stock of both Funds has generally traded at a discount to net asset value, and does so currently. It is not possible to state whether shares of PGF will trade at a premium or discount to net asset value following the Merger, or the extent of any such premium or discount. The Directors of both Funds have regularly considered, and the Directors of PGF will continue to consider, the respective Fund's market price discount and the effect of the discount on the Fund and its stockholders. -23-
PER SHARE DATA FOR PROGRESSIVE RETURN FUND, INC. COMMON STOCK TRADED ON THE NYSE Closing Market Closing Net Asset Premium/Discount Quarter Ended High Price ($) Low Price ($) Price ($) Value ($) 3/31/99 54.75 54.75 54.75 68.00 (15.44) 6/30/99 57.25 57.25 57.25 60.84 (5.90) 9/30/99 50.75 50.75 50.75 56.56 (10.27) 12/31/99 52.25 52.25 52.25 61.84 (15.51) 3/31/00 56.75 56.75 56.75 64.40 (11.88) 6/30/00 49.75 49.75 49.75 64.44 (17.69) 9/30/00 44.00 44.00 44.00 55.00 (20.00) 12/31/00 38.00 38.00 38.00 49.48 (23.20) 3/31/01 37.04 37.04 37.04 44.04 (15.89) 6/30/01 40.00 40.00 40.00 45.96 (12.97) 9/30/01 32.00 32.00 32.00 Na Na 12/31/01 36.20 36.20 36.20 40.08 (9.68) 3/31/02 28.04 28.04 28.04 30.96 (9.43) 6/30/02 23.90 23.90 23.90 24.80 (5.65) -24- PER SHARE DATA FOR CORNERSTONE STRATEGIC VALUE FUND, INC. COMMON STOCK TRADED ON THE NYSE Closing Market Closing Net Asset Premium/Discount Quarter Ended High Price ($) Low Price ($) Price ($) Value ($) 3/31/99 13.12 13.12 13.12 14.55 (9.79) 6/30/99 14.00 14.00 14.00 15.38 (8.97) 9/30/99 13.81 13.81 13.81 15.23 (9.31) 12/31/99 14.25 14.25 14.25 14.95 (4.68) 3/31/00 14.50 14.50 14.50 15.85 (8.52) 6/30/00 13.00 13.00 13.00 15.28 (14.92) 9/30/00 12.06 12.06 12.06 13.72 (12.08) 12/31/00 10.59 10.59 10.59 11.31 (6.37) 3/31/01 7.75 7.75 7.75 9.19 (15.67) 6/30/01 8.35 8.35 8.35 9.68 (13.74) 9/30/01 6.40 6.40 6.40 Na Na 12/31/01 7.75 7.75 7.75 9.31 (16.76) 3/31/02 7.65 7.65 7.65 9.04 (15.38) 6/30/02 6.65 6.65 6.65 7.73 (13.97)
CAPITALIZATION. The following table shows on an unaudited basis the capitalization of PGF and CLM as of June 30, 2002 and on a pro forma basis as of that same date giving effect to the Merger: (in thousands, except per share values) PGF CLM PRO FORMA Net Assets Shares of Common Stock Outstanding Net Assets Per Share of Common Stock DIVIDENDS AND OTHER DISTRIBUTIONS. - ---------------------------------- Each Fund intends to distribute dividends from its net investment income and any net realized capital gains after utilization of capital loss carryforwards annually to prevent application of a federal excise tax. An additional distribution may be made if necessary. Any dividends or capital gains distributions declared in October, November or December with a record date in such a month and paid during the following January will be treated by stockholders for federal income tax purposes as if received on December 31 of the calendar year in which it is declared. Dividends and distributions of each Fund are invested in shares of the Fund at market value and credited to the stockholder's account on the settlement date which is usually three Business Days from the purchase date or, at the stockholder's election, paid in cash. -25- On June 19, 2002, each Fund's Board of Directors authorized the implementation of a fixed, monthly distribution policy whereby PGF would distribute on a monthly basis $0.2675 per share and CLM would distribute $0.0825 per share to their respective stockholders. Each distribution could consist of either income, capital gains, or return of capital, or a combination of all three. The Board of Directors of PGF, in its continuing discretion, intends to continue a fixed, monthly distribution policy after the Merger. PORTFOLIO VALUATION. - -------------------- Investments of each Fund are stated at value in each Fund's financial statements. All securities for which market quotations are readily available are valued at the last sales price or lacking any sales, at the closing price last quoted for the securities (but if bid and asked quotations are available, at the mean between the current bid and asked prices). Securities that are traded over-the-counter are valued at the mean between the current bid and the asked prices, if available. All other securities and assets are valued at fair value as determined in good faith by each Fund's Board of Directors. Short-term investments having a maturity of 60 days or less are valued on the basis of amortized cost. The Board of Directors of each Fund has established general guidelines for calculating fair value of securities that are not readily marketable. At December 31, 2001, both PGF and CLM held no securities valued in good faith by the Board of Directors. The net asset value per share of each Fund is made public weekly. For purposes of valuing assets in connection with the Merger, the assets of CLM will be valued pursuant to the principles and procedures consistently utilized by PGF, which principles and procedures are also utilized by CLM in valuing its own assets and determining its own liabilities. As a result, it is not expected that PGF's valuation procedures as applied to CLM's portfolio securities will result in any difference from the valuation that would have resulted from the application of CLM's valuation procedures to such securities. DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN. - --------------------------------------------- Each Fund operates a Dividend Reinvestment and Cash Purchase Plan (the "Program"), sponsored and administered by American Stock Transfer & Trust Co. (the "Agent"), pursuant to which Fund dividends and distributions, net of any applicable U.S. withholding tax, are reinvested in shares of the Fund. American Stock Transfer & Trust Co., serves as the Program Administrator for the stockholders in administering the Program. Stockholders who have shares registered directly in their own names automatically participate in the respective Fund's Program, unless and until an election is made to withdraw from the Program on behalf of such participating stockholder. Stockholders who do not wish to have distributions automatically reinvested should so notify the Agent at 59 Maiden Lane, New York, New York 10038. Under the Program, each of the Fund's respective dividends and other distributions to stockholders are reinvested in full and fractional shares as described below. When the respective Fund declares an income dividend or a capital gain or other distribution (each, a "Dividend" and collectively, "Dividends"), the Agent, on the stockholders behalf, will (i) receive additional authorized shares from the respective Fund either newly issued or repurchased from stockholders by the Fund and held as treasury stock ("Newly Issued Shares") or, (ii) at the sole discretion of the Board of Directors, be authorized to purchase outstanding shares on the open market, on the NYSE or elsewhere, with cash allocated to it by the respective Fund ("Open Market Purchases"). -26- Shares acquired by the Agent in Open Market Purchases will be allocated to the reinvesting stockholders based on the average cost of such Open Market Purchases. Alternatively, the Agent will allocate Newly Issued Shares to the reinvesting stockholders at a price equal to the average closing price of the respective Fund over the five trading days preceding the payment date of such dividend. Registered stockholders who acquire their shares through Open Market Purchases and who do not wish to have their Dividends automatically reinvested should so notify the Fund in writing. If a stockholder has not elected to receive cash Dividends and the Agent does not receive notice of an election to receive cash Dividends prior to the record date of any Dividend, the stockholder will automatically receive such Dividends in additional shares. Participants in the Program may withdraw from the Program by providing written notice to the Agent at least 30 days prior to the applicable Dividend payment date. When a Participant withdraws from the Program, or upon termination of the Program as provided below, certificates for whole shares credited to his/her account under the Program will, upon request, be issued. Whether or not a participant requests that certificates for whole shares by issued, a cash payment will be made for any fraction of a share credited to such account. The Agent will maintain all stockholder accounts in the Program and furnish written confirmations of all transactions in the accounts, including information needed by stockholders for personal and tax records. The Agent will hold shares in the account of each Program participant in non-certified form in the name of the participant, and each stockholder's proxy will include those shares purchased pursuant to the Program. Each participant, nevertheless, has the right to receive certificates for whole shares owned. The Agent will distribute all proxy solicitation materials to participating stockholders. In the case of stockholders, such as banks, brokers or nominees, that hold shares for others who are beneficial owners participating in the Program, the Agent will administer the Program on the basis of the number of shares certified from time to time by the record stockholder as representing the total amount of shares registered in the stockholder's name and held for the account of beneficial owners participating in the Program. All correspondence concerning the Program should be directed to the Agent at 59 Maiden Lane, New York, New York 10038. CORPORATE GOVERNANCE PROVISIONS. - -------------------------------- Both Funds are Maryland corporations and in many respects have similar charter and by-law provisions. SPECIAL VOTING PROVISIONS AND REQUIREMENTS. - ------------------------------------------- The Articles of Incorporation and By-laws of each Fund contain provisions that could have the effect of limiting the ability of other entities or persons to acquire control of the Fund, to cause it to engage in certain transactions or to modify its structure. The Board of Directors of each Fund is divided into three classes each having a term of three years. Each year, the term of one class expires and the successor or successors elected to such class will serve for a three-year term. This provision could delay for up to two years the replacement of a majority of the Board of Directors. -27- The affirmative vote of at least sixty-six and two-thirds (66 2/3%) of the holders of the shares of either of the Funds is required to authorize any of the following transactions: (i) merger, consolidation or share exchange of either of the Funds with or into any Principal Shareholder (as defined below); (ii) issuance by either of the Funds of any securities of either of the Funds to any Principal Shareholder for cash; (iii) sale, lease, or exchange by either of all or any substantial part of the assets of the Funds to any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000 aggregating for the purpose of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period); and (iv) The sale, lease or exchange to the Funds, in exchange for securities of the Funds, of any assets of any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000 aggregating for the purpose of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period). Each Fund's By-laws contain provisions the effect of which is to prevent matters, including nominations of directors, from being considered at stockholders' meetings where the Fund has not received sufficient prior notice of the matters. The Board of Directors of each Fund has determined that the foregoing voting requirements are in the best interests of Stockholders generally. A "Principal Shareholder" is defined in each Fund's respective Articles of Incorporation as any corporation, person or other entity which is the beneficial owner, directly or indirectly, of more than five percent (5%) of the outstanding shares of any class of stock of the respective Fund and shall include any affiliate or associate, as such terms are defined in clause (ii) below, of a Principal Shareholder. In addition to the shares of stock which a corporation, person or other entity beneficially owns directly, (a) any corporation, person or other entity shall be deemed to be the beneficial owner of any shares of stock of either of the Funds (i) which it has the right to acquire pursuant to any agreement or upon exercise of conversion rights or warrants, or otherwise (but excluding stock option granted by the respective Fund), or (ii) which are beneficially owned, directly or indirectly (including shares deemed owned through application of clause (i) above), by any other corporation, person or entity with which it or its "affiliate" or "associate" (as defined below) has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of stock of either Fund, or which is its "affiliate" or "associate," as those terms are defined in Rule 12b-2 of the 1934 Act, and (b) the outstanding shares of any class of stock of either Fund shall include shares deemed owned through application of clauses (i) and (ii) above but shall not include any other shares which may be issuable pursuant to any agreement, or upon exercise of conversions rights or warrants, or otherwise. BY-LAWS. - -------- Each Fund's By-laws provide, among other things, that: - certain advance notice requirements must be met in order for Stockholders to submit proposals at annual meetings and for nominations by stockholders for election to the Board of Directors, and - the power to amend the By-laws is reserved to the Board of Directors, except as otherwise required by the Investment Company Act. -28- MANAGEMENT OF THE FUNDS DIRECTORS AND PRINCIPAL OFFICERS. - --------------------------------- The business and affairs of each Fund are managed under the direction of that Fund's Board of Directors, and the day-to-day operations are conducted through or under the direction of the officers of that Fund. The following tables set forth the names, ages and principal occupations of each of the Directors of the Fund: -29-
Term of Office Directorships held by Director Name, Address and Age Position(s) Since Principal Occupation during outside of the Fund Complex* with Fund past 5 years CLASS I DIRECTORS SERVING UNTIL THE YEAR 2004 ANNUAL MEETING OF STOCKHOLDERS. Andrew A. Strauss (48) Director 2000 Attorney and senior member Director of The Small Cap Fund, Inc. 77 Central Avenue of Strauss & Associates, Memorial Mission Hospital Foundation Suite F P.A., Attorneys, Asheville and Deerfield Episcopal Retirement Community. Asheville, NC 28801 and Hendersonville, N.C.; previous President of White Knight Healthcare, Inc. and LMV Leasing, Inc., a wholly owned subsidiary of Xerox Credit Corporation. Thomas H. Lenagh (79) Director 2001 Chairman of the Board of Director of Gintel Fund, The Adams 13 Allen's Corner Road Inrad Corp. and Independent Express Corp., Petroleum and Flemington, NJ 08822 Financial Adviser. Resources Corporation and ICN Pharmaceuticals. -30- CLASS II DIRECTORS SERVING UNTIL THE YEAR 2005 ANNUAL MEETING OF STOCKHOLDERS Edwin Meese III (70) Director 2001 Distinguished Fellow, The The Heritage Foundation Heritage Foundation, 214 Massachusetts Ave. NE Washington D.C.; Washington D.C. 20002 Distinguished Visiting Fellow at the Hoover Institution, Stanford University; Distinguished Senior Fellow at the Institute of United States Studies, University of London; and Formerly U.S. Attorney General under President Ronald Reagan. Ralph W. Bradshaw (51)** Chairman of 1999 President of Cornerstone Director of The SmallCap Fund, Inc. One West Pack Square the Board Advisors, Inc., and of the Suite 1650 and President Funds within the Fund Asheville, NC 28801 Complex; Vice President, Deep Discount Advisors, Inc. (1993-1999). -31- CLASS III DIRECTORS SERVING UNTIL THE YEAR 2003 ANNUAL MEETING OF STOCKHOLDERS. Glenn W. Wilcox, Sr. (70) Director 2000 Chairman of the Board and Director of The Small Cap Fund, Inc., One West Pack Square Chief Executive Officer of Wachovia Corp.; Board Trustee and Chairman Suite 1700 Wilcox Travel Agency. of Appalachian State University; Board Asheville, NC 28801 Trustee and Director, Mars Hill College; Director, Champion Industries, Inc.; Chairman, Tower Associates, Inc. (a real estate venture). Scott B. Rogers (46) Director 2000 Chief Executive Officer, Director of A-B Vision Board; 30 Cumberland Ave. Asheville Buncombe Chairman and Director, Recycling Asheville, NC 28801 Community Christian Unlimited and Interdenominational Ministry; and President, Ministerial Alliance; Director, ABCCM Doctor's Medical Southeastern Jurisdiction Urban Clinic; Appointee, NC Networkers. Governor's Commission on Welfare to Work. - ------------ * As of January 2, 2002, the Fund Complex is comprised of PGF, CLM, The Cornerstone Strategic Return Fund, Inc. and EIS Fund, Inc. all of which are managed by Cornerstone Advisors, Inc. as of that date. ** Mr. Bradshaw is an "interested person" as defined in the Investment Company Act of 1940 ("Investment Company Act") because he is a director, officer and 50% shareholder in Cornerstone Advisors, Inc., the Fund's investment manager.
With the exception of EIS Fund, Inc., all of the Directors served on the Board of Directors for each closed-end fund within the Fund Complex that was managed by Cornerstone Advisors, Inc. ("Cornerstone Advisors"), the Fund's investment manager, during the year ended December 31, 2001. Messrs. Lenagh and Meese do not serve as members of the Board of Directors of EIS Fund, Inc. The following table sets forth, for each Director and for the Directors as a group, the amount of shares beneficially owned in the Fund as of June 30, 2002. The information as to beneficial ownership is based on statements furnished to the Fund by each Director. Unless otherwise noted, beneficial ownership is based on sole investment power. -32- Name of Director Amount of Securities Beneficially Owned Edwin Meese III 0 Ralph W. Bradshaw 625 Andrew A. Strauss 100 Thomas H. Lenagh 0 Glenn W. Wilcox Sr. 250 Scott B. Rogers 0 All Directors as a Group 975 -33- The following table sets forth, for each Director, the aggregate dollar range of equity securities owned of the Fund and of all Funds overseen by each Director in the Fund Complex as of June 30, 2002. The information as to beneficial ownership is based on statements furnished to the Fund by each Director.
------------------------------- --------------------------- ----------------------------------------------------- Name Dollar Range of Equity Aggregate Dollar Range of Equity Securities in All Securities in the Fund. Funds Overseen by Directors in Fund Complex. ------------------------------- --------------------------- ----------------------------------------------------- ------------------------------- --------------------------- ----------------------------------------------------- Edwin Meese III 0 0 ------------------------------- --------------------------- ----------------------------------------------------- ------------------------------- --------------------------- ----------------------------------------------------- Ralph A. Bradshaw $10,001-$50,000 $50,001-$100,000 ------------------------------- --------------------------- ----------------------------------------------------- ------------------------------- --------------------------- ----------------------------------------------------- Andrew A. Strauss $1-$10,000 $10,001-$50,000 ------------------------------- --------------------------- ----------------------------------------------------- ------------------------------- --------------------------- ----------------------------------------------------- Thomas H. Lenagh 0 0 ------------------------------- --------------------------- ----------------------------------------------------- ------------------------------- --------------------------- ----------------------------------------------------- Glenn W. Wilcox Sr. $1-$10,000 $10,001-$50,000 ------------------------------- --------------------------- ----------------------------------------------------- ------------------------------- --------------------------- ----------------------------------------------------- Scott B. Rogers 0 0 ------------------------------- --------------------------- -----------------------------------------------------
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EXECUTIVE OFFICERS In addition to Mr. Bradshaw, the current officers of the Fund are: Term of Name, Address and Age Position(s) Office Principal Occupation during past 5 Directorships held by with Fund Since years Officer Gary A. Bentz (46) Vice President 2001 Chief Financial Officer of Director of EIS Fund, One West Pack Square and Treasurer Cornerstone Advisors, Inc., Vice Inc. Suite 1650 President and Treasurer of The Asheville, NC 28801 Cornerstone Strategic Return Fund, Inc., Cornerstone Strategic Value Fund, Inc. and EIS Fund, Inc.; Chief Financial Officer of Deep Discount Advisors, Inc. (1993-2000). Thomas R. Westle (48) Secretary 2001 Partner of Spitzer & Feldman P.C., 405 Park Avenue a law firm, and previous Partner New York, NY 10022 at Battle Fowler LLP; Secretary of The Cornerstone Strategic Return Fund, Inc., Cornerstone Strategic Value Fund, Inc. and EIS Fund, Inc.
ALL THE DIRECTORS AND OFFICERS OF PGF ARE ALSO DIRECTORS AND OFFICERS OF CLM. PLEASE SEE CLM PROPOSAL 2 FOR A MORE THOROUGH DISCUSSION OF CLM'S DIRECTORS AND OFFICERS CAN BE FOUND BELOW IN CLM'S PROPOSAL 2. Each Fund pays each of its Directors who is not a director, officer, partner, co-partner or employee of Cornerstone Advisors or any affiliate thereof a stipend of $6,000, a fee in the amount of $600 per Board Meeting, and a fee of $100 per Special Telephonic Board Meeting. In addition, each Fund will reimburse those Directors for travel and out-of-pocket expenses incurred in connection with Board of Directors meetings. The aggregate remuneration paid to Directors by PGF during the fiscal year ended December 31, 2001 was $68,816, and the aggregate remuneration paid to Directors by CLM during the fiscal year ended December 31, 2001 was $79,200. -35- The Fund has an Audit Committee and a Nominating Committee each of which is comprised of all of the non-interested members of the Board of Directors. The Articles of Incorporation and By-laws of each Fund provide that the Fund will indemnify directors and officers and may indemnify employees or agents of the Fund against liabilities and expenses incurred in connection with litigation in which they may be involved because of their positions with the Fund to the fullest extent permitted by law. In addition, each Fund's Articles of Incorporation provide that the Fund's directors and officers will not be liable to Stockholders for money damages, except in limited instances. INVESTMENT ADVISER. - ------------------- Cornerstone Advisors is the investment adviser to both PGF and CLM pursuant to investment advisory agreements with each. Cornerstone Advisors, which has its principal office at One West Pack Square, Suite 1650, Asheville, North Carolina 28801, was organized in February of 2001, to provide investment management services to closed-end investment companies and is registered with the Securities and Exchange Commission under the Investment Company Act. Cornerstone Advisors is the investment adviser to two other closed-end funds, The Cornerstone Strategic Return Fund, Inc. and EIS Fund, Inc. (f/k/a Excelsior Income Shares, Inc.). Mr. Ralph W. Bradshaw, a Director and President of PGF and CLM, serves as each Fund's portfolio manager. Mr. Bradshaw and Mr. Gary A. Bentz, a Director of EIS Fund, Inc., are the sole stockholders of Cornerstone Advisors. Messrs. Bradshaw and Bentz have extensive experience with closed-end investment companies. Mr. Bradshaw, also serves as a Director to The Smallcap Fund, Inc., EIS Fund, Inc. and The Cornerstone Strategic Return Fund, and served as a Vice President of Deep Discount Advisors, Inc. ("Deep Discount") from 1993 to 1999. Mr. Bentz currently serves as Treasurer and Vice President of PGF, CLM and the two other funds for which Cornerstone Advisors serves as investment adviser, was also affiliated with Deep Discount as its Chief Financial Officer from 1993 to 2000. Messrs. Bradshaw and Bentz no longer possess any ownership interest in Deep Discount nor do they provide any investment advisory services to Deep Discount or its clients. Deep Discount and Ron Olin Investment Management Company ("ROIMC"), both of which jointly filed a Schedule 13G with the Securities and Exchange Commission (the "SEC") on February 15, 2002 as beneficial owners of more than five (5%) percent of the outstanding shares of each Fund, are registered investment advisers which, on behalf of their respective advisory clients, invest in the common stock of closed-end investment companies. There exists no arrangements or understandings among Cornerstone Advisors, Deep Discount, ROIMC or any of their respective stockholders with respect to the Funds. Cornerstone Advisors has sole investment discretion for each Fund's assets under the supervision of each Fund's Board of Directors and in accordance with each Fund's stated policies. Cornerstone Advisors selects investments for each Fund and places purchase and sale orders on behalf of the Funds. -36- ADMINISTRATOR. Bear Stearns Funds Management Inc. ("BSFM") serves as each Fund's administrator pursuant to an administrative agreement with each Fund. BSFM is located at 383 Madison Avenue, 23rd Floor, New York, New York 10179. BSFM provides office facilities and personnel adequate to perform the following services for each Fund: - oversight of the determination and publication of each Fund's net asset value in accordance with the respective Fund's policy as adopted from time to time by the respective Board of Directors, - maintenance of the books and records of each Fund as required under the Investment Company Act, - preparation of each Fund's U.S. federal, state and local income tax returns, - preparation of financial information for each Fund's proxy statements and semiannual and annual reports to Stockholders, and - preparation of certain of each Fund's reports to the SEC. As of June 30, 2002, BSFM provided accounting and/or administrative services for 29 investment companies and investment partnerships, with combined total assets of approximately $6.6 billion. CUSTODIAN. - ---------- Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey, is the custodian for both Funds' assets. TRANSFER AGENT AND REGISTRAR. - ----------------------------- American Stock Transfer & Trust Co., 59 Maiden Lane, New York, New York 10038 acts as the transfer agent and registrar of each Fund. ESTIMATED EXPENSES. - ------------------- Except as otherwise provided in the administrative services agreements, Cornerstone Advisors and BSFM are each obligated to pay expenses associated with providing the services contemplated by the agreements to which they are parties, including compensation of and office space for their respective officers and employees connected with investment and economic research, trading and investment management and administration of each Fund, as well as the fees of all directors of each Fund who are affiliated with those companies or any of their affiliates. Each Fund pays all other expenses incurred in the operation of that Fund including, among other things: - expenses for legal and independent accountants' services, - costs of printing proxies, stock certificates and stockholder reports, - charges of the custodians, and the transfer and dividend- paying agent's expenses in connection with the Funds' Dividend Reinvestment and Cash Purchase Plan, -37- - fees and expenses of unaffiliated directors, - accounting and pricing costs, - membership fees in trade associations, - fidelity bond coverage for the Funds' officers and employees, - directors' and officers' errors and omissions insurance coverage, - brokerage costs and stock exchange fees, - taxes, - stock exchange listing fees and expenses, and - other extraordinary or non-recurring expenses and other expenses properly payable by the Funds. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES. - ---------------------------------------------------- The following table shows certain information based on filings made with the SEC concerning persons who may be deemed beneficial owners of 5% or more of the shares of common stock of either Fund because they possessed or shared voting or investment power with respect to the shares of that Fund: -38-
PGF(1) CLM SHARES OF COMMON STOCK SHARES OF COMMON STOCK BENEFICIALLY OWNED BENEFICIALLY OWNED NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT % AMOUNT %% OF - ------------------------------------ Deep Discount Advisors, Inc. (2) 721,900 16.8% 734,580 18.5% One West Pack Square Suite 777 Asheville, NC 28801 Ron Olin Investment Management Company (2) 1,812,600 42.2% 708,900 17.9% One West Pack Square Suite 777 Asheville, NC 28801 Ronald G. Olin (3) 356,707 33.1% N/A One West Pack Square Suite 777 Asheville, NC 28801 Karpus Management, Inc. (4) N/A 550,425 14.3% D/b/a Karpus Investment Management 183 Sullys Trail Pittsford, NY 14534 - ----------------- (1) This column accurately reflects the Schedule 13G/As as of the date of filing and may not take into account the effect of the one-for-four reverse stock split that occurred on April 22, 2002. While the number of securities may have been reduced by a factor of four, the percentage of ownership is still accurately stated in the Schedule 13G/As. (2) Based solely upon information presented in a Schedule 13G/A, dated February 15, 2002 (for PGF) and February 13, 2002 (for CLM), filed jointly by Deep Discount Advisors, INc. and Ron Olin Investment Management Company. (3) Based solely upon information presented in a Schedule 13G/A, dated June 27, 2002, which reflects the effect of the reverse stock split. (4) Based solely upon information presented in a Schedule 13D/A, dated July 9, 2002, filed by Karpus Management, Inc.. The Fund does not not have any knowledge of who the ultimate beneficiaries are of the Fund's shares.
-39- All the directors and executive officers, as a group, of PGF, as of June 30, 2002, owned less than 1% of the outstanding shares of PGF, and all the directors and executive officers, as a group, of CLM, as of the same date, owned less than 1% of the outstanding shares of CLM. EXPERTS Each Fund previously used PricewaterhouseCoopers LLP, Two Commerce Square, Philadelphia, PA 19103, as its independent public accountants who audited each Funds financial statements for the fiscal year ended December 31, 2001. On April 19, 2002, PGF's stockholders ratified the selection of Tait, Weller & Baker as the Fund's independent accountants for the year ending December 31, 2002. Currently, CLM, in the event that the Merger is not consummated, is requesting that the Fund's stockholders contingently ratify the decision, by the Fund's Board of Directors, to engage Tait, Weller & Baker as independent public accountants. See CLM Proposal 3. REQUIRED VOTE The Merger has been approved by the Board of Directors of each Fund. Approval of the Merger requires the affirmative vote of the holders of a majority of the outstanding shares of common stock of each Fund. Therefore an bstention is equivalent to a vote against the Merger. The Board of Directors of each Fund recommends that the Stockholders vote in favor of this Proposal 1. LEGAL PROCEEDINGS There are currently no material legal proceedings to which the Funds are a party. LEGAL OPINIONS Certain legal matters in connection with the Merger will be passed upon for the Funds by Spitzer & Feldman P.C. -40- II. ADDITIONAL PROPOSAL TO BE VOTED ON BY PGF STOCKHOLDERS WHICH WILL ONLY TAKE EFFECT IN THE EVENT THAT PROPOSAL 1 IS APPROVED BY BOTH FUNDS STOCKHOLDERS. PGF PROPOSAL 2 RATIFICATION OF THE CHANGE IN THE NAME OF THE FUND FROM "PROGRESSIVE RETURN FUND, INC." TO "PROGRESSIVE TOTAL RETURN FUND, INC." In connection with the proposed merger of PGF and CLM, the Board of Directors of PGF authorized an amendment to PGF's Articles of Incorporation to change the name of the Fund from "Progressive Return Fund, Inc." to "Progressive Total Return Fund, Inc." which will only take effect in the event that the proposed merger is approved by the shareholders of both Funds. Under the Maryland General Corporation Law, an amendment to a Charter, which changes the name of the corporation, must be authorized by the Board of Directors and ratified by a majority of the outstanding shares entitled to vote. At the Board of Directors Meeting held on August 2, 2002, the Board of Directors unanimously authorized the amendment to the Articles of Incorporation to change the name of the Fund from "Progressive Return Fund, Inc." to "Progressive Total Return Fund, Inc.", as set forth on Exhibit C. Accordingly, the Board of Directors believes that, subject to shareholder ratification of PGF Proposal 2, changing the name of the Fund to "Progressive Total Return Fund, Inc." is necessary and appropriate and in the best interests of the Fund and its shareholders. REQUIRED VOTE Ratification of the name change requires the affirmative vote of the holders of a majority of the Fund's outstanding voting securities. If the name change is approved by the Fund's shareholders, such change will become effective immediately following the filing of the Fund's Certificate of Amendment to the Articles of Incorporation with the Maryland Secretary of State. THE BOARD OF DIRECTORS, INCLUDING THE NON-INTERESTED DIRECTORS, RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE RATIFICATION OF THE AMENDMENT TO THE FUND'S ARTICLES OF INCORPORATION TO CHANGE THE NAME OF THE FUND FROM "PROGRESSIVE RETURN FUND, INC." TO "PROGRESSIVE TOTAL RETURN FUND, INC." -41- III. ADDITIONAL PROPOSALS TO BE VOTED ON BY CLM'S STOCKHOLDERS WHICH WILL ONLY TAKE EFFECT IN THE EVENT THAT PROPOSAL 1 IS NOT APPROVED BY CLM'S STOCKHOLDERS. CLM PROPOSAL 2: ELECTION OF DIRECTORS In accordance with the Fund's By-Laws, the Fund's Board of Directors is divided into three classes: Class I, Class II and Class III. Each class has a term of three years and each year the term of office of one class expires. The effect of these staggered terms is to limit the ability of other entities or persons to acquire control of the Fund by delaying the replacement of a majority of the Board of Directors. At the Meeting, stockholders will be asked to elect two Class I Directors to hold office until the year 2005 Annual Meeting of Stockholders or thereafter until each of their respective successors is duly elected and qualified. The term of office of the Class II Directors, currently consisting of Messrs. Thomas H. Lenagh and Scott B. Rogers, expires at the year 2003 Annual Meeting of Stockholders or thereafter in each case until their successors are duly elected and qualified. The term of office of the Class III Directors, Messrs. Glenn W. Wilcox, Sr. and Andrew A. Strauss, expires at the year 2004 Annual Meeting of Stockholders or thereafter in each case until their successors are duly elected and qualified. At the Meeting, stockholders will be asked to vote for the election of Messrs. Ralph W. Bradshaw and Edwin Meese III as Class I Directors to serve until the year 2005 Annual Meeting of Stockholders or thereafter until each of their successors is duly elected and qualified. If elected, each nominee has consented to serve as a director of the Fund until his successor is duly elected and qualified. The persons named in the accompanying form of proxy intend to vote at the Meeting (unless directed not to vote) FOR the election of Messrs. Ralph W. Bradshaw and Edwin Meese III. Each nominee has indicated that he will serve if elected, and the Board of Directors has no reason to believe that any of the nominees named above will become unavailable for election as a director, but if any nominee should be unable to serve, the proxy will be voted for any other person determined by the persons named in the proxy in accordance with their judgment. The following table sets forth the names, addresses, ages and principal occupations of each of the nominees for election as Class I Directors: -42-
NOMINEES Directorships held by Term of Nominee for Director Outside Position Office Principal Occupation during of Fund Complex* Name, Address and Age with Fund Since past 5 years ---- CLASS I INDEPENDENT NOMINEE TO SERVE UNTIL THE YEAR 2005 ANNUAL MEETING OF STOCKHOLDERS: Edwin Meese III (70) Director 2001 Distinguished Fellow, The The Heritage Foundation Heritage Foundation, 214 Massachusetts Ave. NE Washington D.C.; Washington D.C. 20002 Distinguished Visiting Fellow at the Hoover Institution, Stanford University; Distinguished Senior Fellow at the Institute of United States Studies, University of London; and Formerly U.S. Attorney General under President Ronald Reagan. INTERESTED DIRECTOR: Ralph W. Bradshaw (51)** Chairman of 1998 President of Cornerstone Director of The SmallCap Fund One West Pack Square the Board Advisors, Inc., and of the Suite 1650 and President Funds within the Fund Asheville, NC 28801 Complex; Vice President, Deep Discount Advisors, Inc. (1993-1999). - ------------ * As of January 2, 2002, the Fund Complex is comprised of CLM, PGF, The Cornerstone Strategic Return Fund, Inc. and EIS Fund, Inc. all of which are managed by Cornerstone Advisors, Inc. ** Mr. Bradshaw is an "interested person" as defined in the Investment Company Act of 1940 ("Investment Company Act") because he is a director, officer and 50% shareholder in Cornerstone Advisors, Inc., the Fund's investment manager.
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REMAINING BOARD OF DIRECTORS The following tables set forth the names, addresses, ages and principal occupations of each of the remaining Directors of the Fund: Term of Directorships held by Director Name, Address and Age Position(s) Office Principal Occupation during Outside of Fund Complex* with Fund Since past 5 years CLASS II INDEPENDENT DIRECTORS SERVING UNTIL THE YEAR 2003 ANNUAL MEETING OF STOCKHOLDERS: Scott B. Rogers (46) Director 2000 Chief Executive Officer, Director of A-B Vision Board; 30 Cumberland Ave. Asheville Buncombe Chairman and Director, Recycling Asheville, NC 28801 Community Christian Unlimited and Interdenominational Ministry; and President, Ministerial Alliance; and Director, ABCCM Doctor's Medical Southeastern Jurisdiction Urban Clinic; Appointee, NC Networkers. Governor's Commission on Welfare to Work. Thomas H. Lenagh (79) Director 1987 Chairman of the Board of Director of Gintel Fund, The Adams 13 Allen's Corner Road Inrad Corp. and Independent Express Company., Petroleum and Flemington, NJ 08822 Financial Adviser. Resources Corporation and ICN Pharmaceuticals International. CLASS III INDEPENDENT DIRECTORS SERVING UNTIL THE YEAR 2003 ANNUAL MEETING OF STOCKHOLDERS: Glenn W. Wilcox, Sr. (70) Director 2000 Chairman of the Board and Director of The Small Cap Fund, Inc., One West Pack Square Chief Executive Officer of Wachovia Corp.; Board Trustee and Chairman Suite 1700 Wilcox Travel Agency. of Appalachian State University; Board Asheville, NC 28801 Trustee and Director, Mars Hill College; Director, Champion Industries, Inc.; and Chairman, Tower Associates, Inc. (a real estate venture) -44- CLASS III INDEPENDENT DIRECTORS CONTINUED: Andrew A. Strauss (48) Director 2000 Attorney and senior member Director of he Small Cap Fund, Inc., 77 Central Avenue of Strauss & Associates, Memorial Mission Hospital Foundation and Suite F P.A., Attorneys, Asheville Deerfield Episcopal Retirement Community. Asheville, NC 28801 and Hendersonville, NC; previous President of White Knight Healthcare, Inc. and LMV Leasing, Inc., a wholly owned subsidiary of Xerox Credit Corporation. - --------- * As of January 2, 2002, the Fund Complex is comprised of CLM, PGF, The Cornerstone Strategic Return Fund, Inc. and EIS Fund, Inc. all of which are managed by Cornerstone Advisors.
-45- With the exception of EIS Fund, Inc., all of the Directors and Nominees for Directors served on the Board of Directors for each closed-end fund within the Fund Complex that was managed by Cornerstone Advisors, Inc. ("Cornerstone Advisors"), the Fund's investment manager, during the year ended December 31, 2001. The following table sets forth, for each Director and for the Directors as a group, the amount of shares beneficially owned in the Fund as of June 30, 2002. The information as to beneficial ownership is based on statements furnished to the Fund by each Director. Unless otherwise noted, beneficial ownership is based on sole investment power. Amount of Securities Name of Director Beneficially Owned ---------------------------- ------------------------------------- ---------------------------- ------------------------------------- Edwin Meese III 0 Ralph W. Bradshaw 3,000 Andrew A. Strauss 600 Thomas H. Lenagh 0 Glenn W. Wilcox Sr. 1,000 Scott B. Rogers 0 ------- All Directors as a Group 4,600 ======= The following table sets forth, for each Director, the aggregate dollar range of equity securities owned of the Fund and of all Funds overseen by each Director in the Fund Complex as of December 31, 2001. The information as to beneficial ownership is based on statements furnished to the Fund by each Director. -46-
Aggregate Dollar Range of Equity Securities in All Funds Overseen by Dollar Range of Equity Securities Directors in Fund Complex. Name in the Fund. ----------------------------- ----------------------------------- ---------------------------------------- ----------------------------- ----------------------------------- ---------------------------------------- Edwin Meese III 0 0 Ralph W. Bradshaw $10,001-$50,000 $50,001-$100,000 Andrew A. Strauss $1-$10,000 $10,001-$50,000 Thomas H. Lenagh 0 0 Glenn W. Wilcox Sr. $1-$10,000 $10,001-$50,000 Scott B. Rogers 0 0 EXECUTIVE OFFICERS In addition to Mr. Bradshaw, the current officers of the Fund are: Term of Name, Address and Age Position(s) Office Principal Occupation during Directorships held by Officer with Fund Since past 5 years - ------------------------------- ---------------- ------------ -------------------------------- ------------------------------ - ------------------------------- ---------------- ------------ -------------------------------- ------------------------------ Gary A. Bentz (46) Vice President 2001 Chief Financial Officer of Director of EIS Fund, Inc. One West Pack Square and Treasurer Cornerstone Advisors, Inc., Suite 1650 Vice President and Treasurer Asheville, NC 28801 of Progressive Return Fund, Inc., The Cornerstone Strategic Return Fund, Inc. and EIS Fund, Inc.; Chief Financial Officer of Deep Discount Advisors, Inc. (1993-2000). Thomas R. Westle (48) Secretary 2001 Partner of Spitzer & Feldman 405 Park Avenue P.C., a law firm, and previous New York, NY 10022 Partner at Battle Fowler LLP; Secretary of Progressive Return Fund, Inc., The Cornerstone Strategic Return Fund, Inc. and EIS Fund, Inc.
Under the federal securities laws, the Fund is required to provide to stockholders in connection with the Meeting, information regarding compensation paid to Directors by the Fund as well as by the various other U.S. registered investment companies advised by the Fund's investment manager during its prior fiscal year. The following table provides information concerning the compensation paid during the year ended December 31, 2001, to each Director of the Fund. All of the Directors received compensation for serving as a Director of The Cornerstone Strategic Return Fund, Inc. and Progressive Return Fund, Inc., which were also managed by Cornerstone Advisors during the year ended December 31, 2001. Please note that the Fund has no bonus, profit sharing, pension or retirement plans. -47- Total Compensation Aggregate From Fund and Director Compensation From Fund Complex* Name of Director Since Fund Paid to Director ---------------- ----- ---- ---------------- Ralph W. Bradshaw 1998 $17,500 $58,621 Glenn W. Wilcox, Sr. 2000 $10,000 $26,150 Andrew A. Strauss 2000 $10,000 $26,150 Edwin Meese III 2001 $7,500 $22,450 Scott B. Rogers 2000 $10,000 $26,150 Thomas H. Lenagh 1987 $10,000 $23,000 William A. Clark** 1999 $12,500 $31,745 - --------------- * For compensation purposes, Fund Complex refers to CLM, PGF and The Cornerstone Strategic Return Fund, Inc. all of which were managed by Cornerstone Advisors during the year ended December 31, 2001. ** Mr. Clark resigned from his position as a member of the Board of Directors of the Fund on January 31, 2001. Each Director attended at least seventy-five (75%) percent or more of the six (6) meetings of the Board of Directors (including regularly scheduled and special meetings) held during the period for which he was a Director. The Fund has a nominating committee which is comprised of the all of the non-interested directors. AUDIT COMMITTEE The Fund's Audit Committee is currently composed of five independent directors, Messrs. Wilcox, Strauss, Meese, Lenagh and Rogers. The principal functions of the Audit Committee include but are not limited to: (i) recommendations to the Board for the appointment of the Fund's independent accountants; (ii) review of the scope and anticipated cost of the independent accountant's audit; and (iii) consideration of the independent accountant's reports concerning their conduct of the audit, including any comments or recommendations the Board of Directors might make in connection thereto. The Audit Committee convened three times during the fiscal year ended December 31, 2001. Each member of the Audit Committee attended at least seventy-five percent (75%) or more of the three meetings of the Audit Committee. -48- On June 1, 2000, the Audit Committee, followed by the full Board of Directors, adopted a written charter setting forth the duties and responsibilities of the Audit Committee, and such charter was reapproved by the Board of Directors on February 9, 2001 and February 14, 2002, respectively. The Audit Committee recommends to the Board of Directors, subject to stockholder approval, the selection of Tait, Weller & Baker, as the Fund's independent accountants. On February 25, 2002, the Board of Directors and the Audit Committee determined to replace PricewaterhouseCoopers LLP ("PwC") as the Fund's independent accountants. PwC's accountant report for the past two years did not contain any adverse opinion or any qualification as to uncertainty, audit scope or accounting principles. Further, the Board's decision to replace PwC was not due to any disagreement on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. The following table sets forth the aggregate fees billed by PricewaterhouseCoopers LLP, the independent accountants for the Fund's most recent fiscal year, for professional services rendered for: (i) the audit of the Fund's annual financial statements and the review of financial statements included in the Fund's reports to stockholders ("Audit Fees"); (ii) financial information systems design and implementation services provided to the Fund, its investment manager and entities that control, are controlled by or under common control with the Fund's investment manager that provides services to the Fund ("Financial Information Systems Design"); and (iii) all other services provided to the Fund, its investment manager and entities that control, are controlled by or under common control with the Fund's investment manager that provides services to the Fund ("All Other Fees"). AUDIT FEES FINANCIAL INFORMATION ALL OTHER FEES SYSTEMS DESIGN ---------- --------------------- -------------- $29,750 $0 $3,000 The Fund has no compensation committees. AUDIT COMMITTEE REPORT The Audit Committee has met and held discussions with the Fund's Administrator, Bear Stearns Funds Management Inc., and the Fund's independent accountants. The independent accountants represented to the Audit Committee that the Fund's financial statements were prepared in accordance with U.S. generally accepted accounting principles, and the Audit Committee has reviewed and discussed the financial statements with the Fund's Administrator and its independent accountants. The Audit Committee also discussed with the independent accountants matters required to be discussed by Statement on Auditing Standards No. 61. The Fund's independent accountants also provided to the Audit Committee the written disclosures required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the Audit Committee discussed with the independent accountants' their independence, in light of the services they were providing. -49- Based upon the Audit Committee's discussion with the Fund's Administrator and the independent accountants and the Audit Committee's review of the representations of the independent accountants to the Audit Committee, the Audit Committee recommended that the Board of Directors include the audited financial statements in the Fund's Annual Report for the fiscal year ended December 31, 2001 filed with the Securities and Exchange Commission. Respectfully submitted, Edwin Meese III Glenn W. Wilcox, Sr. Andrew A. Strauss Thomas H. Lenagh Scott B. Rogers SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Section 30(h) of the 1940 Act in combination require the Fund's directors and officers, persons who own more than ten (10%) of the Fund's common stock, and the Fund's investment manager and its directors and officers, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the New York Stock Exchange, Inc. The Fund believes that the Fund's directors and officers, the Fund's investment manager and its directors and officers have complied with all applicable filing requirements during the year ended December 31, 2001. REQUIRED VOTE Directors are elected by a plurality (a simple majority of the votes cast at the meeting) of the votes cast by the holders of shares of common stock of the Fund present in person or represented by proxy at a meeting with a quorum present. For purposes of the election of Directors, abstentions and broker non-votes will be counted as shares present for quorum purposes, will be considered votes cast, and will affect the plurality vote required for Directors. THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE ELECTION OF MESSRS. EDWIN MEESE III AND RALPH W. BRADSHAW AS CLASS I DIRECTORS OF THE FUND. -50- CLM PROPOSAL 3: RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS The second proposal to be submitted will be the ratification or rejection of the selection by the Board of Directors of Tait, Weller & Baker as independent accountants of the Fund for the year ending December 31, 2002. At a meeting held on February 25, 2002, the Board of Directors, including those directors who are not "interested persons" of the Fund, approved the selection of Tait, Weller & Baker for the year ending December 31, 2002 and determined to replace PricewaterhouseCoopers LLP. Such selection is being submitted to the stockholders for ratification. The engagement of Tait, Weller & Baker is conditioned on the right of the Fund, by majority vote of its stockholders, to terminate such employment. Tait, Weller & Baker has informed the Fund that it has no material direct or indirect financial interest in the Fund. A representative of Tait, Weller & Baker will be available by telephone at the Meeting and will have the opportunity to make a statement if the representative so desires and will be available to respond to appropriate questions. REQUIRED VOTE Ratification of the selection of Tait, Weller & Baker as independent accountants of the Fund requires the affirmative vote of the holders of a simple majority, defined as a majority of the votes cast by holders of shares of common stock of the Fund present in person or represented by proxy at a meeting with a quorum present. For purposes of this proposal, abstentions and broker non-votes will be counted as shares present at the Meeting for quorum purposes and will have no effect on the outcome of this proposal. THE BOARD OF DIRECTORS, INCLUDING THE "NON-INTERESTED" DIRECTORS, RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE RATIFICATION OF TAIT, WELLER & BAKER AS THE FUND'S INDEPENDENT ACCOUNTANTS. -51- CLM PROPOSAL 4: SHAREHOLDER PROPOSAL REQUESTING THAT THE FUND BE CONVERTED INTO AN OPEN-END FUND Karpus Management, Inc. d/b/a Karpus Investment Management ("KIM"), 183 Sully's Trail, Pittsford, New York, New York 14534, has submitted the following proposal for inclusion in this Proxy Statement. KIM claims that it has owned shares of the Fund with a market value of at least $2,000 continuously for the preceding year and intends to maintain the required ownership through the date of the Meeting. The Board of Directors and the Fund accept no responsibility for the accuracy of either the proposal or of KIM's supporting statement. STOCKHOLDER PROPOSAL Karpus Investment Management proposes: Cornerstone Strategic Value Fund, Inc. (CLM) be converted to an open-end fund within 90 days after acceptance by the shareholders. SUPPORTING STATEMENT It is the belief of KIM that current Fund Management of CLM is not making significant strides in closing the discount at which the Fund trades. For the time period from January 5, 2001 through December 7, 2001 the Fund has traded at an average discount of 15.79%. Management claims that the share buy back program can help close this discount over time. It is the opinion of KIM this can not happen simply by the Fund repurchasing shares. KIM believes that drastic steps must occur for the shareholders to recognize the full economic value of their investment. KIM believes the only way for shareholders to reap the full value of their investment is to open-end the Fund. If this would occur, shareholders would immediately increase the value of their investment by 14.46% (based on the net asset value of December 7, 2001)! It is the opinion of KIM that the current Fund Management may not have sufficient experience to be the best choice for managing the Fund. KIM believes that the Fund's Manager lacks adequate experience in managing individual securities (only funds in a closed-end format). The current manager does not have a track record, known to KIM, to instill our confidence in their abilities. Poor performance in both price and net asset value does not have to be tolerated by the shareholders. Management will claim that they are doing a good job and they have not been the manager long enough for shareholders to recognize their abilities. KIM believes that the shareholders must act now. Time is not on the side of the shareholders to wait! From January 4, 2001 through December 6, 2001 the net asset value performance of CLM has equaled - 19.4518% (-20.9417 annual equivalent). The price performance of the Fund has been equally dismal. For the same holding period price performance equaled -20.80% (-22.3781 annual equivalent)(All calculations by Bloomberg). KIM believes that the shareholders deserve better performance than what has been delivered in 2001. CLM is plagued by low trading volume. Trading volume from January 4, 2001 through December 6, 2001 has averaged a mere 8,706 shares. It is KIM's opinion that shareholders who wish to liquidate large positions could severely depress the price at which the Fund trades. This could cause economic harm to shareholders remaining in CLM. -52- KIM believes open ending is the only possible method for shareholders to recognize the economic reality of their investment. Open ending would allow shareholders, such as KIM, who do not have confidence in the direction of the Fund's management, to get out of the Fund. Should CLM be open ended at net asset value, shareholders would recognize an immediate economic benefit of approximately 14.46% (based on price of $7.93 and NAV of $9.27 as of 12/7/01). KIM further believes that any Investment Adviser is not fulfilling their Fiduciary duty to their clients if they do not vote to open end CLM. STATEMENT OF POSITION OF THE BOARD OF DIRECTORS IN OPPOSITION TO THE SHAREHOLDER PROPOSAL - -------------------------------------------------------------------------------- The shareholder proposal asks that the Fund be converted to an open-end fund in order to provide full Net Asset Value (NAV) to those shareholders wishing to leave the Fund. All of the Directors believe that this is not the most effective means to deliver long-term added value to a majority of shareholders. The full Board opposes the proposal and believes that open-ending should be rejected in favor of other means of maximizing shareholder value within the closed-end structure. The Board believes that somewhat more patience is justified in an attempt to reap potentially greater rewards. The goal of this Board is not to pit one shareholder against another, but to establish a balance that satisfies the greatest number of shareholders. During the first quarter of 2001, the Fund substantially under-performed the S&P 500 benchmark, which fell 12.1%. Following Cornerstone Advisors' becoming the Fund's investment manager, after the end of the first quarter of 2001, the benchmark continued to decline through the end of the year as the U.S. entered a recession in March which was followed by the September 11th tragedy and its aftermath. In spite of this challenging environment over the last three quarters of 2001, the Fund's price appreciated 3.9% and the Fund's discount to NAV closed to 12.5% by the end of the year. While nine months is not enough time for effective evaluation, we believe our approach that includes repurchasing shares at a discount, optimizing Fund expenses, and diversifying the Fund's portfolio has and will continue to create significant added value for our shareholders. Different types of investors have their own agendas and their own beliefs. The closed-end structure is fundamentally different from an open-end structure or one that provides NAV on demand. Attempts to deliver NAV immediately to a minority of shareholders who wish to exit the Fund may well destroy or diminish the advantages otherwise enjoyed by the remaining shareholders. For the time being, the current Board is committed to realizing the potential of the Fund without changing its fundamental nature. The major benefits of the closed-end structure to long-term shareholders are threefold: flexibility in managing fund assets, lower expenses, and performance enhancement through profiting from the discount. -53- Flexibility in managing fund assets. Unlike open-end funds, closed-end funds are not subject to cash flow disruptions caused by inflows or outflows of capital when shareholders buy new shares or redeem shares. This permits Fund management to take a more long-term perspective on investments and may permit a more effective investment strategy. This may in turn produce higher long-term portfolio returns. In addition, cash can be raised to take advantage of anticipated market declines without fear that it will instead have to be used to satisfy the shareholder redemptions in open-end funds that normally accompany market reversals. Less liquid securities, such as other closed-end funds selling at discounts, can be placed in the Fund's portfolio without fear that redemptions will require untimely sales to raise capital. Lower expenses. Because closed-end funds need not engage in many of the shareholders services normally required of open-end funds and do not have the same marketing and communication activities, costs can be kept to a minimum. The current Directors have found many ways to reduce expenses and are pursuing many more. The Board remains convinced that closed-end funds can be run more cost effectively than open-end funds and that these savings, along with the additional flexibility in managing Fund assets, may well permit substantial additional returns to be realized over time as compared with equivalent open-end funds. Profiting from the discount. Closed-end funds often sell at discounts, at least part of the time. A fund that purchases its own shares at a discount benefits loyal, long-term shareholders in two ways. First, the net asset value is automatically increased at no additional risk. Second, the supply of shares available for sale at a discount is reduced and this creates price pressure which is likely to reduce the discount and enhance share value. While the extra liquidity may benefit shareholders who choose to sell their shares, the greatest value of an ongoing buyback program accrues to long-term shareholders. Shareholders who view the fund as a long-term, tax efficient investment may be better off in a closed-end structure at a nominal or moderate discount which fluctuates. For all these reasons, the Board unanimously recommends that stockholders vote AGAINST this stockholder proposal. EFFECT OF PASSAGE OF THE PROPOSAL This advisory Proposal requires the affirmative vote of a majority of shares voting at the Meeting for passage. The Investment Company Act of 1940 requires that any conversion of a closed-end investment company to an open-end investment company be by a vote of a majority of the Fund's outstanding voting securities. The term "a majority of the Fund's outstanding voting securities" is defined by the 1940 Act to mean the vote, at the annual or a special meeting of the security holders of such company duly called (a) of 67 per centum or more of the voting securities present at such meeting, if the holders of more than 50 per centum of the outstanding voting securities of such company are present or represented by proxy; or (b) of more than 50 per centum of the outstanding voting securities of such company, whichever is the less. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE AGAINST PROPOSAL NO. 4 -54- ADDITIONAL INFORMATION The Proxy Statement/Prospectus does not contain all of the information set forth in the registration statements and the exhibits relating thereto which the Funds have filed with the Commission, under the Securities Act and the Investment Company Act, to which reference is hereby made. The Funds are subject to the informational requirements of the Exchange Act and in accordance therewith, file reports and other information with the SEC. Reports, proxy statements, registration statements and other information filed by the Funds can be inspected and copied at the public reference facilities of the SEC in Washington, D.C. Copies of such materials also can be obtained by mail from the Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and Exchange Commission, Washington, D.C. 20594, at prescribed rates. OTHER MATTERS TO COME BEFORE THE MEETING. The Board of Directors of each Fund is not aware of any matters that will be presented for action at the Meeting other than the matters set forth herein. Should any other matters requiring a vote of Stockholders arise, the proxy in the accompanying form will confer upon the person or persons entitled to vote the shares represented by such proxy the discretionary authority to vote the shares as to any such other matters in their discretion in the interest of the respective Fund. PLEASE COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) PROMPTLY. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. By order of the Boards of Directors of Progressive Return Fund, Inc. and Cornerstone Strategic Value Fund, Inc. PROGRESSIVE RETURN FUND, INC. Ralph W. Bradshaw President, Progressive Return Fund, Inc. CORNERSTONE STRATEGIC VALUE FUND, INC. Ralph W. Bradshaw President, Cornerstone Strategic Value Fund, Inc. -55- PROGRESSIVE RETURN FUND, INC. 383 Madison Avenue New York, New York 10179 PART B STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information ("SAI"), relates specifically to the shares of Progressive Return Fund, Inc. ("PGF") to be issued pursuant to an Agreement and Plan of Merger, dated October __, 2002, between PGF and Cornerstone Strategic Value Fund, Inc. ("CLM"). This SAI does not constitute a prospectus. This SAI does not contain all the information that a stockholder should consider before voting on the proposal contained in the Proxy Statement/Prospectus that relates to their fund, and, therefore, should be read in conjunction with the related Proxy Statement/Prospectus, dated September __, 2002. A copy of the Proxy Statement/Prospectus may be obtained without charge by calling (212) 272-2093. Please retain this document for future reference. THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED SEPTEMBER __, 2002 The SEC has not approved or disapproved these securities or determined if this Proxy Statement/Prospectus is truthful or complete. Any representation to the contrary is a criminal offense. TABLE OF CONTENTS DESCRIPTION OF THE FUND............................................... 1 INVESTMENT POLICIES, RISKS AND RESTRICTIONS........................... 1 MANAGEMENT............................................................ 5 CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS............................10 INVESTMENT MANAGEMENT AND OTHER SERVICES..............................10 PORTFOLIO TRANSACTIONS................................................12 TAX STATUS............................................................14 FINANCIAL STATEMENTS..................................................15 THE INFORMATION IN THIS SAI IS NOT COMPLETE AND MAY BE CHANGED. PGF MAY NOT SELL THESE SECURITIES UNTIL THE PROXY STATEMENT/PROSPECTUS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS DECLARED EFFECTIVE. THIS SAI IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. INTRODUCTION This SAI is intended to supplement the information provided in the Proxy Statement/Prospectus dated September __, 2002 (the "Proxy Statement/Prospectus"). The Proxy Statement/Prospectus has been sent to the stockholders of CLM in connection with the solicitation of proxies by the Board of Directors to be voted at the CLM Annual Meeting of Stockholders and the PGF Special Meeting of Stockholders both to be held on October __, 2002. This SAI incorporates by reference the Prospectus of CLM dated as June 23, 1987, and the Fund's Annual Report to Stockholders for the fiscal year ended December 31, 2001 and Semi-Annual Report to Stockholders for the period ended June 30, 2002. DESCRIPTION OF THE FUND Progressive Return Fund, Inc. (the "Fund" or "PGF") was incorporated in Maryland on August 11, 1989, under its previous name "The Portugal Fund, Inc.", and commenced investment operations on November 9, 1989. On December 15, 2000, the stockholders of the Fund changed the name of the Fund to Progressive Return Fund, Inc. The Fund is registered under the Investment Company of 1940, as amended (the "Investment Company Act"), as a closed-end, non-diversified management investment company and is listed on the New York Stock Exchange ("NYSE") under the symbol "PGF." PGF seeks total return consisting of capital appreciation and current income by investing primarily in U.S. and non-U.S. securities. The authorized capitalization of PGF consists of 100,000,000 shares of common stock having $0.001 par value per share (the "Shares"). Shares of the Fund have equal voting rights and liquidation rights. When matters are submitted to stockholders for a vote, each stockholder is entitled to one vote for each full Share owned and fractional votes for fractional Shares owned. The Fund holds its annual meeting of stockholders within 120 days after the end of its fiscal year which ends on December 31. Each Share of PGF represents an equal proportionate interest in the assets and liabilities belonging to PGF with each other share of PGF and is entitled to such dividends and distributions out of the income belonging to PGF as are declared by the Board of Directors (the "Directors"). The Shares do not have cumulative voting rights or any preemptive or conversion rights. In the event of the dissolution or liquidation of the Fund, the holders of shares of the Fund are entitled to share pro rata in the net assets of the Fund available for distribution to shareholders. INVESTMENT POLICIES, RISKS AND RESTRICTIONS The Proxy Statement/Prospectus presents the investment objective and the principal investment strategies and risks of the Fund. The investment objective of the Fund is to seek total return consisting of capital appreciation and current income by investing primarily in U.S. and non-U.S. companies. There can be no assurance that the Fund will achieve its investment objective. This section supplements the disclosure in the Fund's Proxy Statement/Prospectus and provides additional information on the Fund's investment policies and restrictions. INVESTMENT POLICIES AND RISKS PRINCIPAL INVESTMENT POLICIES STOCK MARKET VOLATILITY. Stock markets can be volatile. In other words, the prices of stocks can rise or fall rapidly in response to developments affecting a specific company or industry, or to changing economic, political or market conditions. The Fund is subject to the general risk that the value of the Fund's investments may decline if the stock markets perform poorly. There is also a risk that the Fund's investments will underperform either the securities markets generally or particular segments of the securities markets. ISSUER SPECIFIC CHANGES. Changes in the financial condition of an issuer, changes in the specific economic or political conditions that affect a particular type of security or issuer, and changes in general economic or political conditions can affect the credit quality or value of an issuer's securities. Lower-quality debt securities tend to be more sensitive to these changes than higher-quality debt securities. INTEREST RATE RISK. Debt securities have varying levels of sensitivity to changes in interest rates. In general, the price of a debt security can fall when interest rates rise and can rise when interest rates fall. Securities with longer maturities and mortgage securities can be more sensitive to interest rate changes although they usually offer higher yields to compensate investors for the greater risks. The longer the maturity of the security, the greater the impact a change in interest rates could have on the security's price. In addition, short-term and long-term interest rates do not necessarily move in the same amount or the same direction. Short-term securities tend to react to changes in short-term interest rates and long-term securities tend to react to changes in long-term interest rates. CREDIT RISKS. Fixed income securities rated B or below by Standards & Poors Corporation or Moody's Investor Service, Inc. may be purchased by the Fund. These securities have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity of those issuers to make principal or interest payments, as compared to issuers of more highly rated securities. EXTENSION RISK. The Fund is subject to the risk that an issuer will exercise its right to pay principal on an obligation held by the Fund (such as mortgage-backed securities) later than expected. This may happen when there is a rise in interest rates. These events may lengthen the duration (i.e. interest rate sensitivity) and potentially reduce the value of these securities. -2- ILLIQUID SECURITIES. The Fund may invest up to 15% of its respective net assets in illiquid securities. Illiquid securities may offer a higher yield than securities which are more readily marketable, but they may not always be marketable on advantageous terms. The sale of illiquid securities often requires more time and results in higher brokerage charges or dealer discounts than does the sale of securities eligible for trading on national securities exchanges or in the over-the-counter markets. A security traded in the U.S. that is not registered under the Securities Act of 1933 will not be considered illiquid if Cornerstone Advisors determines that an adequate investment trading market exists for that security. However, there can be no assurance that a liquid market will exist for any security at a particular time. NON-PRINCIPAL INVESTMENT POLICIES TEMPORARY DEFENSIVE POSITIONS. The Fund may, from time to time, take temporary defensive positions that are inconsistent with its principal investment strategies in attempting to respond to adverse market, economic, political or other conditions. Such investments include various short-term instruments. If the Fund takes a temporary defensive position at the wrong time, the position would have an adverse impact on the Fund's performance and it may not achieve its investment objective. The Fund reserves the right to invest all of its assets in temporary defensive positions. SECURITIES LENDING. The Fund may lend its portfolio securities to broker-dealers in amounts equal to no more than 33 1/3% of the Fund's net assets. These transactions will be fully collateralized at all times with cash and/or high quality, short-term debt obligations. These transactions involve risk to the Fund if the other party should default on its obligation and the Fund is delayed or prevented from recovering the securities lent. In the event the original borrower defaults on its obligation to return lent securities, the Fund will seek to sell the collateral, which could involve costs or delays. To the extent proceeds from the sale of collateral are less than the repurchase price, the Fund would suffer a loss and you could lose money on your investment. BORROWING. The Fund may borrow money from banks, including pursuant to a revolving line of credit established for the benefit of investment companies managed by Cornerstone Advisors, for temporary or emergency purposes in order to meet redemption requests. To reduce its indebtedness, the Fund may have to sell a portion of its investments at a time when it may be disadvantageous to do so. In addition, interest paid by the Fund on borrowed funds would decrease the net earnings of the Fund REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements collateralized by the securities in which it may invest. A repurchase agreement involves the purchase by the Fund of securities with the condition that the original seller (a bank or broker-dealer) will buy back the same securities ("collateral") at a predetermined price or yield. Repurchase agreements involve certain risks not associated with direct investments in securities. In the event the original seller defaults on its obligation to repurchase, the Fund will seek to sell the collateral, which could involve costs or delays. To the extent proceeds from the sale of collateral are less than the repurchase price, the Fund would suffer a loss. -3- INVESTMENT RESTRICTIONS The Fund has adopted certain fundamental investment restrictions that may not be changed without the prior approval of the holders of a majority of the Fund's outstanding voting securities. For purposes of the restrictions listed below, all percentage limitations apply immediately after a purchase or initial investment, and any subsequent change in any applicable percentage resulting from market fluctuations does not require elimination of any security from the Fund's portfolio. Fund policies which are not fundamental may be modified by the Board of Directors if, in the reasonable exercise of the Board's business judgment, modification is determined to be necessary or appropriate to carry out the Fund's objective. Under its fundamental restrictions, the Fund may not: 1. Invest 25% or more of the total value of its assets in a particular industry. This restriction does not apply to investments in United States Government securities. 2. Issue senior securities, borrow or pledge its assets, except that the Fund may borrow from a bank for temporary or emergency purposes or for the clearance of transactions in amounts not exceeding 10% (taken at the lower of cost or current value) of its total assets (not including the amount borrowed) and may also pledge its assets to secure such borrowings. Additional investments will not be made when borrowings exceed 5% of the Fund's assets. 3. Lend money to other persons except through the purchase of debt obligations, loans or participation interests in loans and the entering into of repurchase agreements or reverse repurchase agreements in the United States consistent with the Fund's investment objective and policies. 4. Make short sales of securities or maintain a short position in any security. 5. Purchase securities on margin, except such short-term credits as may be necessary or routine for the clearance or settlement of transactions and the maintenance of margin with respect to forward contracts or other hedging transactions. 6. Underwrite securities of other issuers, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933, as amended, in selling portfolio securities. 7. Purchase or sell commodities or real estate, except that the Fund may invest in securities secured by real estate or interests in real estate or in securities issued by companies, including real estate investment trusts, that invest in real estate or interests in real estate, and may purchase and sell forward contracts on foreign currencies to the extent permitted under applicable law. 8. Make investments for the purpose of exercising control over, or management of, the issuers of any securities. -4- MANAGEMENT OF THE FUND The business and affairs of the Fund are managed under the direction of the Fund's Board of Directors, and the day-to-day operations are conducted through or under the direction of the officers of the Fund. The following tables set forth the names, ages and principal occupations of each of the Directors of the Fund:
Term of Office Directorships held by Director Name, Address and Age Position(s) Since Principal Occupation during outside of the Fund Complex* with Fund past 5 years CLASS I DIRECTORS SERVING UNTIL THE YEAR 2004 ANNUAL MEETING OF STOCKHOLDERS. Andrew A. Strauss (48) Director 2000 Attorney and senior member Director of The SmallCap Fund, Inc., 77 Central Avenue of Strauss & Associates, Memorial Mission Hospital Foundation Suite F P.A., Attorneys, Asheville and Deerfield Episcopal Retirement Asheville, NC 28801 and Hendersonville, N.C.; Community. previous President of White Knight Healthcare, Inc. and LMV Leasing, Inc., a wholly owned subsidiary of Xerox Credit Corporation. Thomas H. Lenagh (79) Director 2001 Chairman of the Board of Director of Gintel Fund, The Adams 13 Allen's Corner Road Inrad Corp. and Independent Express Corp., Petroleum and Flemington, NJ 08822 Financial Adviser. Resources Corporation and ICN Pharmaceuticals. -5- CLASS II DIRECTORS SERVING UNTIL THE YEAR 2005 ANNUAL MEETING OF STOCKHOLDERS Edwin Meese III (70) Director 2001 Distinguished Fellow, The The Heritage Foundation Heritage Foundation, 214 Massachusetts Ave. NE Washington D.C.; Washington D.C. 20002 Distinguished Visiting Fellow at the Hoover Institution, Stanford University; Distinguished Senior Fellow at the Institute of United States Studies, University of London; and Formerly U.S. Attorney General under President Ronald Reagan. Ralph W. Bradshaw (51)** Chairman of 1999 President of Cornerstone Director of The SmallCap Fund, Inc. One West Pack Square the Board Advisors, Inc., and of the Suite 1650 and President Funds within the Fund Asheville, NC 28801 Complex; Vice President, Deep Discount Advisors, Inc. (1993-1999). CLASS III DIRECTORS SERVING UNTIL THE YEAR 2003 ANNUAL MEETING OF STOCKHOLDERS. Glenn W. Wilcox, Sr. (70) Director 2000 Chairman of the Board and Director of The SmallCap Fund, Inc., One West Pack Square Chief Executive Officer of Wachovia Corp.; Board Trustee and Suite 1700 Wilcox Travel Agency. Chairman of Appalachian State Asheville, NC 28801 University; Board Trustee and Director, Mars Hill College; Director, Champion Industries, Inc.; Chairman, Tower Associates, Inc. (a real estate venture). Scott B. Rogers (46) Director 2000 Chief Executive Officer, Director of A-B Vision Board; 30 Cumberland Ave. Asheville Buncombe Chairman and Director, Recycling Asheville, NC 28801 Community Christian Unlimited and Interdenominational Ministry; and President, Ministerial Alliance; Director, ABCCM Doctor's Medical Southeastern Jurisdiction Urban Clinic; Appointee, NC Networkers. Governor's Commission on Welfare to Work. - ------------ * As of January 2, 2002, the Fund Complex is comprised of PGF, CLM, The Cornerstone Strategic Return Fund, Inc. and EIS Fund, Inc. all of which are managed by Cornerstone Advisors, Inc. as of that date. ** Mr. Bradshaw is an "interested person" as defined in the Investment Company Act of 1940 ("Investment Company Act") because he is a director, officer and 50% shareholder in Cornerstone Advisors, Inc., the Fund's investment manager.
-6- With the exception of EIS Fund, Inc., all of the Directors served on the Board of Directors for each closed-end fund within the Fund Complex that was managed by Cornerstone Advisors, Inc. ("Cornerstone Advisors"), the Fund's investment manager, during the year ended December 31, 2001. Messrs. Lenagh and Meese do not serve as members of the Board of Directors of EIS Fund, Inc. The following table sets forth, for each Director and for the Directors as a group, the amount of shares beneficially owned in the Fund as of June 30, 2002. The information as to beneficial ownership is based on statements furnished to the Fund by each Director. Unless otherwise noted, beneficial ownership is based on sole investment power. Name of Director Amount of Securities Beneficially Owned Edwin Meese III 0 Ralph W. Bradshaw 625 Andrew A. Strauss 100 Thomas H. Lenagh 0 Glenn W. Wilcox Sr. 250 Scott B. Rogers 0 All Directors as a Group 975 The following table sets forth, for each Director, the aggregate dollar range of equity securities owned of the Fund and of all Funds overseen by each Director in the Fund Complex as of June 30, 2002. The information as to beneficial ownership is based on statements furnished to the Fund by each Director.
------------------------------- --------------------------- ----------------------------------------------------- Name Dollar Range of Equity Aggregate Dollar Range of Equity Securities in All Securities in the Fund. Funds Overseen by Directors in Fund Complex. ------------------------------- --------------------------- ----------------------------------------------------- ------------------------------- --------------------------- ----------------------------------------------------- Edwin Meese III 0 0 ------------------------------- --------------------------- ----------------------------------------------------- ------------------------------- --------------------------- ----------------------------------------------------- Ralph A. Bradshaw $10,001-$50,000 $50,001-$100,000 ------------------------------- --------------------------- ----------------------------------------------------- ------------------------------- --------------------------- ----------------------------------------------------- Andrew A. Strauss $1-$10,000 $10,001-$50,000 ------------------------------- --------------------------- ----------------------------------------------------- ------------------------------- --------------------------- ----------------------------------------------------- Thomas H. Lenagh 0 0 ------------------------------- --------------------------- ----------------------------------------------------- ------------------------------- --------------------------- ----------------------------------------------------- Glenn W. Wilcox Sr. $1-$10,000 $10,001-$50,000 ------------------------------- --------------------------- ----------------------------------------------------- ------------------------------- --------------------------- ----------------------------------------------------- Scott B. Rogers 0 0 ------------------------------- --------------------------- -----------------------------------------------------
-7- EXECUTIVE OFFICERS In addition to Mr. Bradshaw, the current officers of the Fund are:
Term of Name, Address and Age Position(s) Office Principal Occupation during past 5 Directorships held by with Fund Since years Officer Gary A. Bentz (46) Vice President 2001 Chief Financial Officer of Director of EIS Fund, One West Pack Square and Treasurer Cornerstone Advisors, Inc., Vice Inc. Suite 1650 President and Treasurer of The Asheville, NC 28801 Cornerstone Strategic Return Fund, Inc., Cornerstone Strategic Value Fund, Inc. and EIS Fund, Inc.; Chief Financial Officer of Deep Discount Advisors, Inc. (1993-2000). Thomas R. Westle (48) Secretary 2001 Partner of Spitzer & Feldman P.C., 405 Park Avenue a law firm, and previous Partner New York, NY 10022 at Battle Fowler LLP; Secretary of The Cornerstone Strategic Return Fund, Inc., Cornerstone Strategic Value Fund, Inc. and EIS Fund, Inc.
The Fund pays each of its Directors who is not a director, officer, partner, co-partner or employee of Cornerstone Advisors or any affiliate thereof a stipend of $6,000, a fee in the amount of $600 per Board Meeting personally attended, and a fee of $100.00 per Board Meeting attended via telephone. In addition, the Fund will reimburse those Directors for travel and out-of-pocket expenses incurred in connection with Board of Directors meetings. The aggregate remuneration paid to Directors by PGF during the fiscal year ended December 31, 2001 was $68,816. The Fund has an Audit Committee and a Nominating Committee each of which is comprised of all of the non-interested members of the Board of Directors. AUDIT COMMITTEE The members of the Audit Committee of the Board of Directors are Messrs. Lenagh, Strauss, Meese, Wilcox and Rogers. The Audit Committee oversees the Fund's financial reporting process, reviews audit results and recommends annually to the Fund a firm of independent certified public accountants. During the fiscal year ended December 31, 2002, the Audit Committee held two meetings in which all of the members of the Audit Committee attended. -8- NOMINATING COMMITTEE At the Quarterly Meeting of the Board of Directors held on August 2, 2002, the Board of Directors established a Nominating Committee. The members of the Nominating Committee of the Board of Directors are all Independent Directors and are Messrs. Lenagh, Strauss, Meese, Wilcox and Rogers. The Nominating Committee is responsible for seeking and reviewing candidates for consideration as nominees for Trustees as is from time to time considered necessary or appropriate. The Nominating Committee will consider nominees recommended by stockholders of the Fund as long as the stockholders properly submit their recommendations as required under the Fund's By-laws. The Fund's Board of Directors, including the Directors who are not interested persons of any party to the Cornerstone Agreement or its affiliates, approved the Cornerstone Agreement for the Fund on February 9, 2001, with its legal counsel in attendance. In approving the Cornerstone Agreement and determining to submit it to the stockholders of the Fund for their approval, the Board of Directors considered the best interests of the stockholders and took into account factors they deemed relevant. The factors considered by the independent Directors included the nature, quality and scope of the operations and services to be provided by Cornerstone Advisors, while focusing on the prior experience of Cornerstone Advisors' principals with respect to: (i) the continuity of the Fund's portfolio management due to the fact that Mr. Bradshaw will continue to be the person responsible for the investment management of the Fund's portfolio securities, despite the externalization of management; (ii) the structure of closed-end investment companies in general; (iii) management of portfolios of U.S. equity securities; (iv) implementing aggressive policies to eliminate closed-end investment companies' discounts; and (v) implementing policies to cut costs and expenses of closed-end investment companies. Furthermore, the Board of Directors of the Fund considered the opportunity to obtain high quality services at costs that it deemed appropriate and reasonable. The Board of Directors also reflected upon the intention of Cornerstone Advisors to continue to act as the investment manager to Cornerstone Strategic Value Fund, Inc. and The Cornerstone Strategic Return Fund, Inc. (the "CFR"), thereby creating a family of closed-end funds including but not necessarily limited to PGF, CRF and CLM. Lastly, consideration was given to the fact that there exists no arrangement or understanding in connection with the Cornerstone Agreement with respect to the composition of the Board of Directors of the Fund or of Cornerstone Advisors or with respect to the selection or appointment of any person to any office of the Fund or Cornerstone Advisors. -9- CODE OF ETHICS The Fund and Cornerstone Advisers have adopted a written Code of Ethics that are compliant with Rule 17j-1 of the Investment Company Act, which permit personnel covered by the Code of Ethics ("Covered Persons") to invest in securities, including securities that may be purchased or held by the Fund. The Code of Ethics also contains provisions designed to address the conflicts of interest that could arise from personal trading by advisory personnel. The following are some of the requirements under the Fund's and Cornerstone Advisers' Code of Ethics: (1) all Covered Persons must report their personal securities transactions at the end of each quarter; (2) with certain limited exceptions, all Covered Persons must obtain preclearance before executing any personal securities transactions; (3) Covered Persons may not execute personal trades in a security if there are any pending orders in that security by the respective Fund; and (4) Covered Persons may not invest in initial public offerings. The Board of Directors of the Fund reviews the administration of the Code of Ethics at least annually and may impose sanctions for violations of the Code of Ethics. The Codes of Ethics for the Fund and Cornerstone Advisers can be reviewed and copied either on the EDGAR database on the SEC's website at http://www.sec.gov or at the Securities Exchange Commission's Public reference room in Washington, D.C. Information on the operation of the Public Reference Room may by obtained by calling the SEC at (202) 942-8090. CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS Please refer to the Proxy Statement/Prospectus for information on this Item. INVESTMENT MANAGEMENT AND OTHER SERVICES INVESTMENT ADVISER. Cornerstone Advisors, Inc. ("Cornerstone Advisors") is the investment adviser of PGF pursuant to an investment advisory agreement. Cornerstone Advisors, which has its principal office at One West Pack Square, Suite 1650, Asheville, North Carolina 28801, was organized in February of 2001, to provide investment management services to closed-end investment companies and is registered with the SEC under the Investment Company Act. In addition to PGF and CLM, Cornerstone Advisors is the investment adviser to two other closed-end funds, The Cornerstone Strategic Return Fund, Inc. and EIS Fund, Inc. (f/k/a Excelsior Income Shares, Inc.). Mr. Ralph W. Bradshaw, a Director and President of PGF and CLM, serves as each Fund's portfolio manager. Mr. Bradshaw and Mr. Gary A. Bentz, a Director of EIS Fund, Inc., are the sole stockholders of Cornerstone Advisors. Messrs. Bradshaw and Bentz have extensive experience with closed-end investment companies. Mr. Bradshaw, also serves as a Director to The Smallcap Fund, Inc., EIS Fund, Inc. and The Cornerstone Strategic Return Fund, and served as a Vice President of Deep Discount Advisors, Inc. ("Deep Discount") from 1993 to 1999. Mr. Bentz, who currently serves as a Director to EIS Fund, Inc. and is Treasurer and Vice President of PGF, CLM and the two other funds for which Cornerstone Advisors serves as investment adviser, was also affiliated with Deep Discount as its Chief Financial Officer from 1993 to 2000. Messrs. Bradshaw and Bentz no longer possess any ownership interest in Deep Discount nor do they provide any investment advisory services to Deep Discount or its clients. Deep Discount and Ron Olin Investment Management Company ("ROIMC"), both of which jointly filed a Schedule 13G with the Securities and Exchange Commission (the "SEC") on February 15, 2002 as beneficial owners of more than five (5%) percent of the outstanding shares of each Fund, are registered investment advisers which, on behalf of their respective advisory clients, invest in the common stock of closed-end investment companies. There exists no arrangements or understandings among Cornerstone Advisors, Deep Discount, ROIMC or any of their respective stockholders with respect to the Funds. -10- Cornerstone Advisors has sole investment discretion for the Fund's assets under the supervision of the Fund's Board of Directors and in accordance with the Fund's stated policies. Cornerstone Advisors selects investments for the Fund and places purchase and sale orders on behalf of the Fund. Pursuant to the Cornerstone Agreement, Cornerstone Advisors conducts investment research and supervision for the Fund and is responsible for the purchase and sale of investment securities for the Fund's portfolio, subject to the supervision and direction of the Board of Directors. Cornerstone Advisors provides the Fund with investment advice, supervises the Fund's management and investment programs and provides investment advisory facilities and executive and supervisory personnel for managing the investments and effectuating portfolio transactions. Cornerstone Advisors also furnishes, at its own expense, all necessary administrative services, office space, equipment and clerical personnel for servicing the investments of the Fund. In addition, Cornerstone Advisors pays the salaries and fees of all officers of the Fund who are affiliated with Cornerstone Advisors. The Cornerstone Agreement provides that the Fund is responsible for all of its expenses and liabilities, except that Cornerstone Advisors is responsible for the expenses in connection with maintaining a staff within its organization to furnish the above services to the Fund. The Fund pays Cornerstone Advisors monthly an annual fee of one (1.00%) percent of the Fund's average weekly net assets for the investment management and research services provided by Cornerstone Advisors. Additionally, Cornerstone Advisors has voluntarily agreed to limit the Fund's annual operating expenses (excluding interest, taxes, brokerage commissions, expenditures which are capitalized in accordance with generally accepted accounting principles, and other extraordinary expenses not incurred in the ordinary course of the Fund's business) to one and twenty one-hundredths (1.20%) percent (on an annualized basis) of the Fund's average net assets for the fiscal period from July 1, 2002 through December 31, 2002. ADMINISTRATOR. Bear Stearns Funds Management Inc. ("BSFM") serves as the Fund's administrator pursuant to an administrative agreement with each Fund. BSFM is located at 383 Madison Avenue, 23rd Floor, New York, New York 10179. -11- BSFM provides office facilities and personnel adequate to perform the following services for the Fund: 1) oversight of the determination and publication of the Fund's net asset value in accordance with the Fund's policy as adopted from time to time by the Board of Directors; 2) maintenance of the books and records of the Fund as required under the Investment Company Act; 3) preparation of the Fund's U.S. federal, state and local income tax returns; 4) preparation of financial information for each Fund's proxy statements and semi-annual and annual reports to Stockholders; and 5) preparation of certain of the Fund's reports to the SEC. CUSTODIAN. Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey, is the custodian for the Fund's assets. TRANSFER AGENT AND REGISTRAR. American Stock Transfer & Trust Co., 59 Maiden Lane, New York, New York 10038 acts as the transfer agent and registrar of the Fund. PORTFOLIO TRANSACTIONS Decisions to buy and sell securities for the Fund are made by Cornerstone Advisors subject to the overall review of the Fund's Board of Directors. Portfolio securities transactions for the Fund are placed on behalf of the Fund by persons authorized by Cornerstone Advisors. Cornerstone Advisors manages other investment companies and accounts that invest in securities. Although investment decisions for the Fund is made independently from those of the other accounts, investments of the type the Fund may make may also be made on behalf of those other accounts. When the Fund and one or more of those other accounts is prepared to invest in, or desires to dispose of, the same security, available investments or opportunities for each will be allocated in a manner believed by Cornerstone Advisors to be equitable. In some cases, this procedure may adversely affect the price paid or received by the Fund or the size of the position obtained or disposed of by the Fund. Transactions on U.S. and some foreign stock exchanges involve the payment of negotiated brokerage commissions, which may vary among different brokers. The cost of securities purchased from underwriters includes an underwriter's commission or concession, and the prices at which securities are purchased from and sold to dealers in the over-the-counter markets include an undisclosed dealer's mark-up or mark-down. Fixed income securities are generally traded on a "net" basis with dealers acting as principal for their own accounts without a stated commission, although the price of the security will likely include a profit to the dealer. -12- In selecting brokers or dealers to execute portfolio transactions on behalf of the Fund, Cornerstone Advisors will seek the best overall terms available. The Advisory Agreement provides that, in assessing the best overall terms available for any transaction, Cornerstone Advisors will consider the factors it deems relevant, including the breadth of the market in the security, the price of the security, the financial condition and execution capability of the broker or dealer and the reasonableness of the commission, if any, for the specific transaction and on a continuing basis. In addition, the Advisory Agreement authorizes Cornerstone Advisors in selecting brokers or dealers, to execute a particular transaction and in evaluating the best overall terms available, to consider the brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934) provided to the Fund and/or other accounts over which Cornerstone Advisors exercises investment discretion. The fees payable under the Advisory Agreements are not reduced as a result of Cornerstone Advisors receiving such brokerage and research services. The Board of Directors of the Fund will review periodically the commissions paid by that Fund to determine if the commissions paid over representative periods of time were reasonable in relation to the benefits inuring to such Fund. The aggregate amounts paid by PGF in brokerage commissions for the fiscal years ended December 31, 1999, 2000 and 2001 were $___________, $______________ and $___________________, respectively. None of the brokerage commissions paid by PGF were paid to affiliated brokers. DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN PGF operates a Dividend Reinvestment and Cash Purchase Plan (the "Program"), sponsored and administered by American Stock Transfer & Trust Co. (the "Agent"), pursuant to which Fund dividends and distributions, net of any applicable U.S. withholding tax, are reinvested in shares of the Fund. American Stock Transfer & Trust Co., serves as the Program Administrator for the stockholders in administering the Program. Stockholders who have shares registered directly in their own names automatically participate in the Fund's Program, unless and until an election is made to withdraw from the Program on behalf of such participating stockholder. Stockholders who do not wish to have distributions automatically reinvested should so notify the Agent at 59 Maiden Lane, New York, New York 10038. Under the Program, the Fund's respective dividends and other distributions to stockholders are reinvested in full and fractional shares as described below. When the Fund declares an income dividend or a capital gain or other distribution (each, a "Dividend" and collectively, "Dividends"), the Agent, on the stockholders behalf, will (i) receive additional authorized shares from the Fund either newly issued or repurchased from stockholders by the Fund and held as treasury stock ("Newly Issued Shares") or, (ii) at the sole discretion of the Board of Directors, be authorized to purchase outstanding shares on the open market, on the NYSE or elsewhere, with cash allocated to it by the Fund ("Open Market Purchases"). -13- Shares acquired by the Agent in Open Market Purchases will be allocated to the reinvesting stockholders based on the average cost of such Open Market Purchases. Alternatively, the Agent will allocate Newly Issued Shares to the reinvesting stockholders at a price equal to the average closing price of the Fund over the five trading days preceding the payment date of such dividend. Registered stockholders who acquire their shares through Open Market Purchases and who do not wish to have their Dividends automatically reinvested should so notify the Fund in writing. If a stockholder has not elected to receive cash Dividends and the Agent does not receive notice of an election to receive cash Dividends prior to the record date of any Dividend, the stockholder will automatically receive such Dividends in additional shares. Participants in the Program may withdraw from the Program by providing written notice to the Agent at least 30 days prior to the applicable Dividend payment date. When a Participant withdraws from the Program, or upon termination of the Program as provided below, certificates for whole shares credited to his/her account under the Program will, upon request, be issued. Whether or not a participant requests that certificates for whole shares by issued, a cash payment will be made for any fraction of a share credited to such account. The Agent will maintain all stockholder accounts in the Program and furnish written confirmations of all transactions in the accounts, including information needed by stockholders for personal and tax records. The Agent will hold shares in the account of each Program participant in non-certified form in the name of the participant, and each stockholder's proxy will include those shares purchased pursuant to the Program. Each participant, nevertheless, has the right to receive certificates for whole shares owned. The Agent will distribute all proxy solicitation materials to participating stockholders. In the case of stockholders, such as banks, brokers or nominees, that hold shares for others who are beneficial owners participating in the Program, the Agent will administer the Program on the basis of the number of shares certified from time to time by the record stockholder as representing the total amount of shares registered in the stockholder's name and held for the account of beneficial owners participating in the Program. All correspondence concerning the Program should be directed to the Agent at 59 Maiden Lane, New York, New York 10038. TAXATION The following is a summary of certain material United States federal income tax considerations regarding the purchase, ownership and disposition of shares in the Fund. Each prospective shareholder is urged to consult his or her own tax adviser with respect to the specific federal, state, local and foreign tax consequences of investing in the Fund. The summary is based on the laws in effect on the date of this SAI, which are subject to change. -14- The Fund has qualified and elected to be treated as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"), and intends to continue to so qualify, which requires compliance with certain requirements concerning the sources of its income, diversification of its assets, and the amount and timing of its distributions to shareholders. Such qualification does not involve supervision of management or investment practices or policies by any government agency or bureau. By so qualifying, the Fund will not be subject to federal income or excise tax on its net investment income or net capital gain which are distributed to shareholders in accordance with the applicable timing requirements. Net investment income and net capital gain of the Fund will be computed in accordance with Section 852 of the Code. The Fund intends to distribute all of its net investment income, any excess of net short-term capital gains over net long-term capital losses, and any excess of net long-term capital gains over net short-term capital losses in accordance with the timing requirements imposed by the Code and therefore will not be required to pay any federal income or excise taxes. Distributions of net investment income and net capital gain will be made no later than December 31 of each year. Both types of distributions will be in shares of the Fund unless a shareholder elects to receive cash. If the Fund fails to qualify as a regulated investment company under Subchapter M in any fiscal year, it will be treated as a corporation for federal income tax purposes. As such the Fund would be required to pay income taxes on its net investment income and net realized capital gains, if any, at the rates generally applicable to corporations. Shareholders of the a Fund would not be liable for income tax on the Fund's net investment income or net realized capital gains in their individual capacities. Distributions to shareholders, whether from the Fund's net investment income or net realized capital gains, would be treated as taxable dividends to the extent of current or accumulated earnings and profits of the Fund. The Fund is subject to a 4% nondeductible excise tax on certain undistributed amounts of ordinary income and capital gain under a prescribed formula contained in Section 4982 of the Code. The formula requires payment to shareholders during a calendar year of distributions representing at least 98% of the Fund's ordinary income for the calendar year and at least 98% of its capital gain net income (i.e., the excess of its capital gains over capital losses) realized during the one-year period ending October 31 during such year plus 100% of any income that was neither distributed nor taxed to the Fund during the preceding calendar year. Under ordinary circumstances, the Fund expects to time its distributions so as to avoid liability for this tax. Net investment income is made up of dividends and interest less expenses. Net capital gain for a fiscal year is computed by taking into account any capital loss carryforward of the Fund. -15- The following discussion of tax consequences is for the general information of shareholders that are subject to tax. Shareholders that are IRAs or other qualified retirement plans are exempt from income taxation under the Code. Distributions of taxable net investment income and the excess of net short-term capital gain over net long-term capital loss are taxable to shareholders as ordinary income. Distributions of net capital gain ("capital gain dividends") are taxable to shareholders as long-term capital gain, regardless of the length of time the shares of the Fund have been held by such shareholders. Distributions of taxable net investment income and net capital gain will be taxable as described above, whether received in shares or in cash. Shareholders electing to receive distributions in the form of additional shares will have a cost basis for federal income tax purposes in each share so received equal to the net asset value of a share on the reinvestment date. All distributions of taxable net investment income and net capital gain, whether received in shares or in cash, must be reported by each taxable shareholder on his or her federal income tax return. Dividends or distributions declared in October, November or December as of a record date in such a month, if any, will be deemed to have been received by shareholders on December 31, if paid during January of the following year. Redemptions of shares may result in tax consequences (gain or loss) to the shareholder and are also subject to these reporting requirements. Under the Code, the Fund will be required to report to the Internal Revenue Service all distributions of taxable income and capital gains, except in the case of certain exempt shareholders. Under the backup withholding provisions of Section 3406 of the Code, distributions of taxable net investment income and net capital gain may be subject to withholding of federal income tax at the rate of 30.5% in the case of non-exempt shareholders who fail to furnish the investment company with their taxpayer identification numbers and with required certifications regarding their status under the federal income tax law, or if the Fund is notified by the IRS or a broker that withholding is required due to an incorrect TIN or a previous failure to report taxable interest or dividends. If the withholding provisions are applicable, any such distributions and proceeds, whether taken in cash or reinvested in additional shares, will be reduced by the amounts required to be withheld. Shareholders of the Fund may be subject to state and local taxes on distributions received from the Fund. A brief explanation of the form and character of the distribution accompany each distribution. In January of each year the Fund issues to each shareholder a statement of the federal income tax status of all distributions. -16- THE FOREGOING IS ONLY A SUMMARY OF CERTAIN MATERIAL TAX CONSEQUENCES AFFECTING THE FUNDS AND THEIR SHAREHOLDERS. SHAREHOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN EITHER FUND. FINANCIAL STATEMENTS (a) The Financial Statements required under this Item are incorporated by reference herein from the 1. Progressive Return Fund, Inc.'s Annual Report for the period ended December 31, 2000, filed with the Securities and Exchange Commission on March 1, 2001 (File No. 811-5891). 2. Progressive Return Fund, Inc.'s Annual Report for the period ended December 31, 2001, as filed with the Securities and Exchange Commission on March 6, 2002 (File No. 811-5891) 3. Progressive Return Fund, Inc.'s Semi-Annual Report for the period ended June 30, 2002, as filed with the Securities and Exchange Commission on August __, 2002 (File No. 811-5891). 4. Cornerstone Strategic Value Fund, Inc. Annual Report for the period ended December 31, 2000, filed with the Securities and Exchange Commission on March 1, 2001 (File No. 811-5150). 5. Cornerstone Strategic Value Fund, Inc. Annual Report for the period ended December 31, 2001, filed with the Securities and Exchange Commission on March 6, 2002 (File No. 811-5150). 6. Cornerstone Strategic Value Fund, Inc. Semi-Annual Report for the period ended June 30, 2002, filed with the Securities and Exchange Commission on August __ (File No. 811-5150). (b) Pro Forma Financial Information The following table represents the pro forma financial information based upon the June 30, 2002 unaudited financial statements that are included in each Fund's Semi-Annual Report to Stockholders.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001(UNAUDITED) PGF ACQUIRING FUND ACQUIRING FUND CLM ADJUSTMENTS PRO FORMA -------------- --- ----------- --------- INVESTMENT INCOME Income: Dividends 642,453 402,428 -- $ 1,044,881 Interest 132,919 30,952 -- 163,871 Less: Foreign taxes witheld (3,483) (2,087) -- (5,570) ---------- ----------- ------- ----------- Total Investment Income 771,889 431,293 -- 1,203,182 ---------- ----------- ------- ----------- Expenses: Investment advisory fees 331,733 381,800 158,269 (c) 871,802 (c) Audit fees 35,900 39,283 (62,183)(d) 13,000 Legal fees 86,660 93,887 (97,080)(d) 83,467 Administration fees 58,976 61,354 (33,150)(e) 87,180 Custodian fees 30,124 21,647 (39,709)(f) 12,062 Printing 54,029 58,270 (67,299)(d) 45,000 Accounting fees 43,425 20,154 (31,446)(g) 32,133 Directors' fees 86,809 70,047 (105,856)(d) 51,000 Transfer agent fees 25,015 7,880 (8,895)(d) 24,000 NYSE listing fees 23,873 25,000 (23,873)(d) 25,000 Insurance 15,558 9,187 (4,745)(d) 20,000 Other 17,061 15,397 (19,958)(d) 12,500 ---------- ----------- ------- ----------- Total Expenses 809,163 803,906 (335,925) 1,277,144 ---------- ----------- ------- ----------- Less: Fee paid indirectly (42,694) (75,381) (118,075) Less: Fee waivers (1,966) (73,434) -- (75,400) ---------- ----------- ------- ----------- Net Expenses 764,503 655,091 (335,925) 1,083,669 ---------- ----------- ------- ----------- Net Investment Income 7,386 (223,798) 335,925 119,513 ---------- ----------- ------- ----------- NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS AND FOREIGN CURRENCY RELATED TRANSACTION Net realized loss from Investments (4,384,728) (12,881,037) (17,265,765) Net change in unrealized appreciation/(depreciation) in value of investments and translation of other assets and liabilities denominated in foreign currencies (2,439,912) 2,927,931 488,019 ---------- ----------- ------- ----------- Net realized and unrealized gain/(loss) on investments and foreign currency related transaction (6,824,640) (9,953,106) (16,777,746) ---------- ----------- ------- ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS (6,817,254) (10,176,904) 335,925 (16,658,233) ---------- ----------- ------- -----------
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STATEMENT OF ASSETS AND LIABILITIES AT DECEMBER 31, 2001 (UNAUDITED) PGF ACQUIRING FUND CLM ACQUIRING FUND PRO FORMA ASSETS COST VALUE COST VALUE ADJUSTMENTS COST VALUE - ------ ---- ----- ---- ----- ----------- ---- ----- Investments, at value 48,089,664 46,170,268 30,367,906 35,357,166 81,527,434 Cash collateral received for securities loaned 755,986 138,721 894,707 Receivables: Dividends 44,217 27,773 71,990 Interest 778 307 1,085 Prepaid expenses and other assets 1,211 2,955 (2,955) (a) 1,21 ----------- ----------- ---------- Total Assets 46,972,460 35,526,922 82,496,427 ----------- ----------- ---------- LIABILITIES Payables: Disrtibution to shareholders 4,228,516 - 4,228,516 Upon return of securities loaned 755,986 138,721 894,707 Investment advisory fee 48,601 24,718 73,319 Capital Shares repurchased - 12,824 12,824 Other accrued expenses 91,915 94,607 186,522 ----------- ----------- ---------- Total Liabilities 5,125,018 270,870 5,395,888 ----------- ----------- ---------- Net Assets 41,847,442 35,256,052 77,100,539 ----------- ----------- ---------- Net Assets Consist Of: Capital stock, $0.001 par value; 4,228,516 shares issued and outstanding for PGF (100,000,000 shares authorized) and $0.01 par value; 3,832,560 shares issued and outstanding for CLM (25,000,000 shares authorized) 4,229 38,326 42,555 Paid-in-capital 62,101,955 57,277,113 (26,579,917)(b) 92,799,151 Cost of 203,900 and 2,177,440 shares repurchased, respectively (1,947,040) (26,579,917) 26,579,917 (b) (1,947,040) Distribution in excess of net investment income (4,221,130) - (2,955)(a) (4,224,085) Accumulated net realized loss on investments (12,171,176) (468,730) (12,639,906) Net unrealized appreciation in value of investments and translation of other assets and liabilities denominated in foreign currencies (1,919,396) 4,989,260 3,069,864 ----------- ----------- ---------- 41,847,442 35,256,052 77,100,539 ----------- ----------- ----------
PROGRESSIVE RETURN FUND, INC. THE CORNERSTONE STRATEGIC VALUE, INC. NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Combination The unaudited Pro Forma Condensed Portfolio of Investments, Pro Forma Condensed Statement of Assets and Liabilities and Pro Forma Condensed Statement of Operations give effect to the proposed merger of Progressive Return Fund, Inc.(PGF) into The Cornerstone Strategic Value Fund, Inc. ("CLM"). The proposed merger will be accounted for by the method of accounting for tax-free mergers of investment companies (sometimes referred to as the pooling-of-interest basis). The Merger provides for the transfer of all or substantially all of the assets of CLM to PGF in exchange for PGF common shares, the distribution of such PGF common shares to common shareholders of CLM and the subsequent liquidation of CLM. Each share of common stock of CLM will convert into an equivalent dollar amount of full shares of common stock of EIS based on the net asset value per share of each Fund. The pro forma combined statements should be read in conjunction with the historical financial statements of the constituent Fund and the notes thereto incorporated by reference in the Registration Statement filed on Form N-14. PGF and CLM are both closed-end, non-diversified management investment companies registered under the Investment Company Act of 1940, as amended. Pro Forma Adjustments: The Pro Forma adjustments below reflect the impact of the merger between PGF and CLM. (a) To remove certain prepaid expenses associated with CLM, in the statement of assets and liabilities, which will not be assumed by PGF. (b) In connection with CLM's intention to merge with PGF; CLM reclass its treasury shares held to paid-in capital. (c) Adjustment based on contractual agreement with Investment Manager. (d) Assumes the elimination of duplicative charges resulting from the combination and reflects management's estimates of combined pro forma operations. (e) Adjustment based on the contractual agreement with the Administrator for the combined Fund. (f) Adjustment based on the contractual agreement with the custodian for the combined Fund. (g) Adjustment based on the contractual agreement with the Accounting fees for the combined Fund. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies, which are consistently followed by each of PGF and CLM in the preparation of its financial statements. MANAGEMENT ESTIMATES: The preparation of financial statements in accordance with ccounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that may affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION: Investments are stated at value in the accompanying financial statements. All equity securities are valued at the closing price on the exchange or market on which the security is primary traded ("Primary Market"). If the security did not trade on the Primary Market, it shall be valued at the closing price on another exchange where it trades. If there is no such sale prices, the value shall be the most recent bid, and if there is no bid, the security shall be valued at the most recent asked. If no pricing service is available and there are more than two dealers, the value shall be the mean of the highest bid and lowest ask. If there is only one dealer, then the value shall be the mean if bid and ask are available, otherwise the value shall be the bid. All other securities and assets are valued as determined in good faith by the Board of Directors. Short-term investments having a maturity of 60 days or less are valued on the basis of amortized cost. The Board of Directors has established general guidelines for calculating fair value of not readily marketable securities. The net asset value per share of each Fund is calculated weekly and on the last business day of the month with the exception of those days on which the New York Stock Exchange is closed. INVESTMENT TRANSACTIONS AND INVESTMENT INCOME: Investment transactions are accounted for on the trade date. The cost of investments sold is determined by use of the specific identification method for both financial reporting and income tax purposes. Interest income is recorded on an accrual basis; dividend income is recorded on the ex-dividend date. TAXES: No provision is made for U.S. federal income or excise taxes as it is each Fund's intention to continue to qualify as a regulated investment company and to make the requisite distributions to its shareholders which will be sufficient to relieve it from all or substantially all U.S. federal income and excise taxes. DISTRIBUTIONS OF INCOME AND GAINS: Each Fund distributes at least annually to shareholders, substantially all of its net investment income and net realized short-term capital gains, if any. Each Fund determines annually whether to distribute any net realized long-term capital gains in excess of net short-term capital losses, including capital loss carryovers, if any. An additional distribution may be made to the extent necessary to avoid the payment of a 4% U.S. federal excise tax. Dividends and distributions to shareholders are recorded by each Fund on the ex-dividend date. . The board of Directors of each Fund may, if it it determined to be in the best interest of each Fund and its shareholders, time to time authorize and declare distribution that may be substantially characterized as a return of capital. The character of distributions made during the year from net investment income or net realized gains may differ from their ultimate characterization for U.S. federal income tax purposes due to U.S. generally accepted accounting principles/tax differences in the character of income and expense recognition. OTHER: Securities denominated in currencies other than U.S. dollars are subject to changes in value due to fluctuations in exchange rates. PART C OTHER INFORMATION ITEM 15. INDEMNIFICATION A policy of insurance covering Cornerstone Advisors, Inc., its affiliates, and all of the registered investment companies advised by Cornerstone Advisors insures the Registrant's directors and officers and others against liability arising by reason of an alleged breach of duty caused by any negligent act, error or accidental omission in the scope of their duties. ITEM 16. EXHIBITS. (1) Copy of the Articles of Incorporation of PGF as now in effect (2) Amended and Restated By-Laws as of February 13, 2002 of the Registrant (3) Not Applicable (4) Copy of Agreement and Plan of Reorganization (included as Exhibit A to the Proxy Statement/Prospectus, which is part of the Registration Statement on Form N-14). (5) Not Applicable (6) Copy of the Investment Management Agreement dated as of April 19, 2001 between Cornerstone Advisors, Inc. and PGF - incorporated herein by reference to Exhibit 4 to PGF's Proxy Statement for the Annual Meeting of Stockholders held on April 19, 2001 on Schedule 14A as filed with the Commission on March 7, 2001. (7) Not Applicable (8) Not Applicable (9) Custody Agreement - (10) Not Applicable (11) Opinion and consent of Counsel regarding legality of securities being registered. (12) Opinion and consent of Counsel regarding certain tax matters and consequences to shareholders. (13) Not Applicable (14) Consent of Independent Auditors (15) Not Applicable (16) Not Applicable (17) Not Applicable C-1 ITEM 17. UNDERTAKINGS. The undersigned registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is a part of this registration statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c) of the Securities Act [17 CFR 230.145c], the reoffering prospectus will contain the information called for by the applicable registration form for reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. The undersigned registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as part of an amendment to the registration statement and will not be used until the amendment is effective, and that, in determining any liability under the 1933 Act, each post-effective amendment shall be deemed to be a new registration statement for the securities offered therein, and the offering of securities at that time shall be deemed to be the initial bona fide offering of them. SIGNATURES As required by the Securities Act of 1933, this registration statement has been signed on behalf of the registrant, in the City of New York and the State of New York, on the 2nd day of August, 2002. PROGRESSIVE RETURN FUND, INC. By: /S/ RALPH W. BRADSHAW ---------------------------------- Name: Ralph Bradshaw Title: President As required by the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated: /S/ ANDREW STRAUSS /S/ THOMAS LENAGH - ------------------------------- ----------------------------- Andrew A. Strauss, Director Thomas H. Lenagh, Director /S/ SCOTT ROGERS /S/ EDWIN MEESE - ------------------------------- ----------------------------- Scott B. Rogers, Director Edwin Meese III, Director /S/ RALPH W. BRADSHAW /S/ GLENN W. WILCOX, SR. - ------------------------------- ----------------------------- Ralph W. Bradshaw, Director Glenn W. Wilcox, Sr., Director C-2 EXHIBIT A MERGER AGREEMENT AND PLAN OF REORGANIZATION THIS MERGER AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of this ____ day of October, 2002, between Cornerstone Strategic Value Fund, Inc. (the "Target Fund" or "CLM"), a Maryland corporation and a registered investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), and Progressive Return Fund, Inc. (the "Acquiring Fund" or "PGF"), a Maryland corporation and a registered investment company under the 1940 Act. This agreement contemplates a tax-free merger transaction which qualifies for federal income tax purposes as a reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, in consideration of the covenants and agreements hereinafter set forth, the Parties hereto agree as follows: 1. DEFINITIONS Certain capitalized terms used in this Agreement are specifically defined herein. 2. BASIC TRANSACTION 2.1. THE MERGER. On and subject to the terms and conditions of this Agreement, the Target Fund will merge with and into the Acquiring Fund (the "Merger") at the Effective Date (as defined in Section 2.3 below) in accordance with the Maryland General Corporation Law ("MGCL"). PGF shall be the surviving investment company. CLM shall cease to exist as a separate investment company. Each share of CLM will be converted into an equivalent dollar amount (to the nearest one ten-thousandth of one cent) of shares of Common Stock of PGF, with a par value of $0.001 per share, based on the net asset value per share of each of the Parties at 4:00 p.m. Eastern Time on the business day prior to the Effective Date (the "Valuation Time"). Fractional shares of PGF will be issued to CLM shareholders. The Effective Date and the business day prior to it must each be a day on which the NYSE is open for trading (a "Business Day"). From and after the Effective Date, the Acquiring Company shall possess all of the properties, assets, rights, privileges, powers and shall be subject to all of the restrictions, liabilities, obligations, disabilities and duties of CLM, all as provided under Maryland law. 2.2. ACTIONS AT CLOSING. At the closing of the transactions contemplated by this Agreement (the "Closing") on the date thereof (the "Closing Date"), (i) CLM will deliver to PGF the various certificates and documents referred to in Article 7 below, (ii) PGF will deliver to CLM the various certificates and documents referred to in Article 8 below, and (iii) CLM and PGF will file jointly with the State Department of Assessments and Taxation of Maryland (the "Department") articles of merger (the "Articles of Merger") and make all other filings or recordings required by Maryland law in connection with the Merger. A-1 2.3. EFFECT OF MERGER. Subject to the requisite approvals of the shareholders of the Parties, and to the other terms and conditions described herein, the Merger shall become effective at such time as the Articles of Merger are accepted for record by the Department or at such later time as is specified in the Articles of Merger (the "Effective Date") and the separate corporate existence of CLM shall cease. As promptly as practicable after the Merger, CLM shall delist its shares from the NYSE and its registration under the 1940 Act shall be terminated. Any reporting responsibility of CLM is, and shall remain, the responsibility of CLM up to and including the Effective Date. 3. REPRESENTATIONS AND WARRANTIES OF CLM CLM represents and warrants to PGF that the statements contained in this Article 3 are correct and complete in all material respects as of the execution of this Agreement on the date hereof. CLM represents and warrants to, and agrees with, PGF that: 3.1. ORGANIZATION. CLM is a corporation duly organized, validly existing under the laws of the State of Maryland and is in good standing with the Department, and has the power to own all of its assets and to carry on its business as it is now being conducted and to carry out this Agreement. 3.2. REGISTRATIONS AND QUALIFICATIONS. CLM is duly registered under the 1940 Act as a closed-end, diversified management investment company (File No. 005-39655), and such registration has not been revoked or rescinded and is in full force and effect. CLM has elected and qualified for the special tax treatment afforded regulated investment companies ("RIC") under Sections 851-855 of the Code at all times since its inception. CLM is qualified as a foreign corporation in every jurisdiction where required, except to the extent that failure to so qualify would not have a material adverse effect on CLM. 3.3. REGULATORY CONSENTS AND APPROVALS. No consent, approval, authorization, or order of any court or governmental authority is required for the consummation by CLM of the transactions contemplated herein, except (i) such as have been obtained or applied for under the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934 (the "1934 Act"), and the 1940 Act, (ii) such as may be required by state securities laws and (iii) such as may be required under Maryland law for the acceptance for record of the Articles of Merger by the Department. 3.4. NONCONTRAVENTION. CLM is not, and the execution, delivery and performance of this Agreement by CLM will not result in, a violation of the laws of the State of Maryland or of the Articles of Incorporation or the By-laws of CLM, or of any material agreement, indenture, instrument, contract, lease or other undertaking to which CLM is a party or by which it is bound, and the execution, delivery and performance of this Agreement by CLM will not result in the acceleration of any obligation, or the imposition of any penalty, under any agreement, indenture, instrument, contract, lease, judgment or decree to which CLM is a party or by which it is bound. 3.5. FINANCIAL STATEMENTS. PGF has been furnished with CLM's Annual Report of Stockholders, as of December 31, 2001, said financial statements having been examined by PricewaterhouseCoopers LLP, independent public auditors. These financial statements are in accordance with generally accepted accounting principles applied on a consistent basis ("GAAP") and present fairly, in all material respects, the financial position of CLM as of such date in accordance with GAAP, and there are no known contingent liabilities of CLM required to be reflected on a balance sheet (including the notes thereto) in accordance with GAAP as of such date not disclosed therein. PGF has also been furnished with CLM's Semi-Annual Report to Stockholders dated as of June 30, 2001. This financial statement and the schedule of investments are in accordance with GAAP and present fairly, in all material respects, the financial position of CLM as of such date in accordance with GAAP, and there are no known contingent liabilities of CLM required to be reflected on a balance sheet (including the notes thereto) in accordance with GAAP as of such date not disclosed therein. A-2 3.6. This Section has been left intentionally Blank. 3.7. QUALIFICATION, CORPORATE POWER, AUTHORIZATION OF TRANSACTION. CLM has full power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement has been duly authorized by all necessary action of its Board of Directors, and, subject to shareholder approval, this Agreement constitutes a valid and binding contract enforceable in accordance with its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors' rights generally and court decisions with respect thereto. 3.8. LEGAL COMPLIANCE. No material litigation or administrative proceeding or investigation of or before any court or governmental body is presently pending (in which service of process has been received) or to its knowledge threatened against CLM or any properties or assets held by it. CLM knows of no facts which might form the basis for the institution of such proceedings which would materially and adversely affect its business 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. 3.9. MATERIAL CONTRACTS. There are no material contracts outstanding to which CLM is a party that have not been disclosed in the N-14 Registration Statement (as defined in Section 3.13 below) or will not be otherwise disclosed to PGF prior to the Effective Date. 3.10. UNDISCLOSED LIABILITIES. There has not been any material adverse change in CLM's financial condition, assets, liabilities or business and CLM has no known liabilities of a material amount, contingent or otherwise, required to be disclosed in a balance sheet in accordance with GAAP other than those shown on CLM's statements of assets, liabilities and capital referred to above, those incurred in the ordinary course of its business as an investment company, and those incurred in connection with the Merger. Prior to the Effective Date, CLM will advise PGF in writing of all known liabilities, contingent or otherwise, whether or not incurred in the ordinary course of business, existing or accrued. For purposes of this Section 3.10, a decline in net asset value per share of CLM due to declines in market values of securities in CLM's portfolio or the discharge of CLM liabilities will not constitute a material adverse change. 3.11. TAX FILINGS. All federal and other tax returns and information reports of CLM required by law to have been filed 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 CLM's knowledge, no such return is currently under audit and no assessment has been asserted with respect to such returns. All tax liabilities of CLM have been adequately provided for on its books, and no tax deficiency or liability of CLM has been asserted and no question with respect thereto has been raised by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid, up to and including the taxable year in which the Effective Date occurs. 3.12. QUALIFICATION UNDER SUBCHAPTER M. For each taxable year of its operation (including the taxable year ending on the Effective Date), CLM has met the requirements of Subchapter M of the Code for qualification as a RIC and has elected to be treated as such, has been eligible to and has computed its federal income tax under Section 852 of the Code, and will have distributed substantially all of its investment company taxable income and net realized capital gain (as defined in the Code) that has accrued through the Effective Date. A-3 3.13. FORM N-14.The registration statement to be filed by PGF on Form N-14 relating to PGF common stock to be issued pursuant to this Agreement, and any supplement or amendment thereto or to the documents therein, as amended (the "N-14 Registration Statement"), on the effective date of the N-14 Registration Statement, at the time of the shareholders' meetings referred to in Article 6 of this Agreement and at the Effective Date, insofar as it relates to CLM (i) shall have complied or will 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 and (ii) did not or will not contain 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 not misleading; and the prospectus included therein did not or will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this Section 3.13 shall only apply to statements in, or omissions from, the N-14 Registration Statement made in reliance upon and in conformity with information furnished by PGF for use in the N-14 Registration Statement. 3.14. CAPITALIZATION. ---------------- (a) All issued and outstanding shares of CLM (i) have been offered and sold in compliance in all material respects with applicable registration requirements of the 1933 Act and state securities laws, (ii) are, and on the Effective Date will be, duly and validly issued and outstanding, fully paid and non-assessable, and (iii) will be held at the time of the Closing by the persons and in the amounts set forth in the records of the transfer agent as provided in Section 6.7. CLM does not have outstanding any options, warrants or other rights to subscribe for or purchase any of CLM shares, nor is there outstanding any security convertible into, or exchangeable for, any of CLM shares. (b) CLM is authorized to issue 25,000,000 shares of stock, par value $0.01 per share, all of which shares are classified as common stock and each outstanding share of which is fully paid, non-assessable and has full voting rights. 3.15. BOOKS AND RECORDS. The books and records of CLM made available to PGF are substantially true and correct and contain no material misstatements or omissions with respect to the operations of CLM. 4. REPRESENTATIONS AND WARRANTIES OF PGF PGF represents and warrants to CLM that the statements contained in this Article 4 are correct and complete in all material respects as of the execution of this Agreement on the date hereof. PGF represents and warrants to, and agrees with, CLM that: 4.1. ORGANIZATION. PGF is a corporation duly organized, validly existing under the laws of the State of Maryland and is in good standing with the Department, and has the power to own all of its assets and to carry on its business as it is now being conducted and to carry out this Agreement. 4.2. REGISTRATIONS AND QUALIFICATIONS. PGF is duly registered under the 1940 Act as a closed-end, diversified management investment company (File No. 005-40528) and such registration has not been revoked or rescinded and is in full force and effect. PGF has elected and qualified for the special tax treatment afforded RICs under Sections 851-855 of the Code at all times since its inception. PGF is qualified as a foreign corporation in every jurisdiction where required, except to the extent that failure to so qualify would not have a material adverse effect on PGF. A-4 4.3. REGULATORY CONSENTS AND APPROVALS. No consent, approval, authorization, or order of any court or governmental authority is required for the consummation by PGF of the transactions contemplated herein, except (i) such as have been obtained or applied for under the 1933 Act, the 1934 Act and the 1940 Act, (ii) such as may be required by state securities laws and (iii) such as may be required under Maryland law for the acceptance for record of the Articles of Merger by the Department. 4.4. NONCONTRAVENTION. PGF is not, and the execution, delivery and performance of this Agreement by PGF will not result, in violation of the laws of the State of Maryland or of the Articles of Incorporation or the By-laws of PGF, or of any material agreement, indenture, instrument, contract, lease or other undertaking to which PGF is a party or by which it is bound, and the execution, delivery and performance of this Agreement by PGF will not result in the acceleration of any obligation, or the imposition of any penalty, under any agreement, indenture, instrument, contract, lease, judgment or decree to which PGF is a party or by which it is bound. 4.5. FINANCIAL STATEMENTS. CLM has been furnished with PGF's Annual Report to Stockholders as of December 31, 2002, said financial statements having been examined by PricewaterhouseCoopers LLP, independent public auditors. These financial statements are in accordance with GAAP and present fairly, in all material respects, the financial position of PGF as of such date in accordance with GAAP, and there are no known contingent liabilities of PGF required to be reflected on a balance sheet (including the notes thereto) in accordance with GAAP as of such date not disclosed therein. CLM has been furnished with PGF's Semi-Annual Report to Stockholders dated as of June 30, 2002. This financial statement and schedule of investments are in accordance with GAAP and present fairly, in all material respects the financial position of PGF as of such date in accordance with GAAP, and there are no known contingent liabilities of PGF required to be reflected on a balance sheet (including the notes thereto) in accordance with GAAP as of such date not disclosed therein. 4.6. This Section has been intentionally left blank. 4.7. QUALIFICATION, CORPORATE POWER, AUTHORIZATION OF TRANSACTION. PGF has full power and authority to enter into and perform its obligations under this Agreement. The execution, delivery and performance of this Agreement has been duly authorized by all necessary action of its Board of Directors, and, subject to shareholder approval, this Agreement constitutes a valid and binding contract enforceable in accordance with its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors' rights generally and court decisions with respect thereto. 4.8. LEGAL COMPLIANCE. No material litigation or administrative proceeding or investigation of or before any court or governmental body is presently pending or to its knowledge threatened against PGF or any properties or assets held by it. PGF knows of no facts which might form the basis for the institution of such proceedings which would materially and adversely affect its business 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. A-5 4.9. MATERIAL CONTRACTS. There are no material contracts outstanding to which PGF is a party that have not been disclosed in the N-14 Registration Statement or will not be otherwise disclosed to CLM prior to the Effective Date. 4.10. UNDISCLOSED LIABILITIES. Since entering into this Agreement, there has not been any material adverse change in PGF's financial condition, assets, liabilities, or business and PGF has no known liabilities of a material amount, contingent or otherwise, required to be disclosed in a balance sheet with GAAP other than those shown on PGF's statements of assets, liabilities and capital referred to above, those incurred in the ordinary course of its business as an investment company since 1989, and those incurred in connection with the Merger. Prior to the Effective Date, PGF will advise CLM in writing of all known liabilities, contingent or otherwise, whether or not incurred in the ordinary course of business, existing or accrued. For purposes of this Section 4.10, a decline in net asset value per share of PGF due to declines in market values of securities in PGF's portfolio or the discharge of PGF liabilities will not constitute a material adverse change. 4.11. TAX FILINGS. All federal and other tax returns and information reports of PGF required by law to have been filed 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 PGF's knowledge, no such return is currently under audit and no assessment has been asserted with respect to such returns. All tax liabilities of PGF have been adequately provided for on its books, and no tax deficiency or liability of PGF has been asserted and no question with respect thereto has been raised by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid, up to and including the taxable year in which the Effective Date occurs. 4.12. QUALIFICATION UNDER SUBCHAPTER M. For each taxable year of its operation, PGF has met the requirements of Subchapter M of the Code for qualification as a RIC and has elected to be treated as such, has been eligible to and has computed its federal income tax under Section 852 of the Code, and will have distributed substantially all of its investment company taxable income and net realized capital gain (as defined in the Code) that has accrued through the Effective Date. 4.13. FORM N-14.The N-14 Registration Statement, on the effective date of the N-14 Registration Statement, at the time of the shareholders' meetings referred to in Section 6 of this Agreement and at the Effective Date, insofar as it relates to PGF (i) shall have complied or will 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 and (ii) did not or will not contain 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 not misleading; and the prospectus included therein did not or will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this Section 4.13 shall not apply to statements in, or omissions from, the N-14 Registration Statement made in reliance upon and in conformity with information furnished by CLM for use in the N-14 Registration Statement. 4.14. CAPITALIZATION. ---------------- (a) All issued and outstanding shares of PGF (i) have been offered and sold in compliance in all material respects with applicable registration requirements of the 1933 Act and state securities laws, (ii) are, and on the Effective Date will be, duly and validly issued and outstanding, fully paid and non-assessable, and (iii) will be held at the time of the Closing by the persons and in the amounts set forth in the records of the transfer agent. PGF does not have outstanding any options, warrants or other rights to subscribe for or purchase any of PGF shares, nor is there outstanding any security convertible into, or exchangeable for, any of PGF shares. A-6 (b) PGF is authorized to issue 100,000,000 shares of stock, par value $0.001 per share, all of which shares are classified as common stock and each outstanding share of which is fully paid, non-assessable and has full voting rights. 4.15. ISSUANCE OF STOCK. ------------------- (a) The offer and sale of the shares to be issued pursuant to this Agreement will be in compliance with all applicable federal and state securities laws. (b) At or prior to the Effective Date, PGF will have obtained any and all regulatory, director and shareholder approvals necessary to issue PGF common stock. 4.16. BOOKS AND RECORDS. The books and records of PGF made available to CLM are substantially true and correct and contain no material misstatements or omissions with respect to the operations of PGF. 5. CONVERSION TO PGF COMMON STOCK 5.1. CONVERSION. ------------ (a) Subject to the requisite approval of the shareholders of the parties, and the other terms and conditions contained herein, at the Effective Date, each share of common stock of CLM will be converted into an equivalent dollar amount (to the nearest one ten-thousandth of one cent) of shares of PGF common stock, computed based on the net asset value per share of each of the parties at the Valuation Time. (b) Fractional shares of PGF will be issued to CLM shareholders. 5.2. COMPUTATION OF NET ASSET VALUE. The net asset value per share of the Parties shall be determined as of the Valuation Time, and no formula will be used to adjust the net asset value so determined of either of the parties to take into account differences in realized and unrealized gains and losses. The value of the assets of CLM to be transferred to PGF shall be determined by PGF pursuant to the principles and procedures consistently utilized by PGF in valuing its own assets and determining its own liabilities for purposes of the Merger, which principles and procedures are substantially similar to those employed by CLM when valuing its own assets and determining its own liabilities. Such valuation and determination shall be made by PGF in cooperation with CLM and shall be confirmed in writing by PGF to CLM. The net asset value per share of PGF common stock shall be determined in accordance with such procedures, and PGF shall certify the computations involved. 5.3. ISSUANCE OF PGF COMMON STOCK. PGF shall issue to the shareholders of CLM separate certificates or share deposit receipts for PGF common stock by delivering the certificates or share deposit receipts evidencing ownership of PGF common stock to American Stock Transfer & Trust Co., as the transfer agent and registrar for PGF common stock. 5.4. SURRENDER OF CLM STOCK CERTIFICATES. With respect to any CLM shareholder holding certificates representing shares of the common stock of CLM as of the Effective Date, and subject to PGF being informed thereof in writing by CLM, PGF will not permit such shareholder to receive new certificates evidencing ownership of PGF common stock until such shareholder has surrendered his or her outstanding certificates evidencing ownership of the common stock of CLM or, in the event of lost certificates, posted adequate bond. CLM will request its shareholders to surrender their outstanding certificates representing certificates of the common stock of CLM or post adequate bond therefor. Dividends payable to holders of record of shares of PGF as of any date after the Effective Date and prior to the exchange of certificates by any shareholder of CLM shall be paid to such shareholder, without interest; however, such dividends shall not be paid unless and until such shareholder surrenders his or her stock certificates of CLM for exchange. A-7 6. COVENANTS OF THE PARTIES 6.1. SHAREHOLDERS' MEETINGS. (a) Each of the parties shall hold a meeting of its respective shareholders for the purpose of considering the Merger as described herein, which meeting has been called by each party for October __, 2002, and any adjournments thereof. (b) Each of the Parties agrees to mail to each of its respective shareholders of record entitled to vote at the meeting of shareholders at which action is to be considered regarding the Merger, in sufficient time to comply with requirements as to notice thereof, a combined Proxy Statement and Prospectus which complies in all material respects with the applicable provisions of Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act, and the rules and regulations, respectively, thereunder. 6.2. OPERATIONS IN THE NORMAL COURSE. Each Party covenants to operate its business in the ordinary course between the date hereof and the Effective Date, it being understood that such ordinary course of business will include (i) the declaration and payment of customary dividends and other distributions and (ii) in the case of CLM, preparing for its deregistration, except that the distribution of dividends pursuant to Sections 7.11 and 8.9 of this Agreement shall not be deemed to constitute a breach of the provisions of this Section 6.2. 6.3. ARTICLES OF MERGER. The Parties agree that, as soon as practicable after satisfaction of all conditions to the Merger, they will jointly file executed Articles of Merger with the Department and make all other filings or recordings required by Maryland law in connection with the Merger. 6.4. REGULATORY FILINGS. (a) CLM undertakes that, if the Merger is consummated, it will file, or cause its agents to file, an application pursuant to Section 8(f) of the 1940 Act for an order declaring that CLM has ceased to be a RIC. (b) PGF will file the N-14 Registration Statement with the SEC and will use its best efforts to ensure that the N-14 Registration Statement becomes effective as promptly as practicable. CLM agrees to cooperate fully with PGF, and will furnish to PGF the information relating to itself to be set forth in the N-14 Registration Statement as required by the 1933 Act, the 1934 Act, the 1940 Act, and the rules and regulations thereunder and the state securities or blue sky laws. (c) This Section has been intentionally left blank. 6.5. PRESERVATION OF ASSETS. PGF agrees that it has no plan or intention to sell or otherwise dispose of the assets of CLM to be acquired in the Merger, except for dispositions made in the ordinary course of business. A-8 6.6. TAX MATTERS. Each of the Parties agrees that by the Effective Date all of its federal and other tax returns and reports required to be filed on or before such date shall have been filed and all taxes shown as due on said returns either have been paid or adequate liability reserves have been provided for the payment of such taxes. In connection with this covenant, the Parties agree to cooperate with each other in filing any tax return, amended return or claim for refund, determining a liability for taxes or a right to a refund of taxes or participating in or conducting any audit or other proceeding in respect of taxes. PGF agrees to retain for a period of ten (10) years following the Effective Date all returns, schedules and work papers and all material records or other documents relating to tax matters of CLM for its final taxable year and for all prior taxable periods. Any information obtained under this Section 6.6 shall be kept confidential except as otherwise may be necessary in connection with the filing of returns or claims for refund or in conducting an audit or other proceeding. After the Effective Date, PGF shall prepare, or cause its agents to prepare, any federal, state or local tax returns, including any Forms 1099, required to be filed and provided to required persons by CLM with respect to its final taxable years ending with the Effective Date and for any prior periods or taxable years for which the due date for such return has not passed as of the Effective Date and further shall cause such tax returns and Forms 1099 to be duly filed with the appropriate taxing authorities and provided to required persons. Notwithstanding the aforementioned provisions of this Section 6.6, any expenses incurred by PGF (other than for payment of taxes) in excess of any accrual for such expenses by CLM in connection with the preparation and filing of said tax returns and Forms 1099 after the Effective Date shall be borne by PGF. 6.7. SHAREHOLDER LIST. Prior to the Effective Date, CLM shall have made arrangements with its transfer agent to deliver to PGF, a list of the names and addresses of all of the shareholders of record of CLM on the Effective Date and the number of shares of common stock of CLM owned by each such shareholder, certified by CLM's transfer agent or President to the best of their knowledge and belief. 6.8. DELISTING, TERMINATION OF REGISTRATION AS AN INVESTMENT COMPANY. CLM agrees that the (i) delisting of the shares of CLM with the NYSE and (ii) termination of its registration as a RIC will be effected in accordance with applicable law as soon as practicable following the Effective Date. 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF PGF The obligations of PGF hereunder shall be subject to the following conditions: 7.1. APPROVAL OF MERGER. This Agreement shall have been adopted by the affirmative vote of the holders of a majority of the shares of common stock of PGF issued and outstanding and entitled to vote thereon and the affirmative vote of the holders of a majority of the shares of common stock of CLM issued and outstanding and entitled to vote thereon; and CLM shall have delivered to PGF a copy of the resolutions approving this Agreement adopted by its Board of Directors and shareholders, certified by its secretary. 7.2. CERTIFICATES AND STATEMENTS BY CLM. (a) CLM shall have furnished a statement of assets, liabilities and capital, together with a schedule of investments with their respective dates of acquisition and tax costs, certified on its behalf by its President (or any Vice President) and its Treasurer, and a certificate executed by both such officers, dated the Effective Date, certifying that there has been no material adverse change in its financial position since the Agreement was entered into, other than changes in its portfolio securities since that date or changes in the market value of its portfolio securities. (b) CLM shall have furnished to PGF a certificate signed by its President (or any Vice President), dated the Effective Date, certifying that as of the Effective Dates, all representations and warranties made in this Agreement are true and correct in all material respects as if made at and as of such date and each has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to such dates. A-9 (c) CLM shall have delivered to PGF a letter from Tait, Weller & Baker, dated the Effective Date, stating that such firm has performed a limited review of the federal, state and local income tax returns for the period ended December 31, 2001, and that based on such limited review, nothing came to their attention which caused them to believe that such returns did not properly reflect, in all material respects, the federal, state and local income taxes of CLM for the period covered thereby; and that for the period from December 31, 2001 to and including the Effective Date and for any taxable year ending upon the Effective Date, such firm has performed a limited review to ascertain the amount of such applicable federal, state and local taxes, and has determined that either such amount has been paid or reserves have been established for payment of such taxes, this review to be based on unaudited financial data; and that based on such limited review, nothing has come to their attention which caused them to believe that the taxes paid or reserves set aside for payment of such taxes were not adequate in all material respects for the satisfaction of federal, state and local taxes for the period from December 31, 2001, to and including the Effective Date and for any taxable year ending upon the Effective Date or that CLM would not continue to qualify as a RIC for federal income tax purposes. 7.3. ABSENCE OF LITIGATION. There shall be no material litigation pending with respect to the matters contemplated by this Agreement. 7.4. LEGAL OPINIONS. ---------------- (a) PGF shall have received an opinion of ______________, as counsel to CLM, in form and substance reasonably satisfactory to PGF and dated the Effective Date, to the effect that (i) CLM is a corporation duly organized, validly existing under the laws of the State of Maryland and in good standing with the Department; (ii) the Agreement has been duly authorized, executed and delivered by CLM, and, assuming that the N-14 Registration Statement complies with the 1933 Act, 1934 Act and the 1940 Act, constitutes a valid and legally binding obligation of CLM, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws pertaining to the enforcement of creditors' rights generally and by equitable principles; (iii) to the best of such counsel's knowledge, no consent, approval, authorization or order of any United States federal or Maryland state court or governmental authority is required for the consummation by CLM of the Merger, except such as may be required under the 1933 Act, the 1934 Act, the 1940 Act, the published rules and regulations of the SEC thereunder and under Maryland law and such as may be required by state securities or blue sky laws; (iv) such counsel does not know of any contracts or other documents with respect to CLM related to the Merger of a character required to be described in the N-14 Registration Statement which are not described therein or, if required to be filed, filed as required; (v) the execution and delivery of this Agreement does not, and the consummation of the Merger will not, violate any material provision of the Articles of Incorporation, as amended, the by-laws, as amended, or any agreement (known to such counsel) to which CLM is a party or by which CLM is bound, except insofar as the parties have agreed to amend such provision as a condition precedent to the Merger; (vi) to the best of such counsel's knowledge, no material suit, action or legal or administrative proceeding is pending or threatened against CLM; and (vii) all corporate actions required to be taken by CLM to authorize this Agreement and to effect the Merger have been duly authorized by all necessary corporate actions on behalf of CLM. Such opinion shall also state that (A) while such counsel cannot make any representation as to the accuracy or completeness of statements of fact in the N-14 Registration Statement or any amendment or supplement thereto with respect to CLM, nothing has come to their attention that would lead them to believe that, on the respective effective dates of the N-14 Registration Statement and any amendment or supplement thereto with respect to CLM, (1) the N-14 Registration Statement or any amendment or supplement thereto contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading with respect to CLM, and (2) the prospectus included in the N-14 Registration Statement contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading with respect to CLM; provided that such counsel need not express any opinion or belief as to the financial statements, other financial data, statistical data or information relating to the CLM contained or incorporated by reference in the N-14 Registration Statement. In giving the opinion set forth above, _______________ may state that it is relying on certificates of officers of CLM with regard to matters of fact and certain certificates and written statements of governmental officials with respect to the good standing of CLM and on the opinion of ______________, as to matters of Maryland law. A-10 (b) PGF shall have received an opinion from Spitzer & Feldman P.C., as counsel to PGF, dated the Effective Date, to the effect that for federal income tax purposes (i) the Merger as provided in this Agreement will constitute a reorganization within the meaning of Section 368(a)(1)(A) of the Code and that PGF and CLM will each be deemed a "party" to a reorganization within the meaning of Section 368(b) of the Code; (ii) no gain or loss will be recognized to CLM as a result of the Merger or the conversion of CLM shares to PGF common stock; (iii) no gain or loss will be recognized to PGF as a result of the Merger; (iv) in accordance with Section 354(a)(1) of the Code, no gain or loss will be recognized to the shareholders of CLM on the conversion of their shares into PGF common stock; (v) the tax basis of CLM assets in the hands of PGF will be the same as the tax basis of such assets in the hands of CLM prior to the consummation of the Merger; (vi) immediately after the Merger, the tax basis of PGF common stock received by the shareholders of CLM in the Merger will be equal, in the aggregate, to the tax basis of the shares of CLM converted pursuant to the Merger; (vii) a shareholder's holding period for PGF common stock will be determined by including the period for which he or she held the common stock of CLM converted pursuant to the Merger, provided that such CLM shares were held as a capital asset; and (viii) PGF's holding period with respect to CLM assets transferred will include the period for which such assets were held by CLM. 7.5. AUDITOR'S CONSENT AND CERTIFICATION. PGF shall have received from Tait, Weller & Baker a letter dated as of the effective date of the N-14 Registration Statement and a similar letter dated within five days prior to the Effective Date, in form and substance satisfactory to PGF, to the effect that (i) they are independent public auditors with respect to CLM within the meaning of the 1933 Act and the applicable published rules and regulations thereunder; and (ii) in their opinion, the financial statements and supplementary information of CLM included or incorporated by reference in the N-14 Registration Statement and reported on by them comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder. 7.6. LIABILITIES. The assets or liabilities of CLM to be transferred to PGF shall not include any assets or liabilities which PGF, by reason of limitations in its Registration Statement or Articles of Incorporation, may not properly acquire or assume. PGF does not anticipate that there will be any such assets or liabilities but PGF will notify CLM if any do exist and will reimburse CLM for any reasonable transaction costs incurred by CLM for the liquidation of such assets and liabilities. 7.7. EFFECTIVENESS OF N-14 REGISTRATION STATEMENT. The N-14 Registration Statement shall have become effective under the 1933 Act and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of PGF, contemplated by the SEC. A-11 7.8. REGULATORY FILINGS. (a) This Section has been intentionally left blank. (b) This Section has been intentionally left blank. 7.9. ADMINISTRATIVE RULINGS, PROCEEDINGS. The SEC shall not have issued an unfavorable advisory report under Section 25(b) of the 1940 Act, nor instituted or threatened to institute any proceeding seeking to enjoin consummation of the Merger under Section 25(c) of the 1940 Act; no other legal, administrative or other proceeding shall be instituted or threatened which would materially affect the financial condition of CLM or would prohibit the Merger. 7.10. SATISFACTION OF PROGRESSIVE RETURN FUND, INC. All proceedings taken by CLM and its counsel in connection with the Merger and all documents incidental thereto shall be satisfactory in form and substance to PGF. 7.11. DIVIDENDS.Prior to the Effective Date, CLM shall have declared and paid a dividend or dividends which, together with all such previous dividends, shall have the effect of distributing to its shareholders substantially all of its net investment company taxable income that has accrued through the Effective Date, if any (computed without regard to any deduction of dividends paid), and substantially all of its net capital gain, if any, realized through the Effective Date. 7.12. CUSTODIAN'S CERTIFICATE. CLM's custodian shall have delivered to PGF a certificate identifying all of the assets of CLM held or maintained by such custodian as of the Valuation Time. 7.13. BOOKS AND RECORDS. CLM's transfer agent shall have provided to PGF (i) the originals or true copies of all of the records of CLM in the possession of such transfer agent as of the Exchange Date, (ii) a certificate setting forth the number of shares of CLM outstanding as of the Valuation Time, and (iii) the name and address of each holder of record of any shares and the number of shares held of record by each such shareholder. 8. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF CLM The obligations of CLM hereunder shall be subject to the following conditions: 8.1. APPROVAL OF MERGER. This Agreement shall have been adopted, by the affirmative vote of the holders of a majority of the shares of Common Stock of CLM issued and outstanding and entitled to vote thereon and the affirmative vote of the holders of a majority of the shares of common stock of PGF issued and outstanding and entitled to vote thereon; and that PGF shall have delivered to CLM a copy of the resolutions approving this Agreement adopted by its Board of Directors and shareholders, certified by its secretary. 8.2. CERTIFICATES AND STATEMENTS BY PGF. (a) PGF shall have furnished a statement of assets, liabilities and capital, together with a schedule of investments with their respective dates of acquisition and tax costs, certified on its behalf by its President (or any Vice President) and its Treasurer, and a certificate executed by both such officers, dated the Effective Date, certifying that there has been no material adverse change in its financial position since the Agreement was entered into, other than changes in its portfolio securities since that date or changes in the market value of its portfolio securities. A-12 (b) PGF shall have furnished to CLM a certificate signed by its President (or any Vice President), dated the Effective Date, certifying that as of the Effective Date, all representations and warranties made in this Agreement are true and correct in all material respects as if made at and as of such date and each has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to such dates. (c) PGF shall have delivered to CLM a letter from Tait, Weller & Baker, dated the Effective Date, stating that such firm has performed a limited review of the federal, state and local income tax returns for the period ended December 31, 2001, and that based on such limited review, nothing came to their attention which caused them to believe that such returns did not properly reflect, in all material respects, the federal, state and local income taxes of PGF for the period covered thereby; and that for the period from December 31, 2001 to and including the Effective Date, such firm has performed a limited review to ascertain the amount of such applicable federal, state and local taxes, and has determined that either such amount has been paid or reserves established for payment of such taxes, this review to be based on unaudited financial data; and that based on such limited review, nothing has come to their attention which caused them to believe that the taxes paid or reserves set aside for payment of such taxes were not adequate in all material respects for the satisfaction of federal, state and local taxes for the period from December 31, 2001, to and including the Effective Date or that PGF would not continue to qualify as a RIC for federal income tax purposes. 8.3. ABSENCE OF LITIGATION. There shall be no material litigation pending with respect to the matters contemplated by this Agreement. 8.4. LEGAL OPINIONS. ---------------- (a) CLM shall have received an opinion of ____________, as counsel to PGF, in form and substance reasonably satisfactory to CLM and dated the Effective Date, to the effect that (i) PGF is a corporation duly organized, validly existing under the laws of the State of Maryland and in good standing with the Department; (ii) the Agreement has been duly authorized, executed and delivered by PGF, and, assuming that the N-14 Registration Statement complies with the 1933 Act, 1934 Act and the 1940 Act, constitutes a valid and legally binding obligation of PGF, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws pertaining to the enforcement of creditors' rights generally and by equitable principles; (iii) to the best of such counsel's knowledge, no consent, approval, authorization or order of any United States federal or Maryland state court or governmental authority is required for the consummation by PGF of the Merger, except such as may be required under the 1933 Act, the 1934 Act, the 1940 Act and the published rules and regulations of the SEC thereunder and under Maryland law and such as may be required under state securities or blue sky laws; (iv) the N-14 Registration Statement has become effective under the 1933 Act, no stop order suspending the effectiveness of the N-14 Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the 1933 Act, and, with respect to PGF, the N-14 Registration Statement, and each amendment or supplement thereto, as of their respective effective dates, appear on their face to be appropriately responsive in all material respects to the requirements of the 1933 Act, the 1934 Act and the 1940 Act and the published rules and regulations of the SEC thereunder; (v) such counsel does not know of any statutes, legal or governmental proceedings or contracts with respect to PGF or other documents related to the Merger of a character required to be described in the N-14 Registration Statement which are not described therein or, if required to be filed, filed as required; (vi) the execution and delivery of this Agreement does not, and the consummation of the Merger will not, violate any material provision of the Articles of Incorporation, as amended, the by-laws, as amended, or any agreement (known to such counsel) to which PGF is a party or by which PGF is bound, except insofar as the parties have agreed to amend such provision as a condition precedent to the Merger; (vii) to the best of such counsel's knowledge, no material suit, action or legal or administrative proceeding is pending or threatened against PGF; and (viii) all corporate actions required to be taken by PGF to authorize this Agreement and to effect the Merger have been duly authorized by all necessary corporate actions on behalf of PGF. Such opinion shall also state that (A) while such counsel cannot make any representation as to the accuracy or completeness of statements of fact in the N-14 Registration Statement or any amendment or supplement thereto with respect to PGF, nothing has come to their attention that would lead them to believe that, on the respective effective dates of the N-14 Registration Statement and any amendment or supplement thereto, (1) the N-14 Registration Statement or any amendment or supplement thereto contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading with respect to PGF; and (2) the prospectus included in the N-14 Registration Statement contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading with respect to PGF; provided that such counsel need not express any opinion or belief as to the financial statements, other financial data, statistical data or information relating to PGF contained or incorporated by reference in the N-14 Registration Statement. In giving the opinion set forth above, __________________ may state that it is relying on certificates of officers of PGF with regard to matters of fact and certain certificates and written statements of governmental officials with respect to the good standing of PGF and on the opinion of _________________ as to matters of Maryland law. A-13 (b) CLM shall have received an opinion from Spitzer & Feldman P.C. and dated the Effective Date, to the effect that for federal income tax purposes (i) the Merger as provided in this Agreement will constitute a reorganization within the meaning of Section 368(a)(1)(A) of the Code and that PGF and CLM will each be deemed a "party" to a reorganization within the meaning of Section 368(b) of the Code; (ii) no gain or loss will be recognized to CLM as a result of the Merger or on the conversion of CLM shares to PGF common stock; (iii) no gain or loss will be recognized to PGF as a result of the Merger; (iv) no gain or loss will be recognized to the shareholders of CLM on the conversion of their shares into PGF common stock; (v) the tax basis of CLM assets in the hands of PGF will be the same as the tax basis of such assets in the hands of CLM prior to the consummation of the Merger; (vi) immediately after the Merger, the tax basis of PGF common stock received by the shareholders of CLM in the Merger will be equal, in the aggregate, to the tax basis of the shares of CLM converted pursuant to the Merger; (vii) a shareholder's holding period for PGF common stock will be determined by including the period for which he or she held the common stock of CLM converted pursuant to the Merger, provided, that such CLM shares were held as a capital asset; and (viii) PGF's holding period with respect to CLM assets transferred will include the period for which such assets were held by CLM. 8.5. AUDITOR'S CONSENT AND CERTIFICATION. CLM shall have received from Tait, Weller & Baker a letter dated as of the effective date of the N-14 Registration Statement and a similar letter dated within five days prior to the Effective Date, in form and substance satisfactory to CLM, to the effect that (i) they are independent public auditors with respect to PGF within the meaning of the 1933 Act and the applicable published rules and regulations thereunder; and (ii) in their opinion, the financial statements and supplementary information of PGF incorporated by reference in the N-14 Registration Statement and reported on by them comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the published rules and regulations thereunder. 8.6. EFFECTIVENESS OF N-14 REGISTRATION STATEMENT. The N-14 Registration Statement shall have become effective under the 1933 Act and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of CLM, contemplated by the SEC. A-14 8.7. REGULATORY FILINGS. (a) This Section has been intentionally left blank. (b) The SEC shall not have issued an unfavorable advisory report under Section 25(b) of the 1940 Act, nor instituted or threatened to institute any proceeding seeking to enjoin consummation of the Merger under Section 25(c) of the 1940 Act; no other legal, administrative or other proceeding shall be instituted or threatened which would materially affect the financial condition of CLM or would prohibit the Merger. (c) PGF shall have received from any relevant state securities administrator such order or orders as are reasonably necessary or desirable under the 1933 Act, the 1934 Act, the 1940 Act, and any applicable state securities or blue sky laws in connection with the transactions contemplated hereby, and that all such orders shall be in full force and effect. 8.8. SATISFACTION OF CLM. All proceedings taken by PGF and its counsel in connection with the Merger and all documents incidental thereto shall be satisfactory in form and substance to CLM. 8.9. DIVIDENDS.Prior to the Effective Date, PGF shall have declared and paid a dividend or dividends which, together with all such previous dividends, shall have the effect of distributing to its shareholders substantially all of its net investment company taxable income that has accrued through the Effective Date, if any (computed without regard to any deduction of dividends paid), and substantially all of its net capital gain, if any, realized through the Effective Date. 9. PAYMENT OF EXPENSES 9.1. ALLOCATION. All expenses incurred in connection with the Merger shall be allocated equally between PGF and CLM in the event the Merger is consummated. Such expenses shall include, but not be limited to, all costs related to the preparation and distribution of the N-14 Registration Statement, proxy solicitation expenses, SEC registration fees, and NYSE listing fees. Neither of the Parties owes any broker's or finder's fees in connection with the transactions provided for herein. 10. COOPERATION FOLLOWING EFFECTIVE DATE In case at any time after the Effective Date any further action is necessary to carry out the purposes of this Agreement, each of the Parties will take such further action (including the execution and delivery of such further instruments and documents) as any other Party may reasonably request, all at the sole cost and expense of the requesting Party (unless the requesting Party is entitled to indemnification as described below). CLM acknowledges and agrees that from and after the Effective Date, PGF shall be entitled to possession of all documents, books, records, agreements and financial data of any sort pertaining to CLM. 11. INDEMNIFICATION 11.1. CLM. PGF agrees to indemnify and hold harmless CLM and each of CLM's directors and officers from and against any and all losses, claims, damages, liabilities or expenses (including, without limitation, the payment of reasonable legal fees and reasonable costs of investigation) to which jointly and severally, CLM or any of its directors or officers may become subject, insofar as any such loss, claim, damage, liability or expense (or actions with respect thereto) arises out of or is based on any breach by PGF of any of its representations, warranties, covenants or agreements set forth in this Agreement. A-15 11.2. PGF. CLM agrees to indemnify and hold harmless PGF and each of PGF's directors and officers from and against any and all losses, claims, liabilities or expenses (including, without limitation, the payment of reasonable legal fees and reasonable costs of investigation) to which jointly and severally, PGF or any of its directors or officers may become subject, insofar as any such loss, claim, damage, liability or expense (or actions with respect thereto) arises out of or is based on any breach by CLM of any of its representations, warranties, covenants or agreements set forth in this Agreement. 12. TERMINATION, POSTPONEMENT AND WAIVERS 12.1. TERMINATION. (a) Notwithstanding anything to the contrary in this Agreement, this Agreement may be terminated and the Merger abandoned at any time (whether before or after adoption by the shareholders of each of the Parties) prior to the Effective Date, or the Effective Date may be postponed by: (i) mutual agreement of the Parties' Board of Directors; (ii) the Board of Directors of PGF if any of the obligations of CLM set forth in this Agreement has not been fulfilled or waived by such Board or if CLM has made a material and intentional misrepresentation herein or in connection herewith; or (iii) the Board of Directors of CLM if any of the obligations of PGF set forth in this Agreement has not been fulfilled or waived by such Board or if PGF has made a material and intentional misrepresentation herein or in connection herewith. (b) If the transaction contemplated by this Agreement shall not have been consummated by December 31, 2002, this Agreement automatically shall terminate on that date, unless a later date is mutually agreed to by the Boards of Directors of the Parties. (c) In the event of termination of this Agreement pursuant to the provisions hereof, the Agreement shall become void and have no further effect, and there shall not be any liability hereunder on the part of either of the parties or their respective directors or officers, except for any such material breach or intentional misrepresentation, as to each of which all remedies at law or in equity of the party adversely affected shall survive. 12.2. WAIVER. At any time prior to the Effective Date, any of the terms or conditions of this Agreement may be waived by the Board of Directors of either CLM or PGF (whichever is entitled to the benefit thereof), if, in the judgment of such Board after consultation with its counsel, such action or waiver will not have a material adverse effect on the benefits intended in this Agreement to the shareholders of their respective fund, on behalf of which such action is taken. 12.3. EXPIRATION OF REPRESENTATIONS AND WARRANTIES. ---------------------------------------------- (a) The respective representations and warranties contained in Articles 3 and 4 of this Agreement shall expire with, and be terminated by, the consummation of the Merger, and neither of the Parties nor any of their officers, directors, agents or shareholders shall have any liability with respect to such representations or warranties after the Effective Date. This provision shall not protect any officer, director, agent or shareholder of the Parties against any liability to the entity for which that officer, director, agent or shareholder so acts or to its shareholders to which that officer, director, agent or shareholder would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties in the conduct of such office. A-16 (b) If any order or orders of the SEC with respect to this Agreement shall be issued prior to the Effective Date and shall impose any terms or conditions which are determined by action of the Boards of Directors of the parties to be acceptable, such terms and conditions shall be binding as if a part of this Agreement without further vote or approval of the shareholders of the parties, unless such terms and conditions shall result in a change in the method of computing the number of shares of PGF Common Stock to be issued pursuant to this Agreement, in which event, unless such terms and conditions shall have been included in the proxy solicitation materials furnished to the shareholders of the parties prior to the meetings at which the Merger shall have been approved, this Agreement shall not be consummated and shall terminate unless the parties call special meetings of shareholders at which such conditions so imposed shall be submitted for approval. 13. MISCELLANEOUS 13.1. TRANSFER RESTRICTION. Pursuant to Rule 145 under the 1933 Act, and in connection with the issuance of any shares to any person who at the time of the Merger is, to its knowledge, an affiliate of a party to the Merger pursuant to Rule 145(c), PGF will cause to be affixed upon the certificate(s) issued to such person (if any) a legend as follows: THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT TO PROGRESSIVE RETURN FUND, INC. (OR ITS STATUTORY SUCCESSOR) UNLESS (I) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933 OR (II) IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE FUND, SUCH REGISTRATION IS NOT REQUIRED. and, further, that stop transfer instructions will be issued to PGF's transfer agent with respect to such shares. CLM will provide PGF on the Effective Date with the name of any CLM Shareholder who is to the knowledge of CLM an affiliate of it on such date. 13.2. MATERIAL PROVISIONS. All covenants, agreements, representations and warranties made under this Agreement and any certificates delivered pursuant to this Agreement shall be deemed to have been material and relied upon by each of the parties, notwithstanding any investigation made by them or on their behalf. 13.3. NOTICES. All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to CLM: Ralph Bradshaw, President C/o Bear Stearns Funds Management Inc. Cornerstone Strategic Value Fund, Inc. 383 Madison Avenue New York, New York 10179 With copies to: Thomas R. Westle, Esq. Spitzer & Feldman P.C. 405 Park Avenue, 6th Floor New York, New York 10022 A-17 If to PGF: Ralph Bradshaw, President C/o Bear Stearns Funds Management Inc. Progressive Return Fund, Inc. 383 Madison Avenue New York, New York 10179 With copies to: Thomas R. Westle, Esq. Spitzer & Feldman P.C. 405 Park Avenue, 6th Floor New York, New York 10022 Any Party may send any notice, request, demand, claim or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any Party may change the address to which notices, requests, demands, claims and other communications hereunder are to be delivered by giving the other Parties notice in the manner herein set forth. 13.4. AMENDMENTS. This Agreement may be amended, modified or supplemented in such manner as may be mutually agreed upon in writing by the authorized officers of CLM and PGF; provided, however, that following the meeting of CLM and PGF shareholders to approve the Merger, no such amendment may have the effect of changing the provisions for determining the number of PGF shares to be issued to CLM shareholders under this Agreement to the detriment of such shareholders without their further approval. 13.5. HEADINGS. The Article headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 13.6. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original. 13.7. ENFORCEABILITY. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 13.8. SUCCESSORS AND ASSIGNS. 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 the shareholders of the Parties and their respective successors and assigns, any rights or remedies under or by reason of this Agreement. 13.9. GOVERNING LAW. This Agreement shall be governed by, and construed and enforced in accordance with the laws of the State of Maryland, without regard to its principles of conflicts of law. A-18 IN WITNESS WHEREOF, each of the Parties hereto has caused this Agreement to be executed by its President or Vice President. PROGRESSIVE RETURN FUND, INC. By:________________________________ Name: Ralph Bradshaw Title: President CORNERSTONE STRATEGIC VALUE FUND, INC. By:________________________________ Name: Ralph Bradshaw Title: President A-19 EXHIBIT B-1 PROXY CARD FORM OF PROXY CARD PROGRESSIVE RETURN FUND, INC. The undersigned stockholder of Progressive Return Fund, Inc. (the "Fund") hereby constitutes and appoints Messrs. Ralph W. Bradshaw, Thomas R. Westle and Frank J. Maresca, or any of them, the action of a majority of them voting to be controlling, as proxy of the undersigned, with full power of substitution, to vote all shares of common stock of the Fund standing in his or her name on the books of the Fund at the Special Meeting of Stockholders of the Fund to be held on _______, October __, 2002 at ____ a.m., New York time, at the offices of Bear Stearns Funds Management Inc., 383 Madison Avenue, 23rd Floor, Conference Room __, New York, New York 10179, or at any adjournment thereof, with all the powers which the undersigned would possess if personally present, as designated on the reverse hereof. The undersigned hereby revokes any proxy previously given and instructs the said proxies to vote in accordance with the aforementioned instructions with respect to (a) the approval of the plan of merger; (b) the amendment to the Articles of Incorporation; and (c) the consideration and vote of such other matters as may properly come before the Special Meeting of Stockholders or any adjournment thereof. If no such specification is made, the undersigned will vote FOR each of the proposals set forth above, and in their discretion with respect to such other matters as may properly come before the Special Meeting of Stockholders. - -------------------------------------------------------------------------------- THIS PROXY IS SOLICITED ON BEHALF OF PROGRESSIVE RETURN FUND, INC.'S BOARD OF DIRECTORS FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON OCTOBER __, 2002 (To be dated and signed on reverse side) B1-1 Please mark boxes / / or /X/ in blue or black ink. PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE: --------- X --------- - -------------------------------------------------------------------------------- 1. To approve the Merger Agreement and Plan of Reorganization: FOR WITHHELD [ ] [ ] 2. In the event that Proposal 1 is approved, then to amend the Certificate of Incorporation to change the name of the Fund from "Progressive Return Fund, Inc." to "Progressive Total Return Fund, Inc.: FOR AGAINST ABSTAIN [ ] [ ] [ ] In their discretion, the proxies are authorized to consider and vote upon such matters as may properly come before said Meeting or any adjournment thereof. B1-2 THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE STOCKHOLDER. IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED IN FAVOR OF EACH PROPOSAL. Your proxy is important to assure a quorum at the Special Meeting of Stockholders whether or not you plan to attend the meeting in person. You may revoke this proxy at anytime, and the giving of it will not effect your right to attend the Special Meeting of Stockholders and vote in person. PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. SIGNATURE(S)____________________________ DATE___________________ NOTE: Please sign exactly as name appears. When shares are held as joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or other authorized officer and if a partnership, please sign in full partnership name by authorized person. B1-3 EXHIBIT B-2 PROXY CARD FORM OF PROXY CARD CORNERSTONE STRATEGIC VALUE FUND, INC. The undersigned stockholder of Cornerstone Strategic Value Fund, Inc. (the "Fund") hereby constitutes and appoints Messrs. Ralph W. Bradshaw, Thomas R. Westle and Frank J. Maresca, or any of them, the action of a majority of them voting to be controlling, as proxy of the undersigned, with full power of substitution, to vote all shares of common stock of the Fund standing in his or her name on the books of the Fund at the Annual Meeting of Stockholders of the Fund to be held on ___________, October __, 2002 at ___ a.m., New York time, at the offices of Bear Stearns Funds Management Inc., 383 Madison Avenue, 13th Floor, Conference Room 301, New York, New York 10179, or at any adjournment thereof, with all the powers which the undersigned would possess if personally present, as designated on the reverse hereof. The undersigned hereby revokes any proxy previously given and instructs the said proxies to vote in accordance with the aforementioned instructions with respect to (a) the merger of CRF with and into Progressive Return Fund, Inc.; (b) the election of two Class I Directors; (c) the ratification of the selection by the Board of Directors of the Fund's independent accountants; (d) the consideration and vote on the stockholder proposal to open-end the Fund; and (e) the consideration and vote of such other matters as may properly come before the Annual Meeting of Stockholders or any adjournment thereof. If no such specification is made, the undersigned will vote FOR proposals 1, 2 and 3 set forth above, vote AGAINST proposal 4, and will vote in their discretion with respect to such other matters as may properly come before the Annual Meeting of Stockholders. - -------------------------------------------------------------------------------- THIS PROXY IS SOLICITED ON BEHALF OF CORNERSTONE STRATEGIC VALUE FUND, INC.'S BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON October __, 2002 (To be dated and signed on reverse side) B2-1 Please mark boxes / / or /X/ in blue or black ink. PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE: --------- X --------- - -------------------------------------------------------------------------------- 1. To approve the proposed merger of the Fund with and into Progressive Return Fund, Inc.: FOR AGAINST ABSTAIN [ ] [ ] [ ] In the event that Proposal 1 is not approved by the stockholders of CLM, then the CLM Stockholders will be asked to vote on the following: 2. To elect two (2) Class I Directors: FOR WITHHELD Edwin Meese III [ ] [ ] Ralph W. Bradshaw [ ] [ ] 3. To ratify the selection by the Board of Directors of Tait, Weller & Baker as the Fund's independent accountants for the year ending December 31, 2002: FOR AGAINST ABSTAIN [ ] [ ] [ ] 4. To consider and vote upon the stockholder proposal to open-end the Fund: FOR AGAINST ABSTAIN [ ] [ ] [ ] In their discretion, the proxies are authorized to consider and vote upon such matters as may properly come before said Meeting or any adjournment thereof. B2-2 THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE STOCKHOLDER. Your proxy is important to assure a quorum at the Annual Meeting of Stockholders whether or not you plan to attend the meeting in person. You may revoke this proxy at anytime, and the giving of it will not effect your right to attend the Annual Meeting of Stockholders and vote in person. PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. SIGNATURE(S)____________________________ DATE___________________ NOTE: Please sign exactly as name appears. When shares are held as joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or other authorized officer and if a partnership, please sign in full partnership name by authorized person. B2-3 EX-1 3 exh-1.txt ARTICLES OF INCORPORATION EXHIBIT 1-A ARTICLES OF INCORPORATION OF THE PORTUGAL FUND, INC. ------------------------------------ ARTICLE I THE UNDERSIGNED, Daniel Schloendorn, whose post office address is c/o Willkie Farr & Gallagher, One Citicorp Center, 53 East 53rd Street, New York, New York 10022, being at least eighteen years of age, does hereby act as an incorporator and form a corporation under any by virtue of the Maryland General Corporation Law. ARTICLE II NAME The name of the Corporation is THE PORTUGAL FUND, INC. ARTICLE III PURPOSES AND POWERS The Corporation is formed for the following purposes: (1) To conduct and carry on the business of a closed-end investment company. (2) To hold, invest and reinvest its assets in securities and other investments or to hold part or all of its assets in cash. (3) To issue and sell shares of its capital stock in such amounts and on such terms and conditions and for such purposes and for such amount or kind of consideration as may now or hereafter be permitted by law. (4) To do any and all additional acts and to exercise any and all additional powers or rights as may be necessary, incidental, appropriate or desirable for the accomplishment of all or any of the foregoing purposes. The Corporation shall be authorized to exercise and enjoy all of the powers, rights and privileges granted to, or conferred upon, corporations by the Maryland General Corporation Law now or hereafter in force, and the enumeration of the foregoing shall not be deemed to exclude any powers, rights or privileges so granted or conferred. ARTICLE IV PRINCIPAL OFFICE AND RESIDENT AGENT The post office address of the principal office of the Corporation in the State of Maryland is c/o The Corporation Trust Company Incorporated, 32 South Street, Baltimore, Maryland 21202. The name of the resident agent of the Corporation in the State of Maryland is The Corporation Trust Company Incorporated. The post office address of the resident agent is 32 South Street, Baltimore, Maryland 21202. ARTICLE V CAPITAL STOCK (1) The total number of shares of capital stock that the Corporation shall have authority to issue is one hundred million (100,000,000) shares, of the par value of one tenth of one percent ($.001) per share and of the aggregate par value of one hundred thousand dollars ($100,000), all of which one hundred million (100,000,000) shares are designated Common Stock. (2) The Corporation may issue fractional shares. Any fractional share shall carry proportionately the rights of a whole share including, without limitation, the right to vote and the right to receive dividends. A fractional share shall not, however, have the right to receive a certificate evidencing it. (3) All persons who shall acquire stock in the Corporation shall acquire the same subject to the provisions of these Articles of Incorporation and the Bylaws of the Corporation, as from time to time amended. (4) No holder of stock of the Corporation by virtue of being such a holder shall have any right to purchase or subscribe for any shares of the Corporation's capital stock or any other security that the Corporation may issue or sell other than a right that the Board of Directors in its discretion may determine to grant. (5) The Board of Directors shall have authority by resolution to classify and reclassify any authorized but unissued shares of capital stock from time to time by setting or changing in any one or more respects the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of the capital stock. (6) Notwithstanding any provision of law requiring any action to be taken or authorized by the affirmative vote of the holders of a greater proportion of the votes of all classes or of any class of stock of the Corporation, such action shall be effective and valid if taken or authorized by the affirmative vote of a majority of the total number of votes entitled to be cast thereon, except as otherwise provided in these Articles of Incorporation. -2- ARTICLE VI BOARD OF DIRECTORS (1) The number of directors constituting the Board of Directors shall be as specified in the Bylaws or determined by the Board of Directors pursuant to the Bylaws, except that the number of Directors shall in no event be greater than nine (9). The names of the directors who shall act until the first annual meeting of shareholders or until their successors are duly chosen and qualified are: Albert L. Zeisger William W. Priest, Jr. Emilio Bassini (2) Beginning with the first annual meeting of stockholders held after the initial public offering of the share of the Corporation (the "initial annual meeting"), the Board of Directors shall be divided into three classes: Class I, Class II and Class III. The terms of office of the classes of Directors elected at the initial annual meting shall expire at the times of the annual meetings of the stockholders as follows: Class I on the next annul meeting, Class II on the second next annual meeting and Class III on the third next annual meeting, or thereafter in each case when their respective successors are elected and qualified. At such subsequent annual election, the Directors chosen to succeed those whose terns are expiring shall be identified as being of the same class as the Directors whom they succeed, and shall be elected for a term expiring at the time of the third succeeding annual meeting of stockholders, or thereafter in each case when their respective successors are elected and qualified. The number of Directorships shall be apportioned among the classes so as to maintain the classes as nearly equal in number as possible. (3) A Director may be removed with or without cause, but only by action of the stockholders taken by the holders of at least sixty-six and two-thirds percent (66-2.3%) of the votes entitled to be cast. (4) In furtherance, and not in limitation, of the powers conferred by the laws of the State of Maryland, the Board of Directors is expressly authorized: (i) To make, alter or repeal the Bylaws of the Corporation, except as otherwise required by the Investment Company Act of 1940, as amended. (ii) From time to time to determine whether and to what extent and at what times and places and under what conditions and regulations the books and accounts of the Corporation, or any of them other than the stock ledger, shall be open to the inspection of the stockholders. No stockholder shall have any right to inspect any account or book or document of the Corporation, except as conferred by law or authorized by resolution of the Board of Directors. -3- (iii) Without the assent or vote of the stockholders, to authorize the issuance from time to time of shares of the stock of any class of the Corporation, whether now or hereafter authorized and securities convertible into shares of stock of the Corporation of any class or classes, whether now or hereafter authorized, for such consideration as the Board of Directors may deem advisable. (iv) Without the assent or vote of the stockholders, to authorize and issue obligations of the Corporation, secured and unsecured, as the Board of Directors may determine, and to authorize and cause to be executed mortgages and liens upon the real or personal property of the Corporation. (v) In addition to the powers and authorities granted herein and by statute expressly conferred upon it, the Board of Directors is authorized to exercise all powers and do all acts that may be exercised or done by the Corporation pursuant to the provisions of the laws of the State of Maryland, these Articles of Incorporation and the Bylaws of the Corporation. (5) Any determination made in good faith by or pursuant to the direction of the Board of Directors, with respect to the amount of assets, obligations or liabilities of the Corporation, as to the amount of net income of the Corporation from dividends and interest for any period or amounts at any time legally available for the payment of dividends, as to the amount of any reserves or charges set up and the propriety thereof, as to the time of or purpose for creating reserves or as to the use, alteration or cancellation of any reserves or charges (whether or not any obligation or liability for which the reserves or charges have been created has been paid or discharged), as to the value of any security owned by the Corporation or as to the determination of the net asset value of shares of any class of the Corporation's capital stock, shall be final and conclusive, and shall be binding upon the Corporation and all holders of its capital stock, past, present and future, and shares of the capital stock of the Corporation are issued and sold on the condition and understanding, evidenced by the purchase of shares of capital stock or acceptance of share certificates, that any and all such determinations shall be binding as aforesaid. No provision of these Articles of Incorporation of the Corporation shall be effective to (i) require a waiver of compliance with any provision of the Securities Act of 1933, as amended, or the Investment Company Act of 1940, as amended, or of any valid rule, regulation or order of the Securities and Exchange Commission under those Acts or (ii) protect or purport to protect any director or officer of the Corporation against any liability to the Corporation or its security holders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. -4- ARTICLE VII CERTAIN TRANSACTIONS (1) Notwithstanding any other provision of these Articles of Incorporation, and subject to the exceptions provided in Paragraph (4) of this Article, the types of transactions described in Paragraph (3) of this Article shall require the affirmative vote of the holders of sixty-six and two-thirds percent (66-2/3%) of the votes entitled to be cast when a Principal Shareholder (as defined in Paragraph (2) of this Article) is a party to the transaction. (2) The term "Principal Shareholder" shall mean any corporation, person or other entity which is the beneficial owner, directly or indirectly, of more than five percent (5%) of the outstanding shares of any class of stock of the Corporation and shall include any affiliate or associate, as such terms are defined in clause (ii) below, of a Principal Shareholder. For the purposes of this Article, in addition to the shares of stock which a corporation, person or other entity beneficially owns directly, (a) any corporation, person or other entity shall be deemed to be the beneficial owner of any shares of stock of the Corporation (i) which it has the right to acquire pursuant to any agreement or upon exercise of conversion rights or warrants, or otherwise (but excluding stock options granted by the Corporation) or (ii) which are beneficially owned, directly or indirectly (including shares deemed owned through application of clause (i) above), by any other corporation, person or entity with which it or its "affiliate" or "associate" (as defined below) has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of stock of the Corporation, or which is its "affiliate", or "associate" as those terms are defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934 as in effect on August 1, 1989, and (b) the outstanding shares of any class of stock of the Corporation shall include shares deemed owned through application of clauses (i0 and (ii) above but shall not include any other shares which may be issuable pursuant to any agreement, or upon exercise of conversion rights or warrants, or otherwise. (3) This Article shall apply to the following transactions: (i) The merger, consolidation or share exchange of the Corporation or any subsidiary of the Corporation with or into any Principal Shareholder. (ii) The issuance of any securities of the Corporation to any Principal Shareholder for cash. (iii) The sale, lease or exchange of all or any substantial part of the assets of the Corporation to any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purpose of such computation all assets sold, leased or exchanged in any series of similar transactions within a twelve-month period). -5- (iv) The sale, lease or exchange to the Corporation or any subsidiary thereof, in exchange for securities of the Corporation, of any assets of any Principal Shareholder (except assets having an aggregate fair market value of less than $1,000,000, aggregating for the purposes of such computation all assets sold, leased or exchanged in any series or similar transactions within a twelve-month period). (4) The provision of this Article shall not be applicable to (i) any of the transactions described in Paragraph (3) of this Article if a majority of the Continuing Directors of the Corporation shall by resolution have approved a memorandum of understanding with such Principal Shareholder with respect to and substantially consistent with such transaction, (ii) any such transaction with any corporation of which a majority of the outstanding shares of all classes of stock normally entitled to vote in elections of directors is owned of record or beneficially by the Corporation and its subsidiaries, or (iii) any transaction involving the issuance of securities of the Corporation pursuant to a dividend reinvestment plan adopted by the Corporation. For purposes of this Paragraph, a "Continuing Director" is a Director of the Company who either was a member of the Board of Directors on the date of the closing of the initial public offering of the Corporation's common stock, or subsequently became a Director and whose election, or nomination for election by the Company's stockholders, was approved by a vote of a majority of the Continuing Directors then on the Board of Directors. (5) The Board of Directors shall have the power and duty to determine for the purposes of this Article on the basis of information known to the Corporation whether (i) a corporation, person or entity beneficially owns more than five percent (5%) of the outstanding shares of any class of stock of the Corporation, (ii) a corporation, person or entity is an "affiliate" or "associate" (as defined above) of another, (iii) the assets being acquired or leased to or by the Corporation, or any subsidiary thereof, constitute a substantial part of the assets of the Corporation and have an aggregate fair market value of less than $1,000,000 and (iv) the memorandum of understanding referred to in Paragraph (4) hereof is substantially consistent with the transaction covered thereby. Any such determination shall be conclusive and binding for all purposes of this Article. ARTICLE VIII CHANGE OF STRUCTURE; LIQUIDATION (1) The conversion of the Corporation from a "closed-end company" to an "open-end company," as those terms are defined in Sections 5(a)(2) and 5(a)(1), respectively, of the Investment Company Act of 1940, as amended, shall require the affirmative vote of the holders of sixty-six and two -thirds percent (66-2/3%) of the votes entitled to be cast. -6- (2) The liquidation or dissolution of the Corporation shall require the affirmative vote of the holders of sixty-six and two-thirds percent 66-2/3%) of the votes entitled to be cast, provided that if a majority of the Continuing Directors, as that term is defined in Article VII, shall have approved the liquidation or dissolution of the Corporation, such action shall require the affirmative vote of a majority of the votes entitled to be cast. ARTICLE IX LIMITATIONS ON LIABILITY; INDEMNIFICATION (1) To the fullest extent that limitations on the liability of directors and officers are permitted by the Maryland General Corporation Law, nor director or officer of the Corporation shall have any liability to the Corporation or its stockholders for damages. This limitation on liability applies to events occurring at the time a person serves as a director or officer of the Corporation whether or not such person is a director or officer at the time of any proceeding in which liability is asserted. (2) Any person who was or is a party or is threatened to be made a party in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is a current or former director or officer of the Corporation, or is or was serving while a director or officer of the Corporation at the request of the Corporation as a director, officer, partner, trustee, employee, agent or fiduciary of another corporation, partnership, joint venture, trust, enterprise or employee benefit plan, shall be indemnified by the Corporation against judgments, penalties, fines, excise taxes, settlements, and reasonable expenses (including attorneys' fees) actually incurred by such person in connection with such action, suit or proceeding to the full extent permissible under the Maryland General Corporation Law, the Securities Act of 1933 and the Investment Company Act of 1940, as such statutes are now or hereafter in force. In addition, the Corporation shall also advance expenses to its currently acting and its former directors and officers to the fullest extent that indemnification of directors is permitted by the Maryland General Corporation Law. The Board of Directors may be Bylaw, resolution or agreement make further provision for indemnification of directors, officers, employees and agents to the fullest extent permitted by the Maryland General Corporation Law. (3) No provision of this Article shall be effective to protect or purport to protect any director or officer of the Corporation against any liability to the Corporation or its security holders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. (4) References to the Maryland General Corporation Law in this Article are to that law as from time to time amended. No amendment to the charter of the Corporation shall affect any right of any person under this Article based on any event, omission or proceeding prior to the Amendment. -7- ARTICLE X AMENDMENTS (1) The Corporation reserves the right from time to time to make any amendment to its Articles of incorporation, now or hereafter authorized by law, including any amendment that alters the contract rights, as expressly set forth in its Articles of Incorporation, of any outstanding stock. (2) Notwithstanding Paragraph (1) of this Article or any other provision of these Articles of Incorporation, no amendment to these Articles of Incorporation of the Corporation shall amend, alter, change or appeal any of the provisions of Articles VI, VII, VIII or X unless the amendment effecting such amendment, alteration, change or repeal shall receive the affirmative vote of sixty-six and two-thirds percent (66-2/3%) of the votes entitled to be cast. IN WITNESS WHEREOF, I have adopted and signed these Articles of Incorporation or do hereby acknowledge that the adoption and signing are my act. Dated: the 9th day of August, 1989. /S/ DANIEL SCHLOENDORN ------------------------------- Daniel Schloendorn, Incorporator -8- EXHIBIT 1-B ARTICLES OF AMENDMENT OF THE PORTUGAL FUND, INC. THE PORTUGAL FUND, INC. (hereinafter referred to as the "Corporation"), a Maryland corporation, hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: Article II of the Charter is hereby amended in its entirety to read as follows: The name of the corporation (which is hereinafter referred to as the "Corporation") is the "PROGRESSIVE RETURN FUND, INC." SECOND: The foregoing amendment to the Charter of the Corporation has been approved by the Board of Directors of the Corporation. IN WITNESS WHEREOF, the Corporation has caused these presents to be signed in its name and on its behalf by its President and witnessed by its Secretary on this 18th day of December, 2000. THE PORTUGAL FUND, INC. By: /S/ RALPH W. BRADSHAW ---------------------------------- Name: Ralph W. Bradshaw Title: President WITNESS: /S/ FRANK MARESCA Name: Frank Maresca Title: Assistant Secretary The Portugal Fund, Inc. c/o Bear Stearns Funds Management Inc. 575 Lexington Avenue, 9th Floor New York, New York 10022 EXHIBIT C ARTICLES OF AMENDMENT OF PROGRESSIVE RETURN FUND, INC. PROGRESSIVE RETURN FUND, INC. (hereinafter referred to as the "Corporation"), a Maryland corporation, hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: Article II of the Charter is hereby amended in its entirety to read as follows: The name of the corporation (which is hereinafter referred to as the "Corporation") is the "PROGRESSIVE TOTAL RETURN FUND, INC." SECOND: The foregoing amendment to the Charter of the Corporation has been approved by the Board of Directors of the Corporation. IN WITNESS WHEREOF, the Corporation has caused these presents to be signed in its name and on its behalf by its President and witnessed by its Secretary on this ____th day of ____, 2002. PROGRESSIVE RETURN FUND, INC. By: /s/ RALPH W. BRADSHAW --------------------- Name: Ralph W. Bradshaw Title: President WITNESS: /S/ THOMAS R. WESTLE - -------------------- Name: Thomas R. Westle Title: Secretary EXHIBIT 1-C ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF PROGRESSIVE RETURN FUND, INC. Progressive Return Fund, Inc. (hereinafter referred to as the "Corporation"), a Maryland corporation, hereby certifies to the State Department of Assessments and Taxation of Maryland: FIRST: Article V Section (1) of the Articles of Incorporation is hereby amended in its entirety to read as follows: (1) The total number of shares of capital stock that the Corporation shall have authority to issue is one hundred million (100,000,000) shares, of the par value of one tenth of one percent ($0.001) per share and of the aggregate par value of one hundred thousand dollars ($100,000), all of which one hundred million (100,000,000) shares are designated Common Stock. Simultaneously with the effective date of this amendment (the "Effective Date"), each share of the Corporation's common stock par value $0.001 per share, issued and outstanding immediately prior to the Effective Date (the "Pre-Split Common Stock") shall automatically and without any action on the part of the holder thereof be reclassified as and changed (the "Reverse Stock Split") into 0.25 of one share of common stock par value $0.001 per share (the "Post Split Common Stock"). SECOND: The foregoing amendment to the Articles of Incorporation of the Corporation has been approved by the Board of Directors of the Corporation. IN WITNESS THEREOF, the Corporation has caused these presents to be signed in its name and on its behalf by its President and witnessed by its Secretary on this 19th day of April, 2002. PROGRESSIVE RETURN FUND, INC. By: /S/ RALPH W. BRADSHAW ------------------------------------- Name: Ralph W. Bradshaw Title: President WITNESS: By: /S/ THOMAS R. WESTLE -------------------------------------- Name: Thomas R. Westle Title: Secretary EX-3.(II) 4 exh2.txt AMENDED AND RESTATED BY-LAWS EXHIBIT 2 Amended and Restated By-laws AMENDED AND RESTATED BYLAWS OF PROGRESSIVE RETURN FUND, INC. ---------------------------------------------- Article I NAME OF COMPANY, LOCATION OF OFFICES AND SEAL 1.1 NAME. The name of the Company is Progressive Return Fund, Inc. 1.2 PRINCIPAL OFFICES. The principal office of the Company in the State of Maryland shall be located in Baltimore, Maryland. The Company may, in addition, establish and maintain such other offices and places of business within or outside the State of Maryland as the Board of Directors may from time to time determine. 1.3 SEAL. The corporate seal of the Company shall be circular in form and shall bear the name of the Company, the year of its incorporation and the words "Corporate Seal, Maryland." The form of the seal shall be subject to alteration by the Board of Directors and the seal may be used by causing it or a facsimile to be impressed or affixed or printed or otherwise reproduced. Any Officer or Director of the Company shall have authority to affix the corporate seal of the Company to any document requiring the same. Article II STOCKHOLDERS 2.1 PLACE OF MEETINGS. All meetings of the Stockholders shall be held at such place within the United States, whether within or outside the State of Maryland, as the Board of Directors shall determine, which shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. 2.2 ANNUAL MEETING. The annual meeting of the Stockholders of the Company shall be held at such place as the Board of Directors shall select on such date, during the thirty-one (31) day period ending six months after the end of the Company's fiscal year, as may be fixed by the Board of Directors each year, at which time the Stockholders shall elect Directors by plurality vote, and transact such other business as may properly come before the meeting. Any business of the Company may be transacted at the annual meeting without being specially designated in the notice except as otherwise provided by statute, by the Articles of Incorporation or by these Bylaws. 2.3 SPECIAL MEETINGS. Special meetings of the Stockholders for any purpose or purposes, unless otherwise prescribed by statute or by the Articles of Incorporation, may be called by resolution of the Board of Directors or by the President, and shall be called by the Secretary at the request, in writing, of a majority of the Board of Directors or at the request, in writing, of Stockholders owning at least 25% of the votes entitled to be cast at the meeting upon payment by such Stockholders to the Corporation of the reasonably estimated cost of preparing and mailing a notice of the meeting (which estimated cost shall be provided to such Stockholders by the Secretary of the Corporation). Notwithstanding the foregoing, unless requested by Stockholders entitled to cast a majority of the votes entitled to be cast at the meeting, a special meeting of the Stockholders need not be called at the request of Stockholders to consider any matter that is substantially the same as a matter voted on at any special meeting of the Stockholders held during the preceding twelve (12) months. A written request shall state the purpose or purposes of the proposed meeting. 2.4 NOTICE. Written notice of every meeting of Stockholders, stating the purpose or purposes for which the meeting is called, the time when and the place where it is to be held, shall be served, either personally or by mail, not less than ten (10) nor more than ninety (90) days before the meeting, upon each Stockholder as of the record date fixed for the meeting who is entitled to vote at such meeting. If mailed (1) such notice shall be directed to a Stockholder at his address as it shall appear on the books of the Company (unless he shall have filed with the Transfer Agent of the Company a written request that notices intended for him be mailed to some other address, in which case it shall be mailed to the address designated in such request) and (2) such notice shall be deemed to have been given as of the date when it is deposited in the United States mail with first class postage thereon prepaid. 2.5 NOMINATIONS AND PROPOSALS BY STOCKHOLDERS. (a) Annual Meetings of Stockholders. (1) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the Stockholders may be made at an annual meeting of Stockholders (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any Stockholder of the Corporation who was a Stockholder of record both at the time of giving of notice provided for in this Section 2.5(a) and at the time of the annual meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 2.5(a). -2- (2) For nominations to the Board of Directors or other business to be properly brought before an annual meeting by a Stockholder pursuant to clause (iii) of paragraph (a)(1) of this Section 2.5, the Stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for action by Stockholders. To be timely, a Stockholder's notice must be delivered to the Secretary at the principal executive office of the Corporation by not later than the close of business on the 90th day prior to the first anniversary of the date of mailing of the notice for the preceding years annual meeting nor earlier than the close of business on the 120th day prior to the first anniversary of the date of mailing of the notice for the preceding year's annual meeting; provided, however, that in the event that the date of the mailing of the notice for the annual meeting is advanced or delayed by more than 30 days from the anniversary date of the mailing of the notice for the preceding year's annual meeting, notice by the Stockholder to be timely must be so delivered not earlier than the close of business on the 120th day prior to the date of mailing of the notice for such annual meeting and not later than the close of business on the later of the 90th day prior to the date of mailing of the notice for such annual meting or the tenth day following the day on which public announcement of the date of mailing of the notice for such meeting is first made by the Corporation. In no event shall the public announcement of a postponement of the mailing of the notice for such annual meeting or of an adjournment or postponement of an annual meeting to a later date or time commence a new time period for the giving of a Stockholder's notice described above. A Stockholder's notice to be proper must set forth (i) as to each person whom the Stockholder proposes to nominate for election or reelection as a director (A) the name, age, business address and residence address of such person, (B) the class and number of shares of stock of the Corporation that are beneficially owned or owned of record by such person and (C) all other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A (or any successor provision) under the Securities Exchange Act of 1934 (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected): (ii) as to any other business that the Stockholder proposes to be before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such Stockholder (including any anticipated benefit to the Stockholder therefrom) and of each beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the Stockholder giving the notice and each beneficial owner, if any, on whose behalf the nomination or proposal is made, (x) the name and address of such Stockholder, as they appear on the Corporation's stock ledger and current name and address, if different, and of such beneficial owner, and (y) the class and number of shares of stock of the Corporation which are owned beneficially and of record by such Stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of Paragraph (a)(2) of this Section 2.5 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement by the Corporation of such action or specifying the size of the increased Board of Directors at least 100 days prior to the first anniversary of the date of mailing of the notice for the preceding year's annual meeting, a Stockholder's notice required by this Section 2.5(a) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if the notice is delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day immediately following the day on which such public announcement is first made by the Corporation. -3- (b) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of Stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of Stockholders at which directors are to be elected (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) provided that the Board of Directors has determined that directors shall be elected at such special meeting, by any Stockholder of the Corporation who is a Stockholder of record both at the time of giving of notice provided for in this Section 2.5(b) and at the time of the special meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 2.5(b). In the event the Corporation calls a special meeting of Stockholders for the purpose of electing one or more directors to the Board of Directors, any such Stockholder may nominate a person or persons (as the case may be) for election to such position as specified in the Corporation's notice of meeting, if the Stockholder's notice containing the information required by paragraph (a)(2) of this Section 2.5 shall have been delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 120th day prior to such special meeting and not later than the close of business on the later of the 90th day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of a postponement or adjournment of a special meeting to a later date or time commence a new time period for the giving of a Stockholder's notice as described above. (c) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 2.5 shall be eligible to serve as directors, and only such business shall be conducted at a meeting of Stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 2.5. The chairman of the meeting shall have the power and duty to determine whether a nomination of any other business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 2.5 and, if any proposed nomination or other business is not in compliance with this Section 2.5, to declare that such nomination or proposal shall be disregarded. (2) For purposes of this Section 2.5, (a) the "date of mailing of the notice" shall mean the date of the proxy statement for the solicitation or proxies for election of directors and (b) "public announcement" shall mean disclosure (i) in a press release either transmitted to the principal securities exchange on which shares of the Corporation's common stock are traded or reported by a recognized news service or (ii) in a document publicly filed by the Corporation with the United States Securities and Exchange Commission. -4- (3) Notwithstanding the foregoing provisions of this Section 2.5, a Stockholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 2.5. Nothing in this Section 2.5 shall be deemed to affect any right of a Stockholder to requires inclusion of a proposal in, nor the right of the Corporation to omit a proposal from, the Corporation's proxy statement pursuant to Rule 14a-8 (or any successor provision) under the Exchange Act. 2.6 QUORUM. The holders of one-third of the total amount of stock issued and outstanding and entitled to vote, present in person or represented by proxy, shall be requisite and shall constitute a quorum at all meetings of the Stockholders for the transaction of business except as otherwise provided by statute, by the Articles of Incorporation or by these Bylaws. If a quorum shall not be present or represented, the Stockholders entitled to vote thereat, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, to a date not more than one hundred twenty (120) days after the original record date, until a quorum shall be present or represented. At such adjourned meeting, at which a quorum shall be present or represented, any business which might have been transacted at the original meeting may be transacted. 2.7 VOTE OF THE MEETING. When a quorum is present or represented at any meeting, the vote of the holders of a majority of votes cast shall decide any question brought before such meeting (except with respect to election of directors which shall be by a plurality of votes cast), unless the question is one upon which, by express provisions of applicable statutes, of the Articles of Incorporation or of these Bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question. 2.8 VOTING RIGHTS OF STOCKHOLDERS. Each Stockholder of record having the right to vote shall be entitled at every meeting of the Stockholders of the Company to one vote for each share of stock having voting power standing in the name of such Stockholder on the books of the Company on the record date fixed in accordance with Article 6.5 of these Bylaws, with pro rata voting rights for any fractional shares, and such votes may be cast either in person or by written proxy. 2.9 ORGANIZATION. At every meeting of the Stockholders, the Chairman of the Board, or in his absence or inability to act, the Vice Chairman of the Board, or in his absence or inability to act, a chairman chosen by the Stockholders, shall act as chairman of the meeting. The Secretary, or in his absence or inability to act, a person appointed by the chairman of the meeting, shall act as secretary of the meeting and keep the minutes of the meeting. -5- 2.10 PROXIES. Every proxy must be executed in writing by the Stockholder or by his duly authorized attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date of its execution unless it shall have specified therein its duration. Every proxy shall be revocable at the pleasure of the person executing it or of his personal representatives or assigns. Proxies shall be delivered prior to the meeting to the Secretary of the Company or to the person acting as Secretary of the meeting before being voted. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by one of them unless, at or prior to exercise of such proxy, the Company receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a Stockholder shall be deemed valid unless challenged at or prior to its exercise. 2.11 STOCK LEDGER AND LIST OF STOCKHOLDERS. It shall be the duty of the Secretary or Assistant Secretary of the Company to cause an original or duplicate stock ledger to be maintained at the office of the Company's transfer agent. 2.12 ACTION WITHOUT MEETING. Any action to be taken by Stockholders may be taken without a meeting if (1) all Stockholders entitled to vote on the matter consent to the action in writing, (2) all Stockholders entitled to notice of the meeting but not entitled to vote at it sign a written waiver of any right to dissent and (3) said consents and waivers are filed with the records of the meetings of Stockholders. Such consent shall be treated for all purposes as a vote at a meeting. Article III BOARD OF DIRECTORS 3.1 GENERAL POWERS. Except as otherwise provided in the Articles of Incorporation, the business and affairs of the Corporation shall be managed under the direction of the Board of Directors. All powers of the Corporation may be exercised by or under authority of the Board of Directors except as conferred on or reserved to the Stockholders by law, by the Articles of Incorporation or by these Bylaws. 3.2 BOARD OF THREE TO NINE DIRECTORS. The Board of Directors shall consist of not less than three (3) nor more than nine (9) Directors; PROVIDED that if there are no shares of capital stock outstanding, the number of Directors may be less than three but not less than one. Directors need not be Stockholders. The Directors shall have power from time to time, and at any time when the Stockholders as such are not assembled in a meeting, regular or special, to increase or decrease the number of Directors. If the number of Directors is increased, the additional Directors may be elected by a majority of the Directors in office at the time of the increase. If such additional Directors are not so elected by the Directors in office at the time they increase the number of places on the Board, or if the additional Directors are elected by the existing Directors prior to the first meeting of the Stockholders of the Company, then in either of such events the additional Directors shall be elected or reelected by the Stockholders at their next annual meeting or at an earlier special meeting called for that purpose. -6- Beginning with the first annual meeting of Stockholders held after the initial public offering of the shares of the Company (the "initial annual meeting"), the Board of Directors shall be divided into three classes: Class I, Class II and Class III. The terms of office of the classes of Directors elected at the initial annual meeting shall expire at the times of the annual meetings of the Stockholders as follows: Class I on the next annual meeting, Class II on the second next annual meeting and Class III on the third next annual meeting, or thereafter in each case when their respective successors are elected and qualified. At each subsequent annual election, the Directors chosen to succeed those whose terms are expiring shall be identified as being of the same class as the Directors whom they succeed, and shall be elected for a term expiring at the time of the third succeeding annual meeting of Stockholders, or thereafter in each case when their respective successors are elected and qualified. The number of Directorships shall be apportioned among the classes so as to maintain the classes as nearly equal in number as possible. 3.3 VACANCIES. Subject to the provisions of the Investment Company Act of 1940, as amended, if the office of any Director or Directors becomes vacant for any reason (other than an increase in the number of Directors), the Directors in office, although less than a quorum, shall continue to act and may choose a successor or successors, who shall hold office until the next election of Directors, or any vacancy may be filled by the Stockholders at any meeting thereof. 3.4 REMOVAL. At any meeting of Stockholders duly called and at which a quorum is present, the Stockholders may, by the affirmative vote of the holders of at least three-fourths (3/4) of the votes entitled to be cast thereon, remove any Director or Directors from office, with or without cause, and may elect a successor or successors to fill any resulting vacancies for the unexpired term of the removed Director. 3.5 RESIGNATION. A Director may resign at any time by giving written notice of his resignation to the Board of Directors or the Chairman or the Vice Chairman of the Board or the Secretary of the Corporation. Any resignation shall take effect at the time specified in it or, should the time when it is to become effective not be specified in it, immediately upon its receipt. Acceptance of a resignation shall not be necessary to make it effective unless the resignation states otherwise. 3.6 PLACE OF MEETINGS. The Directors may hold their meetings at the principal office of the Company or at such other places, either within or outside the State of Maryland, as they may from time to time determine. 3.7 REGULAR MEETINGS. Regular meetings of the Board may be held at such date and time as shall from time to time be determined by resolution of the Board. 3.8 SPECIAL MEETINGS. Special meetings of the Board may be called by order of the Chairman or Vice Chairman of the Board on one (1) day's notice given to each Director either in person or by mail, telephone, telegram, cable or wireless to each Director at his residence or regular place of business. Special meetings will be called by the Chairman or Vice Chairman of the Board or Secretary in a like manner on the written request of a majority of the Directors. -7- 3.9 QUORUM. At all meetings of the Board, the presence of one-third (1/3) of the entire Board of Directors (but not less than two Directors unless the Board of Directors shall consist of only one Director in which event that one Director shall constitute a quorum) shall be necessary to constitute a quorum and sufficient for the transaction of business, and any act of a majority present at a meeting at which there is a quorum shall be the act of the Board of Directors, except as may be specifically provided by statute, by the Articles of Incorporation or by these Bylaws. If a quorum shall not be present at any meeting of Directors, the Directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. 3.10 ORGANIZATION. The Board of Directors shall designate one of its members to serve as Chairman of the Board and another of its members to serve as Vice Chairman of the Board. The Chairman of the Board shall preside at each meeting of the Board. In the absence or inability of the Chairman of the Board to act, the Vice Chairman of the Board, or, in his absence or inability to act, another Director chosen by a majority of the Directors present, shall act as chairman of the meeting and preside at the meeting. The Secretary (or, in his absence or inability to act, any person appointed by the chairman) shall act as secretary of the meeting and keep the minutes of the meeting. 3.11 INFORMAL ACTION BY DIRECTORS AND COMMITTEES. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may, except as otherwise required by statute, be taken without a meeting if a written consent to such action is signed by all members of the Board, or of such committee, as the case may be, and filed with the minutes of the proceedings of the Board or committee. Subject to the Investment Company Act of 1940, as amended, members of the Board of Directors or a committee thereof may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. 3.12 EXECUTIVE COMMITTEE. There may be an Executive Committee of two or more Directors appointed by the Board who may meet at stated times or on notice to all by any of their own number. The Executive Committee shall consult with and advise the Officers of the Company in the management of its business and exercise such powers of the Board of Directors as may be lawfully delegated by the Board of Directors. Vacancies shall be filled by the Board of Directors at any regular or special meeting. The Executive Committee shall keep regular minutes of its proceedings and report the same to the Board when required. 3.13 AUDIT COMMITTEE. There shall be an Audit Committee of two or more Directors who are not "interested persons" of the Company (as defined in the Investment Company Act of 1940, as amended) appointed by the Board who may meet at stated times or on notice to all by any of their own number. The Committee's duties shall include reviewing both the audit and other work of the Company's independent accountants, recommending to the Board of Directors the independent accountants to be retained, and reviewing generally the maintenance and safekeeping of the Company's records and documents. -8- 3.14 OTHER COMMITTEES. The Board of Directors may appoint other committees which shall in each case consist of such number of members (but not less than two) and shall have and may exercise, to the extent permitted by law, such powers as the Board may determine in the resolution appointing them. A majority of all members of any such committee may determine its action, and fix the time and place of its meetings, unless the Board of Directors shall otherwise provide. The Board of Directors shall have power at any time to change the members and, to the extent permitted by law, to change the powers of any such committee, to fill vacancies and to discharge any such committee. 3.15 COMPENSATION OF DIRECTORS. The Board may, by resolution, determine what compensation and reimbursement of expenses of attendance at meetings, if any, shall be paid to Directors in connection with their service on the Board. Nothing herein contained shall be construed to preclude any Director from serving the Company in any other capacity or from receiving compensation therefor. Article IV OFFICERS 4.1 OFFICERS. The Officers of the Company shall be fixed by the Board of Directors and shall include a President, Secretary and Treasurer. Any two of the aforesaid offices may be held by the same person except the offices of President and Vice President. A person who holds more than one office in the Company may not act in more than one capacity to execute, acknowledge or verify an instrument required by law to be executed, acknowledged or verified by more than one officer. 4.2 APPOINTMENT OF OFFICERS. The Directors shall appoint the Officers, who need not be members of the Board. 4.3 ADDITIONAL OFFICERS. The Board may appoint such other Officers and agents as it shall deem necessary who shall exercise such powers and perform such duties as shall be determined from time to time by the Board. 4.4 SALARIES OF OFFICERS. The salaries of all Officers of the Company shall be fixed by the Board of Directors. 4.5 TERM, REMOVAL, VACANCIES. The Officers of the Company shall serve at the pleasure of the Board of Directors and hold office for one year and until their successors are chosen and qualify in their stead. Any Officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Directors. If the office of any Officer becomes vacant for any reason, the vacancy shall be filled by the Board of Directors. -9- 4.6 PRESIDENT. The President shall be the chief executive officer of the Company, shall, subject to the supervision of the Board of Directors, have general responsibility for the management of the business of the Company and shall see that all orders and resolutions of the Board are carried into effect. 4.7 VICE PRESIDENT. The Vice President shall, in the absence or disability of the President, perform the duties and exercise the powers of the President and shall perform such other duties as the Board of Directors shall prescribe. 4.8 TREASURER. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Company and shall deposit all moneys and other valuable effects in the name and to the credit of the Company in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the Company as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the Chairman of the Board and Directors at the regular meetings of the Board, or whenever they may require it, an account of the financial condition of the Company. Any Assistant Treasurer may perform such duties of the Treasurer as the Treasurer or the Board of Directors may assign, and, in the absence of the Treasurer, he may perform all the duties of the Treasurer. 4.9 SECRETARY. The Secretary shall attend meetings of the Board and meetings of the Stockholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose, and shall perform like duties for the Executive Committee of the Board when required. He shall give or cause to be given notice of all meetings of Stockholders and special meetings of the Board of Directors and shall perform such other duties as may be prescribed by the Board of Directors. He shall keep in safe custody the seal of the Company and affix it to any instrument when authorized by the Board of Directors. Any Assistant Secretary may perform such duties of the Secretary as the Secretary or the Board of Directors may assign, and, in the absence of the Secretary, may perform all the duties of the Secretary. 4.10 SUBORDINATE OFFICERS. The Board of Directors from time to time may appoint such other officers or agents as it may deem advisable, each of whom shall serve at the pleasure of the Board of Directors and have such title, hold office for such period, have such authority and perform such duties as the Board of the Directors may I determine. The Board of Directors from time to time may delegate to one or more officers or agents the power to appoint any such subordinate officers or agents and to prescribe their respective rights, terms of office, authorities and duties. 4.11 SURE BONDS. The Board of Directors may require any officer or agent of the Company to execute a bond (including, without limitation, any bond required by the Investment Company Act of 1940, as amended, and the rules and regulations of the Securities and Exchange Commission) to the Company in such sum and with such surety or sureties as the Board of Directors may determine, conditioned upon the faithful performance of his duties to the Company, including responsibility for negligence and for the accounting of any of the Company's property, funds or securities that may come into his hands. -10- Article V GENERAL PROVISIONS 5.1 WAIVER OF NOTICE. Whenever the Stockholders or the Board of Directors are authorized by statute, the provisions of the Articles of Incorporation or these Bylaws to take any action at any meeting after notice, such notice may be waived, in writing, before or after the holding of the meeting, by the person or persons entitled to such notice, or, in the case of a Stockholder, by his duly authorized attorney-in-fact. 5.2 INDEMNITY. (a) The Company shall indemnify its directors to the fullest extent that indemnification of directors is permitted by the Maryland General Corporation Law. The Company shall indemnify its officers to the same extent as its directors and to such further extent as is consistent with law. The Company shall indemnify its directors and officers who while serving as directors or officers also serve at the request of the Company as a director, officer, partner, trustee, employee, agent or fiduciary of another corporation, partnership, joint venture, trust, other enterprise or employee benefit plan to the fullest extent consistent with law. The indemnification and other rights provided by this Article shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. This Article shall not protect any such person against any liability to the Company or any stockholder thereof to which such person would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office ("disabling conduct"). (b) Any current or former director or officer of the Company seeking indemnification within the scope of this Article shall be entitled to advances from the Company for payment of the reasonable expenses incurred by him in connection with the matter as to which he is seeking indemnification in the manner and to the fullest extent permissible under the Maryland General Corporation Law. The person seeking indemnification shall provide to the Company a written affirmation of his good faith belief that the standard of conduct necessary for indemnification by the Company has been met and a written undertaking to repay any such advance if it should ultimately be determined that the standard of conduct has not been met. In addition, at least one of the following additional conditions shall be met: (a) the person seeking indemnification shall provide a security in form and amount acceptable to the Company for his undertaking; (b) the Company is insured against losses arising by reason of the advance; or (c) a majority of a quorum of directors of the Company who are neither "interested persons" as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended, nor parties to the proceeding ("disinterested non-party directors"), or independent legal counsel, in a written opinion, shall have determined, based on a review of facts readily available to the Company at the time the advance is proposed to be made, that there is reason to believe that the person seeking indemnification will ultimately be found to be entitled to indemnification. -11- (c) At the request of any person claiming indemnification under this Article, the Board of Directors shall determine, or cause to be determined, in a manner consistent with the Maryland General Corporation Law, whether the standards required by this Article have been met. Indemnification shall be made only following: (a) a final decision i on the merits by a court or other body before whom the proceeding was brought that the person to be indemnified was not liable by reason or disabling conduct or (b) in the absence of such a decision, a reasonable determination, based upon a review of the facts, that the person to be indemnified was not liable by reason of disabling conduct by (i) the vote of a majority of a quorum of disinterested non-party directors or (ii) an independent legal counsel in a written opinion. (d) Employees and agents who are not officers or directors of the Company may be indemnified, and reasonable expenses may be advanced to such employees or agents, as may be provided by action of the Board of Directors or by contract, subject to any limitations imposed by the Investment Company Act of 1940. (e) The Board of Directors may make further provision consistent with law for indemnification and advance of expenses to directors, officers, employees and agents by resolution, agreement or otherwise. The indemnification provided by this Article shall not be deemed exclusive of any other right, with respect to indemnification or otherwise, to which those seeking indemnification may be entitled under any insurance or other agreement or resolution of stockholders or disinterested directors or otherwise. (f) References in this Article are to the Maryland General Corporation Law and to the Investment Company Act of 1940 as from time to time amended. No amendment of these Bylaws shall affect any right of any person under this Article based on any event, omission or proceeding prior to the amendment. 5.3 INSURANCE. The Company may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee, or agent of the Company or who, while a director, officer, employee, or agent of the Company, is or was serving at the request of the Company as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan, against any liability asserted against and incurred by such person in any such capacity or arising out of such person's position; provided that no insurance may be purchased by the Company on behalf of any person against any liability to the Company or to its Stockholders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. -12- 5.4 CHECKS. All checks or demands for money and notes of the Company shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. 5.5 FISCAL YEAR. The fiscal year of the Company shall be determined by resolution of the Board of Directors. Article VI CERTIFICATES OF STOCK 6.1 CERTIFICATES OF STOCK. The interest of each Stockholder of the Company shall be evidenced by certificates for shares of stock in such form as the Board of Directors may from time to time prescribe. The certificates shall be numbered and entered in the books of the Company as they are issued. They shall exhibit the holder's name and the number of whole shares and no certificate shall be valid unless it has been signed by the President and the Treasurer or an Assistant Treasurer or the i Secretary or an Assistant Secretary and bears the corporate seal. Such seal may be a facsimile, engraved or printed. Where any such certificate is signed by a Transfer Agent or by a Registrar, the signatures of any such officer may be facsimile, engraved or printed. In case any of the officers of the Company whose manual or facsimile signature appears on any stock certificate delivered to a Transfer Agent of the Company shall cease to be such Officer prior to the issuance of such certificate, the Transfer Agent may nevertheless countersign and deliver such certificate as though the person signing the same or whose facsimile signature appears thereon had not ceased to be such officer, unless written instructions of the Company to the contrary are delivered to the Transfer Agent. 6.2 LOST, STOLEN OR DESTROYED CERTIFICATES. The Board of Directors, or the President together with the Treasurer or Secretary, may direct a new certificate to be issued in place of any certificate theretofore issued by the Company, alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person I claiming the certificate of stock to be lost, stolen or destroyed, or by his legal representative. When authorizing such issue of a new certificate, the Board of Directors, or the President and Treasurer or Secretary, may, in its or their discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as it or they shall require and/or give the Company a bond in such sum and with such surety or sureties as it or they may direct as indemnity against any claim that may be made against the Company with respect to the certificate alleged to have been lost, stolen or destroyed for such newly issued certificate. -13- 6.3 TRANSFER OF STOCK. Shares of the Company shall be transferable on the books of the Company by the holder thereof in person or by his duly authorized attorney or legal representative upon surrender and cancellation of a certificate or certificates for the same number of shares of the same class, duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, with such proof of the authenticity of the signature as the Company or its agents may reasonably require. The shares of stock of the Company may be freely transferred, and the Board of Directors may, from time to time, adopt rules and regulations with reference to the method of transfer of the shares of stock of the Company. 6.4 REGISTERED HOLDER. The Company shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as expressly provided by statute. 6.5 RECORD DATE. The Board of Directors may fix a time not less than 10 nor more than 90 days prior to the date of any meeting of Stockholders or prior to the last day on which the consent or dissent of Stockholders may be effectively expressed for any purpose without a meeting, as the time as of which Stockholders entitled to notice of, and to vote at, such a meeting or whose consent or dissent is required or may be expressed for any purpose, as the case may be, shall be determined; and all such persons who were holders of record of voting stock at such time and no other shall be entitled to notice of, and to vote at, such meeting or to express their consent or dissent, as the case may be. If no record date has been fixed, the record date for the determination of Stockholders entitled to notice of, or to vote at, a meeting of Stockholders shall be the later of the close of business on the day on which notice of the meeting is mailed or the thirtieth (30th) day before the meeting, or, if notice is waived by all Stockholders, at the close of business on the tenth day next preceding the day on which the meeting is held. The Board of Directors may also fix a time not exceeding ninety (90) days preceding the date fixed for the payment of any dividend or the making of any distribution, or for the delivery of evidences of rights, or evidences of interests arising out of any change, conversion or exchange of capital stock, as a record time for the determination of the Stockholder entitled to receive any such dividend, distribution, rights or interests. 6.6 STOCK LEDGERS. The stock ledgers of the Company, containing the names and addresses of the Stockholders and the number of shares held by them respectively, shall be kept at the principal offices of the Company or at the offices of the transfer agent of the Company or at such other location as may be authorized by the Board of Directors from time to time. 6.7 TRANSFER AGENTS AND REGISTRARS. The Board of Directors may from time to time appoint or remove transfer agents and/or registrars of transfers (if any) of shares of stock of the Company, and it may appoint the same person as both transfer agent and registrar. Upon any such appointment being made, all certificates representing shares of capital stock thereafter issued shall be countersigned by one of such transfer agents or by one of such registrars of transfers (if any) or by both and shall not be valid unless so countersigned. If the same person shall be both transfer agent and registrar, only one countersignature by such person shall be required. -14- Article VII AMENDMENTS 7.1 GENERAL. Except as provided in the next succeeding sentence and in the Articles of Incorporation, all Bylaws of the Corporation, whether adopted by the Board of Directors or the Stockholders, shall be subject to amendment, alteration or repeal, and new Bylaws may be made, by the affirmative vote of a majority of either: (a) the holders of record of the outstanding shares of stock of the Corporation entitled to vote, at any annual or special meeting, the notice or waiver of notice of which shall have specified or summarized the proposed amendment, alteration, repeal or new Bylaw; or (b) the Directors, at any regular or special meeting the notice or waiver of notice of which shall have specified or summarized the proposed amendment, alteration, repeal or new Bylaw. The provisions of Articles 2.5 and 3.2 of these Bylaws shall be subject to amendment, alteration or repeal by the affirmative vote of either: (i) the holders of record of 75% of the outstanding shares of stock of the Corporation entitled to vote, at any annual or special meeting, the notice or waiver of notice of which shall have specified or summarized the proposed amendment, alteration or repeal or (ii) 75% of the Continuing Directors (as such term is defined in Article VII of the Corporation's Articles of Incorporation), at any regular or special meeting the notice or waiver of notice of which shall have specified or summarized the proposed amendment, alteration or repeal. Dated: Amended and Restated as of February 13, 2002 -15- EX-10.9 5 exh9.txt CUSTODY AGREEMENT EXHIBIT 9 CUSTODY AGREEMENT AGREEMENT, dated as of April 23, 2001, between PROGRESSIVE RETURN FUND, INC., a corporation organized and existing under the laws of the State of Maryland, (the "Company") and CUSTODIAL TRUST COMPANY, a bank organized and existing under the laws of the State of New Jersey (the "Custodian"). WHEREAS, the Company desires to retain and employ Custodian to act, and Custodian is willing to act, as Securities Intermediary and custodian for certain of its securities, funds and other assets pursuant to this Agreement; WHEREAS, capitalized terms used herein but not otherwise defined herein that are defined in the New York Uniform Commercial Code as in effect from time to time (the "NYUCC") shall have the meanings given such terms in the NYUCC; WHEREAS, the Company is a closed-end, diversified management investment company registered under the 1940 Act; WHEREAS, Custodian represents that it is a bank having the qualifications prescribed in the 1940 Act to act as custodian for management investment companies registered under the 1940 Act; NOW, THEREFORE, in consideration of the mutual agreements herein made, the Company and Custodian hereby agree as follows: ARTICLE I DEFINITIONS Whenever used in this Agreement, the following terms, unless the context otherwise requires, shall mean: 1.1 "AUTHORIZED PERSON" means any person authorized by resolution of the Board of Directors to give Oral Instructions and Written Instructions on behalf of the Company and identified, by name or by office, in Exhibit A hereto. 1.2 "BOARD OF DIRECTORS" means the Board of Directors of the Company or, when permitted under the 1940 Act, the Executive Committee thereof, if any. 1.3 "BOOK-ENTRY SYSTEM" means a book-entry system maintained by a Federal Reserve Bank for securities of the United States government or of agencies or instrumentalities thereof (including government-sponsored enterprises). 1.4 "BUSINESS DAY" means any day on which banks in the State of New Jersey and New York are open for business. 1.5 "CUSTODY ACCOUNT" means the account in the name of the Company, which is provided for in Section 3.2 below. 1.6 "DOMESTIC SECURITIES DEPOSITORY" means The Depository Trust & Clearing Corporation and any other clearing agency registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, which acts as a securities depository. 1.7 "ELIGIBLE DOMESTIC BANK" means a bank as defined in the 1940 Act. 1.8 "ELIGIBLE FOREIGN CUSTODIAN" has the same meaning as in Rule 17f-5 under the 1940 Act. 1.9 "ELIGIBLE SECURITIES DEPOSITORY" has the same meaning as in Rule 17f-7 under the 1940 Act. 1.10 "FOREIGN ASSETS" has the same meaning as in Rule 17f-5 under the 1940 Act. 1.11 "FOREIGN CUSTODY MANAGER" has the same meaning as in Rule 17f-5 under the 1940 Act. 1.12 "MASTER REPURCHASE AGREEMENT" means the Master Repurchase Agreement of even date herewith between the Company and Bear, Stearns & Co. Inc. ("Bear Stearns") as it may from time to time be amended. 1.13 "MASTER SECURITIES LOAN AGREEMENT" means the Master Securities Loan Agreement of even date herewith between the Company and Bear, Stearns Securities Corp. ("BS Securities") as it may from time to time be amended. -2- 1.14 "1940 ACT" means the Investment Company Act of 1940, as amended, and the rules and regulations thereunder. 1.15 "ORAL INSTRUCTIONS" means instructions orally transmitted to and accepted by Custodian which are (A) reasonably believed by Custodian to have been given by an Authorized Person, (B) recorded and kept among the records of Custodian made in the ordinary course of business, and (C) completed in accordance with Custodian's requirements from time to time as to content of instructions and their manner and timeliness of delivery by the Company. 1.16 "PROPER INSTRUCTIONS" means Oral Instructions or Written Instructions. Proper Instructions may be continuing Written Instructions when deemed appropriate by the Company and Custodian. 1.17 "SECURITIES DEPOSITORY" means any Domestic Securities Depository or Eligible Securities Depository. 1.18 "SHARES" means those shares of the capital stock of Company that represent interests in the Company. 1.19 "WRITTEN INSTRUCTIONS" means written communications received by Custodian that are (A) reasonably believed by Custodian to have been signed or sent by an Authorized Person, (B) sent or transmitted by letter, facsimile, central processing unit connection, on-line terminal or magnetic tape, and (C) completed in accordance with Custodian's requirements from time to time as to content of instructions and their manner and timeliness of delivery by the Company. -3- ARTICLE II APPOINTMENT OF CUSTODIAN 2.1 APPOINTMENT. The Company hereby appoints Custodian as Securities Intermediary and custodian of all such securities, funds and other assets of the Company as may be acceptable to Custodian and from time to time delivered to it by Custodian or others for the account of the Company. 2.2 ACCEPTANCE. Custodian hereby accepts appointment as such Custodian and agrees to perform the duties thereof as hereinafter set forth. ARTICLE III CUSTODY OF SECURITIES, CASH, AND OTHER ASSETS 3.1 SEGREGATION. All securities and non-cash property of the Company in the possession of Custodian (other than securities maintained by Custodian with a foreign sub-custodian appointed pursuant to this Agreement or in a Securities Depository or Book-Entry System) shall be physically segregated from other such securities and non-cash property in the possession of Custodian. All cash, securities and other non-cash property of the Company shall be identified as subject to this Agreement. 3.2 CUSTODY ACCOUNT. (a) Custodian shall open and maintain in its trust department a custody account in the name of the Company, subject only to draft or order of Custodian, in which Custodian shall enter and carry all securities, funds and other assets of the Company which are delivered to Custodian and accepted by it. (b) If Custodian at any time fails to receive any of the documents referred to in Section 3.10(a) below, then, until such time as it receives such document, it shall not be obligated to receive any securities of the Company into the Custody Account and shall be entitled to return to the Company any securities of the Company that it is holding in the Custody Account. (c) The Custody Account is an account to which Financial Assets are or may be credited, and all assets credited to the Account shall be deemed to be Financial Assets under Article 8 of the NYUCC. Securities Intermediary shall indicate by book entry that such Financial Assets have been credited to the Custody Account. -4- 3.3 SECURITIES IN PHYSICAL FORM. Custodian may, but shall not be obligated to, hold securities that may be held only in physical form. 3.4 DISCLOSURE TO ISSUERS OF SECURITIES. Custodian is authorized to disclose the Company's name, address and securities positions in the Custody Account to the issuers of such securities when requested by them to do so. 3.5 EMPLOYMENT OF DOMESTIC SUB-CUSTODIANS. At any time and from time to time, Custodian in its discretion may appoint and employ any Eligible Domestic Bank as sub-custodian to hold securities and other assets of the Company that are maintained in the United States and to carry out such other provisions of this Agreement as it may determine, provided, however, that the employment of any such sub-custodian has been approved by the Company. The employment of any such sub-custodian shall be at Custodian's expense and shall not relieve Custodian of any of its obligations or liabilities under this Agreement. 3.6 EMPLOYMENT OF FOREIGN CUSTODIANS. (a) (i) By providing Proper Instructions to open an account in a given jurisdiction outside the United States, the Company shall be deemed to have confirmed to Custodian that the Company has (A) assessed and accepted all material country or sovereign risks in such jurisdiction and accepted responsibility for their occurrence, (B) made all determinations required to be made by the Company under the 1940 Act, and (C) appropriately and adequately disclosed to its shareholders, other investors and all persons who have right in or to such investments, all material investment risks, including those relating to the custody and settlement infrastructure or the servicing of securities in such jurisdiction. Proper Instructions to open an account in a given country shall comprise authorization of Custodian to hold assets in such country in accordance with the terms of this Agreement. Custodian shall not be required to make independent inquiry as to the authorization of the Company to invest in such country. -5- (ii) Unless instructed otherwise by the Company, Custodian at any time and from time to time in its discretion may appoint and employ in accordance with the 1940 Act, and may also cease to employ, (A) any overseas branch of any Eligible Domestic Bank, or (B) any Eligible Foreign Custodian selected by the Foreign Custody Manager, in each case as a foreign sub-custodian for securities and other assets of the Company that are maintained outside the United States, provided, however, that the employment of any such overseas branch has been approved by the Company and, provided further that, in the case of any such Eligible Foreign Custodian, the Foreign Custody Manager has approved, in writing, the agreement pursuant to which custodian employs such Eligible Foreign Custodian. (iii) Unless instructed otherwise by the Company, Custodian may deposit and/or maintain Foreign Assets of the Company in any Eligible Securities Depository. Prior to the time that securities are placed with such Eligible Securities Depository, but subject to the provisions of Section 3.6(a)(iv) below, Custodian shall have prepared an assessment of the custody risks associated with maintaining assets with the Eligible Securities Depository. (iv) Prior to placing any assets of the Company with an Eligible Securities Depository, Custodian shall provide to the Company an assessment of the custody risks associated with maintaining assets within such Eligible Securities Depository, provided, however, that if such Foreign Assets are to be placed or maintained with such Eligible Securities Depository prior to July 1, 2001 (which is the effective date of Rule 17f-7 under the 1940 Act, that requires the delivery of such an assessment) and Custodian does not then have such assessment available, custodian may provide such assessment to the Company on July 1, 2001, or promptly thereafter. Custodian shall monitor such custody risks on a continuing basis and promptly notify the Company of any material change in such risks. In performing its duties under this Section 3.6(a)(iv), Custodian shall use reasonable care, prudence and diligence and, in the exercise of such care, prudence and diligence, may rely upon examinations performed and determinations made by Citibank, N.A. or such other operator of a global custody system as the Company may from time to time approve. (b) Set forth on Exhibit C hereto are the foreign sub-custodians that Custodian may employ pursuant to Section 3.6(a) above. Exhibit C shall be revised from time to time as foreign sub-custodians and countries are added or deleted. -6- (c) If the Company proposes to make an investment which is to be held in a country in which Custodian does not have appropriate arrangements in place with a foreign sub-custodian selected in accordance with section 3.6(a)(ii) above, then the Company shall inform Custodian sufficiently in advance of such investment to allow Custodian to make such arrangements. (d) Notwithstanding anything to the contrary in Section 8.1 below or elsewhere in this Agreement, Custodian shall have no greater liability to the Company for the actions or omissions of any foreign sub-custodian appointed pursuant to this Agreement than any such foreign sub-custodian has to Custodian, and Custodian shall not be required to discharge any such liability which may be imposed on it unless and until such foreign sub-custodian has effectively indemnified Custodian against it or has otherwise discharged its liability to Custodian in full. (e) Upon the request of the Foreign Custody Manager, Custodian shall annually furnish to the Foreign Custody Manager information concerning all foreign sub-custodians appointed pursuant to this Agreement which shall be similar in kind and scope to that furnished to the Foreign Custody Manager in connection with the initial approval by the Foreign Custody Manager of the agreements pursuant to which Custodian employs such foreign sub-custodians or as otherwise required by the 1940 Act. 3.7 APPOINTMENT OF OTHER AGENTS. Custodian may employ other suitable agents, which may include affiliates of Custodian such as Bear Stearns or BS Securities, both of which are securities broker-dealers, provided, however, that Custodian shall not employ either of such affiliates to hold any collateral pledged to the Company, or purchased by the Company, under any securities loan agreement or repurchase agreement (whether now or hereafter in effect) between the Company and such affiliate. The appointment of any agent pursuant to this Section 3.7 shall not relieve Custodian of any of its obligations or liabilities under this Agreement. -7- 3.8 BANK ACCOUNTS. In its discretion and from time to time Custodian may open and maintain one or more demand deposit accounts with any Eligible Domestic Bank (any such accounts to be in the name of Custodian and subject only to its draft or order), provided, however, that the opening and maintenance of any such account shall be at Custodian's expense and shall not relieve Custodian of any of its obligations or liabilities under this Agreement. 3.9 DELIVERY OF ASSETS TO CUSTODIAN. Provided they are acceptable to Custodian, the Company shall deliver to Custodian its securities, funds and other assets, including (A) payments of income, payments of principal and capital distributions received by the Company with respect to its securities, funds or other assets at any time during the term of this Agreement, and (B) funds received by the Company for the issuance, at any time during such term, of its Shares. Custodian shall not be under any duty or obligation to require the Company to deliver to it any of its securities or other assets and shall have no responsibility or liability for or on account of securities or other assets not so delivered. 3.10 DOMESTIC SECURITIES DEPOSITORIES AND BOOK-ENTRY SYSTEMS. Custodian may deposit and/or maintain securities of the Company in a Domestic Securities Depository or in a Book-Entry System, subject to the following provisions: (a) Prior to a deposit of securities of the Company in any Domestic Securities Depository or Book-Entry System, the Company shall deliver to Custodian a resolution of the Board of Directors of the Company, certified by an officer of the Company, authorizing and instructing Custodian (and any sub-custodian employed by it) on an on-going basis to deposit in such Domestic Securities Depository or Book-Entry System all securities eligible for deposit therein and to make use of such Domestic Securities Depository or Book-Entry System to the extent possible and practical in connection with the performance of its obligations under custody or sub-custody agreements for securities belonging to the Company, including, without limitation, in connection with loans of securities and deliveries and returns of collateral consisting of securities. -8- (b) Securities of the Company kept in a Book-Entry System or Domestic Securities Depository shall be kept in an account ("Depository Account") of Custodian in such Book-Entry System or Domestic Securities Depository which includes only assets held by Custodian as Securities Intermediary, custodian, fiduciary or otherwise for customers. (c) The records of Custodian with respect to securities of the Company maintained in a Book-Entry System or Domestic Securities Depository shall at all times identify such securities as belonging to the Company. (d) If securities purchased by the Company are to be held in a Book-Entry System or Domestic Securities Depository, Custodian (or any sub-custodian appointed pursuant to Section 3.5 above) shall pay for such securities upon (I) receipt of advice from the Book-Entry System or Domestic Securities Depository that such securities have been transferred to the Depository Account, and (II) the making of an entry on the records of Custodian (or of such sub-custodian) to reflect such payment and transfer for the account of the Company. If securities sold by the Company are held in a Book-Entry System or Domestic Securities Depository, Custodian (or such sub-custodian) shall transfer such securities upon (A) receipt of advice from the Book-Entry System or Domestic Securities Depository that payment for such securities has been transferred to the Depository Account, and (B) the making of an entry on the records of Custodian (or of such sub-custodian) to reflect such transfer and payment for the account of the Company. (e) Custodian shall provide the Company with copies of any report obtained by Custodian from a Book-Entry System or Domestic Securities Depository in which securities of the Company are kept on the internal accounting controls and procedures for safeguarding securities deposited in such Book-Entry System or Domestic Securities Depository. (f) At its election, the Company shall be subrogated to the rights of Custodian with respect to any claim against a Book-Entry System or Domestic Securities Depository or any other person for any loss or damage to the Company arising from the use of such Book-Entry System or Domestic Securities Depository, if and to the extent that the Company has not been made whole for any such loss or damage. -9- 3.11 FOREIGN SECURITIES DEPOSITORIES. Custodian or any foreign sub-custodian appointed pursuant to Section 3.6 above may maintain securities of the Company in any Eligible Securities Depository set forth on Exhibit C hereto. Exhibit C shall be revised from time to time as Foreign Securities Depositories are added or deleted. 3.12 RELATIONSHIP WITH SECURITIES DEPOSITORIES. No Book-Entry System, Securities Depository, or other securities depository or clearing agency (whether foreign or domestic) which it is or may become standard market practice to use for the comparison and settlement of trades in securities shall be an agent or sub-contractor of Custodian for purposes of Section 3.7 above or otherwise. 3.13 PAYMENTS FROM CUSTODY ACCOUNT. Upon receipt of Proper Instructions but subject to its right to foreclose upon and liquidate collateral pledged to it pursuant to Section 9.3 below, Custodian shall make payments from the Custody Account, but only in the following cases, provided, FIRST, that such payments are in connection with the clearance and/or custody of securities or other assets, SECOND, that there are sufficient funds in such Custody Account, whether belonging to the Company or advanced to it by Custodian in its sole and absolute discretion as set forth in Section 3.18 below, for Custodian to make such payments, and, THIRD, that after the making of such payments, the Company would not be in violation of any margin or other requirements agreed upon pursuant to Section 3.18 below: (a) For the purchase of securities for the Company but only (I) in the case of securities (other than options on securities, futures contracts and options on futures contracts), against the delivery to Custodian (or any sub-custodian appointed pursuant to this Agreement) of such securities registered as provided in Section 3.20 below or in proper form for transfer or, if the purchase of such securities is effected through a Book-Entry System or Domestic Securities Depository, in accordance with the conditions set forth in Section 3.10 above, and (II) in the case of options, futures contracts and options on futures contracts, against delivery to Custodian (or such sub-custodian) of evidence of title thereto in favor of the Company, the Custodian, any such sub-custodian, or any nominee referred to in Section 3.20 below; -10- b) In connection with the conversion, exchange or surrender, as set forth in Section 3.14(f) below, of securities owned by the Company; (c) For transfer in accordance with the provisions of any agreement among the Company, Custodian and a securities broker-dealer, relating to compliance with rules of The Options Clearing Corporation and of any registered national securities exchange (or of any similar organization or organizations) regarding escrow or other arrangements in connection with transactions of the Company; (d) For transfer in accordance with the provisions of any agreement among the Company, Custodian and a futures commission merchant, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any contract market (or any similar organization or organizations) regarding margin or other deposits in connection with transactions of the Company; (e) For the funding of any time deposit (whether certificated or not) or other interest-bearing account with any banking institution (including Custodian), provided that Custodian shall receive and retain such certificate, advice, receipt or other evidence of deposit (if any) as such banking institution may deliver with respect to any such deposit or account; f) For the purchase from a banking or other financial institution of loan participations, but only if Custodian has in its possession a copy of the agreement between the Company and such banking or other financial institution with respect to the purchase of such loan participations and provided that Custodian shall receive and retain such participation certificate or other evidence of participation (if any) as such banking or other financial institution may deliver with respect to any such loan participation; -11- (g) For the purchase and/or sale of foreign currencies or of options to purchase and/or sell foreign currencies, for spot or future delivery, for the account of the Company pursuant to contracts between the Company and any banking or other financial institution (including Custodian, any sub-custodian appointed pursuant to this Agreement and any affiliate of Custodian); (h) For transfer to a securities broker-dealer as margin for a short sale of securities for the Company, or as payment in lieu of dividends paid on securities sold short for the Company; (i) For the payment as provided in Article IV below of any dividends, capital gain distributions or other distributions declared on the Shares of the Company; (j) For the payment as provided in Article IV below of the redemption price of the Shares of the Company; (k) For the payment of any expense or liability incurred by the Company, including but not limited to the following payments for the account of the Company: interest, taxes, and administration, investment advisory, accounting, auditing, transfer agent, custodian, trustee and legal fees, and other operating expenses of the Company; in all cases, whether or not such expenses are to be in whole or in part capitalized or treated as deferred expenses; and (l) For any other proper purpose, but only upon receipt of Proper Instructions, specifying the amount and purpose of such payment, certifying such purpose to be a proper purpose of the Company, and naming the person or persons to whom such payment is to be made. 3.14 DELIVERIES FROM CUSTODY ACCOUNT. Upon receipt of Proper Instructions but subject to its right to foreclose upon and liquidate collateral pledged to it pursuant to Section 9.3 below, Custodian shall release and deliver securities and other assets from the Custody Account, but only in the following cases, provided, FIRST, that such deliveries are in connection with the clearance and/or custody of securities or other assets, SECOND, there are sufficient amounts and types of securities or other assets in the Custody Account for Custodian to make such deliveries, and, THIRD, that after the making of such deliveries, the Company would not be in violation of any margin or other requirements agreed upon pursuant to Section 3.18 below: -12- (a) Upon the sale of securities for the account of the Company but, subject to Section 3.15 below, only against receipt of payment therefor or, if such sale is effected through a Book-Entry System or Domestic Securities Depository, in accordance with the provisions of Section 3.10 above; (b) To an offeror's depository agent in connection with tender or other similar offers for securities of the Company; provided that, in any such case, the funds or other consideration for such securities is to be delivered to Custodian; (c) To the issuer thereof or its agent when such securities are called, redeemed or otherwise become payable, provided that in any such case the funds or other consideration for such securities is to be delivered to Custodian; (d) To the issuer thereof or its agent for exchange for a different number of certificates or other evidence representing the same aggregate face amount or number of units; provided that, in any such case, the new securities are to be delivered to Custodian; (e) To the securities broker through whom securities are being sold for the Company, for examination in accordance with the "street delivery" custom; (f) For exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the issuer of such securities, or pursuant to provisions for conversion contained in such securities, or pursuant to any deposit agreement, including surrender or receipt of underlying securities in connection with the issuance or cancellation of depository receipts; provided that, in any such case, the new securities and funds, if any, are to be delivered to Custodian; (g) In the case of warrants, rights or similar securities, to the issuer of such warrants, rights or similar securities, or its agent, upon the exercise thereof, provided that, in any such case, the new securities and funds, if any, are to be delivered to Custodian; (h) To the borrower thereof, or its agent, in connection with any loans of securities for the Company pursuant to any securities loan agreement entered into by the Company, but only against receipt by Custodian of such collateral as is required under such securities loan agreement; (i) To any lender, or its agent, as collateral for any borrowings from such lender by the Company that require a pledge of assets of the Company, but only against receipt by Custodian of the amounts borrowed; (j) Pursuant to any authorized plan of liquidation, reorganization, merger, consolidation or recapitalization of the Company; (k) For delivery in accordance with the provisions of any agreement among the Company, Custodian and a securities broker- dealer, relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange (or of any similar organization or organizations) regarding escrow or other arrangements in connection with transactions of the Company; (l) For delivery in accordance with the provisions of any agreement among the Company, Custodian, and a futures commission merchant, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any contract market (or any similar organization or organizations) regarding margin or other deposits in connection with transactions of the Company; -13- (m) For delivery to a securities broker-dealer as margin for a short sale of securities for the Company; (n) To the issuer of American Depositary Receipts or International Depositary Receipts (hereinafter, collectively, "ADRs") for such securities, or its agent, against a written receipt therefor adequately describing such securities, provided that such securities are delivered together with instructions to issue ADRs in the name of Custodian or its nominee and to deliver such ADRs to Custodian; (o) In the case of ADRs, to the issuer thereof, or its agent, against a written receipt therefor adequately describing such ADRs, provided that such ADRs are delivered together with instructions to deliver the securities underlying such ADRs to Custodian or an agent of Custodian; or (p) For any other proper purpose, but only upon receipt of Proper Instructions, specifying the securities or other assets to be delivered, setting forth the purpose for which such delivery is to be made, certifying such purpose to be a proper purpose of the Company, and naming the person or persons to whom delivery of such securities or other assets is to be made. 3.15 DELIVERY PRIOR TO FINAL PAYMENT. When instructed by the Company to deliver its securities against payment, Custodian shall be entitled, but only if in accordance with generally accepted market practice, to deliver such securities prior to actual receipt of final payment therefor and, exclusively in the case of securities in physical form, prior to receipt of payment therefor. In any such case, the Company shall bear the risk that final payment for such securities may not be made or that such securities may be returned or otherwise held or disposed of by or through the person to whom they were delivered, and Custodian shall have no liability for any of the foregoing. 3.16 COLLECTION OF INCOME AND OTHER PAYMENTS.(a) Custodian shall receive in the Account any money or property, including without limitation any dividends, payments of principal or other distributions or payments, on account of securities in the Account. Custodian shall not, however, be required to enforce collection, by legal means or otherwise, of any such money or other property not paid when due, but shall receive the proceeds of such collections as may be effected by it or its agents in the ordinary course of its custody and safekeeping business. (b) Custodian shall not be liable for, or considered to be custodian of, any cash belonging to Custodian or any money represented by a check, draft or other instrument for the payment of money, until Custodian or its agents actually receive such cash or collect on such instrument. (c) In its sole discretion and from time to time, Custodian may credit the Custody Account, prior to actual receipt of final payment thereof, with (A) proceeds from the sale of securities in the Custody Account which it has been instructed to deliver against payment, (B) proceeds from the redemption of securities or other assets in such Custody Account, and (C) income from cash, securities or other assets in the Custody Account. Any such credit shall be conditional upon actual receipt by Custodian of final payment and may be reversed if final payment is not actually received in full. Custodian may, in its sole discretion and from time to time, permit the Company to use funds so credited to the Account in anticipation of actual receipt of final payment. Any such funds so used shall bear interest at such rate as Custodian and the Company may agree, shall be repayable immediately upon demand made by Custodian at any time prior to the actual receipt by it of all final payments in anticipation of which funds were credited to the Account, and shall constitute an advance that is fully secured as provided in Section 9.3 below. (d) For purposes of this Agreement, "final payment" means payment in funds which are (or have become) immediately available, under applicable law are irreversible, and are not subject to any security interest, levy, lien or other encumbrance. -14- 3.17 PAYMENTS AND DELIVERIES OUTSIDE THE UNITED STATES. Notwithstanding anything to the contrary that may be required by Section 3.13 or Section 3.14 above, or elsewhere in this Agreement, in the case of securities and other assets maintained outside the United States and in the case of payments made outside the United States, Custodian and any sub-custodian appointed pursuant to this Agreement may receive and deliver such securities or other assets, and may make such payments, in accordance with the laws, regulations, customs, procedures and practices applicable in the relevant local market outside the United States. 3.18 CLEARING CREDIT. Custodian may, in its sole discretion and from time to time, advance funds to the Company to facilitate the settlement of transactions in the Custody Account. Any such advance (A) shall be repayable immediately upon demand made by Custodian, (B) shall be fully secured as provided in Section 9.3 below, and (C) shall bear interest at such rate, and be subject to such other terms and conditions, as Custodian and the Company may agree. 3.19 ACTIONS NOT REQUIRING PROPER INSTRUCTIONS. Unless otherwise instructed by the Company, Custodian shall with respect to all securities and other assets held for the Company: (a) Subject to Section 3.16(a) above, receive into the Custody Account any funds or other property, including payments of principal, interest and dividends, due and payable on or on account of such securities and other assets; (b) Deliver securities of the Company to the issuers of such securities or their agents for the transfer thereof into the name of the Company, Custodian or any of the nominees referred to in Section 3.20 below; (c) Endorse for collection, in the name of the Company, checks, drafts and other negotiable instruments; (d) Surrender interim receipts or securities in temporary form for securities in definitive form; (e) Execute, as custodian, any necessary declarations or certificates of ownership under the federal income tax laws of the United States, or the laws or regulations of any other taxing authority, in connection with the transfer of such securities or other assets or the receipt of income or other payments with respect thereto; (f) Receive and hold for the Company all rights and similar securities issued with respect to securities or other assets of the Company; (g) As may be required in the execution of Proper Instructions, transfer funds from the Custody Account to any demand deposit account maintained by Custodian pursuant to Section 3.8 above; and (h) In general, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase and transfer of, and other dealings in, such securities and other assets. 3.20 REGISTRATION AND TRANSFER OF SECURITIES. All securities held for the Company under this Agreement that are issuable only in bearer form shall be held by Custodian in that form, provided that any such securities shall be held in a Securities Depository or Book-Entry System if eligible therefor. All other securities and all other assets held for the Company may be registered in the name of (A) Custodian as agent, (B) any Securities Depository, or (C) any nominee of any of them. The Company shall furnish to Custodian appropriate instruments to enable Custodian to hold or deliver in proper form for transfer, or to register as in this Section 3.20 provided, any securities or other assets delivered to Custodian which are registered in the name of the Company, Custodian or a nominee of Custodian. -15- 3.21 RECORDS. (A) Custodian shall maintain complete and accurate records with respect to securities, funds and other assets held for the Company, including (I) journals or other records of original entry containing an itemized daily record in detail of all receipts and deliveries of securities and all receipts and disbursements of funds; (II) ledgers (or other records) reflecting (A) securities in transfer, if any, (B) securities in physical possession, (C) monies and securities borrowed and monies and securities loaned (together with a record of the collateral therefor and substitutions of such collateral), (D) dividends and interest received, and (E) dividends receivable and interest accrued; and (III) canceled checks and bank records related thereto. Custodian shall keep such other books and records with respect to securities, funds and other assets of the Company which are held hereunder as Custodian may reasonably request. (b) All such books and records maintained by Custodian shall (I) be maintained in a form acceptable to the Company and in compliance with rules and regulations of the Securities and Exchange Commission, (II) be the property of the Company and at all times during the regular business hours of Custodian be made available upon request for inspection by duly authorized officers, employees or agents of the Company and employees or agents of the Securities and Exchange Commission, and (III) if required to be maintained under the 1940 Act, be preserved for the periods prescribed therein. 3.22 ACCOUNT REPORTS BY CUSTODIAN. Custodian shall furnish the Company with a daily activity statement, including a summary of all transfers to or from the Custody Account. At least monthly and from time to time, Custodian shall furnish the Company with a detailed statement of the securities, funds and other assets held under this Agreement. 3.23 OTHER REPORTS BY CUSTODIAN. Custodian shall provide the Company with such reports as the Company may reasonably request from time to time on the internal accounting controls and procedures for safeguarding securities which are employed by Custodian. 3.24 PROXIES AND OTHER MATERIALS. (A) Unless otherwise instructed by the Company, Custodian shall promptly deliver to the Company all notices of meetings, proxy materials (other than proxies) and other announcements, which it receives regarding securities held by it in the Custody Account. Whenever Custodian or any of its agents receives a proxy with respect to securities in the Custody Account, Custodian shall promptly request instructions from the Company on how such securities are to be voted, and shall give such proxy, or cause it to be given, in accordance with such instructions. If the Company timely informs Custodian that it wishes to vote any such securities in person, Custodian shall promptly seek to have a legal proxy covering such securities issued to the Company. Unless otherwise instructed by the Company, neither Custodian nor any of its agents shall exercise any voting rights with respect to securities held hereunder. (b) Unless otherwise instructed by the Company, Custodian shall promptly transmit to the Company all other written information received by Custodian from issuers of securities held in the Custody Account. With respect to tender or exchange offers for such securities or with respect to other corporate transactions involving such securities, Custodian shall promptly transmit to the Company all written information received by Custodian from the issuers of such securities or from any party (or its agents) making any such tender or exchange offer or participating in such other corporate transaction. If the Company, with respect to such tender or exchange offer or other corporate transaction, desires to take any action that may be taken by it pursuant to the terms of such offer or other transaction, the Company shall notify Custodian (I) in the case of securities maintained outside the United States, such number of Business Days prior to the date on which Custodian is to take such action as will allow Custodian to take such action in the relevant local market for such securities in a timely fashion, and (II) in the case of all other securities, at least five Business Days prior to the date on which Custodian is to take such action. 3.25 CO-OPERATION. Custodian shall cooperate with and supply necessary information to the entity or entities appointed by the Company to keep the books of account of the Company and/or to compute the value of its assets. -16- ARTICLE IV REDEMPTION OF PORTFOLIO SHARES; DIVIDENDS AND OTHER DISTRIBUTIONS 4.1 TRANSFER OF FUNDS. From such funds as may be available for the purpose in the Custody Account, and upon receipt of Proper Instructions specifying that the funds are required to redeem Shares of the Company or to pay dividends or other distributions to holders of its Shares, Custodian shall transfer each amount specified in such Proper Instructions to such account of the Company or of an agent thereof (other than Custodian), at such bank, as the Company may designate therein with respect to such amount. 4.2 SOLE DUTY OF CUSTODIAN. Custodian's sole obligation with respect to the redemption of Shares of the Company and the payment of dividends and other distributions thereon shall be its obligation set forth in Section 4.1 above, and Custodian shall not be required to make any payments to the various holders from time to time of Shares of the Company nor shall Custodian be responsible for the payment or distribution by the Company, or any agent designated in Proper Instructions given pursuant to Section 4.1 above, of any amount paid by Custodian to the account of the Company or such agent in accordance with such Proper Instructions. ARTICLE V SEGREGATED ACCOUNTS Upon receipt of Proper Instructions to do so, Custodian shall establish and maintain a segregated account or accounts for and on behalf of the Company, into which account or accounts may be transferred funds and/or securities, including securities maintained in a Securities Depository: (a) in accordance with the provisions of any agreement among the Company, Custodian and a securities broker-dealer (or any futures commission merchant), relating to compliance with the rules of The Options Clearing Corporation or of any registered national securities exchange (or the Commodity Futures Trading Commission or any registered contract market), or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions of the Company, (b) for purposes of segregating funds or securities in connection with securities options purchased or written by the Company or in connection with financial futures contracts (or options thereon) purchased or sold by the Company, (c) which constitute collateral for loans of securities made by the Company, (d) for purposes of compliance by the Company with requirements under the 1940 Act for the maintenance of segregated accounts by registered management investment companies in connection with reverse repurchase agreements, when-issued, delayed delivery and firm commitment transactions, and short sales of securities, and (e) for other proper purposes, but only upon receipt of Proper Instructions, specifying the purpose or purposes of such segregated account and certifying such purposes to be proper purposes of the Company. ARTICLE VI CERTAIN SECURITIES LENDING TRANSACTIONS 6.1 TRANSACTIONS. If and to the extent that the necessary funds and securities have been entrusted to it under this Agreement, and subject to Custodian's right to foreclose upon and liquidate collateral pledged to it pursuant to Section 9.3 below, Custodian, as agent of the Company, shall from time to time (and unless the Company gives it Proper Instructions to do otherwise) make for the account of the Company the transfers of funds and deliveries of securities which the Company is required to make pursuant to the Master Securities Loan Agreement and shall receive for the account of the Company the transfers of funds and deliveries of securities which the borrower under the Master Securities Loan Agreement is required to make pursuant thereto. Custodian shall make and receive all such transfers and deliveries pursuant to, and subject to the terms and conditions of, the Master Securities Loan Agreement. -17- 6.2 COLLATERAL. Custodian shall daily mark to market, in the manner provided for in the Master Securities Loan Agreement, all loans of securities which may from time to time be outstanding thereunder. 6.3 DEFAULTS. Custodian shall promptly notify the Company of any default under the Master Securities Loan Agreement (as such term "default" is defined therein) of which it has actual knowledge. 6.4 MASTER SECURITIES LOAN AGREEMENT. Custodian hereby acknowledges its receipt from the Company of a copy of the Master Securities Loan Agreement. The Company shall provide Custodian, prior to the effectiveness thereof, with a copy of any amendment to the Master Securities Loan Agreement. ARTICLE VII CERTAIN REPURCHASE TRANSACTIONS 7.1 TRANSACTIONS. If and to the extent that the necessary funds and securities have been entrusted to it under this Agreement, and subject to Custodian's right to foreclose upon and liquidate collateral pledged to it pursuant to Section 9.3 below, Custodian, as agent of the Company, shall from time to time (and unless the Company gives it Proper Instructions to do otherwise) make for the account of the Company the transfers of funds and deliveries of securities which the Company is required to make pursuant to the Master Repurchase Agreement and shall receive for the account of the Company the transfers of funds and deliveries of securities which the seller under the Master Repurchase Agreement is required to make pursuant thereto. Custodian shall make and receive all such transfers and deliveries pursuant to, and subject to the terms and conditions of, the Master Repurchase Agreement. 7.2 COLLATERAL. Custodian shall daily mark to market the securities purchased under the Master Repurchase Agreement and held in the Custody Account, and shall give to the seller thereunder any such notice as may be required thereby in connection with such mark-to-market. 7.3 EVENTS OF DEFAULT. Custodian shall promptly notify the Company of any event of default under the Master Repurchase Agreement (as such term "event of default" is defined therein) of which it has actual knowledge. 7.4 MASTER REPURCHASE AGREEMENT. Custodian hereby acknowledges its receipt from the Company of a copy of the Master Repurchase Agreement. The Company shall provide Custodian, prior to the effectiveness thereof, with a copy of any amendment to the Master Repurchase Agreement. ARTICLE VIII CONCERNING THE CUSTODIAN 8.1 STANDARD OF CARE. Custodian shall be held to the exercise of reasonable care in carrying out its obligations under this Agreement, and shall be without liability to the Company for any loss, damage, cost, expense (including attorneys' fees and disbursements), liability or claim which does not arise from willful misfeasance, bad faith or negligence on the part of Custodian. Custodian shall be entitled to rely on and may act upon advice of counsel in all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice. In no event shall Custodian be liable for special, incidental or consequential damages, even if Custodian has been advised of the possibility of such damages, or be liable in any manner whatsoever for any action taken or omitted upon instructions from the Company or any agent of the Company. 8.2 NO RESPONSIBILITY FOR TITLE, ETC. So long as and to the extent that it is in the exercise of reasonable care, Custodian shall not be responsible for the title, validity or genuineness of any assets or evidence of title thereto received or delivered by it or its agents. -18- 8.3 EXPRESS DUTIES ONLY. Custodian shall have no duties or obligations whatsoever except such duties and obligations as are specifically set forth in this Agreement, and no covenant or obligation shall be implied in this Agreement against Custodian. Custodian shall have no discretion whatsoever with respect to the management, disposition or investment of the Custody Account and is not a fiduciary to the Company. In particular, Custodian shall not be under any obligation at any time to monitor or to take any other action with respect to compliance by the Company with the 1940 Act, the provisions of the Company's charter documents or by-laws, or the Company's investment objectives, policies and limitations as in effect from time to time. ARTICLE IX INDEMNIFICATION 9.1 INDEMNIFICATION. The Company shall indemnify and hold harmless Custodian, any sub-custodian appointed pursuant to this Agreement and any nominee of any of them, from and against any loss, damages, cost, expense (including attorneys' fees and disbursements), liability (including, without limitation, liability arising under the Securities Act of 1933, the Securities Exchange Act of 1934, the 1940 Act, and any federal, state or foreign securities and/or banking laws) or claim arising directly or indirectly (A) from the fact that securities or other assets in the Custody Account are registered in the name of any such nominee, or (B) from any action or inaction by Custodian or such sub-custodian or nominee (i) at the request or direction of or in reliance on the advice of the Company or any of its agents, or (II) upon Proper Instructions, or (c) generally, from the performance of its obligations under this Agreement, provided that Custodian, any such sub-custodian or any nominee of any of them shall not be indemnified and held harmless from and against any such loss, damage, cost, expense, liability or claim arising from willful misfeasance, bad faith or negligence on the part of Custodian or any such sub-custodian or nominee. 9.2 INDEMNITY TO BE PROVIDED. If the Company requests Custodian to take any action with respect to securities or other assets of the Company, which may, in the opinion of Custodian, result in Custodian or its nominee becoming liable for the payment of money or incurring liability of some other form, Custodian shall not be required to take such action until the Company shall have provided indemnity therefor to Custodian in an amount and form satisfactory to Custodian. 9.3 SECURITY. As security for the payment of any present or future obligation or liability of any kind which the Company may have to Custodian with respect to or in connection with the Custody Account or this Agreement, or which the Company may otherwise have to Custodian, the Company hereby pledges to Custodian all securities, funds and other assets of every kind which are in such Custody Account or otherwise held for the Company pursuant to this Agreement, and hereby grants to Custodian a lien, right of set-off and continuing security interest in such securities, funds and other assets. ARTICLE X FORCE MAJEURE Custodian shall not be liable for any failure or delay in performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its reasonable control, including, without limitation, acts of God; earthquakes; fires; floods; wars; civil or military disturbances; sabotage; strikes; epidemics; riots; power failures; computer failure and any such circumstances beyond its reasonable control as may cause interruption, loss or malfunction of utility, transportation, computer (hardware or software) or telephone communication service; accidents; labor disputes; acts of civil or military authority; actions by any governmental authority, DE JURE or DE FACTO; or inability to obtain labor, material, equipment or transportation. ARTICLE XI REPRESENTATIONS AND WARRANTIES Each of Custodian and the Company represents and warrants for itself that (a) it has all necessary power and authority to perform its obligations hereunder, (b) the execution and delivery by it of this Agreement, and the performance by it of its obligations hereunder, have been duly authorized by all necessary action, corporate or otherwise, and will not violate any law, regulation, charter, by-law, or other instrument, restriction or provision applicable to it or by which it or its assets may be bound, and (c) this Agreement constitutes a legal, valid and binding obligation of it, enforceable against it in accordance with its terms. -19- ARTICLE XII COMPENSATION OF CUSTODIAN The Company shall pay Custodian such fees and charges as are set forth in Exhibit B hereto, as such Exhibit B may from time to time be revised by Custodian upon 14 days' prior written notice to the Company. Any annual fee or other charges payable by the Company shall be calculated on the basis of the total market value of the assets in the Custody Account on the last Business Day of the month for which such fee is charged; and such fee, and any transaction charges payable by Custodian, shall be paid monthly by automatic deduction from the Custody Account. Out-of-pocket expenses incurred by Custodian in the performance of its services hereunder and all other proper charges and disbursements of the Custody Account, shall be charged to the Custody Account by Custodian and paid in the same manner as the annual fee and other charges referred to in this Article XII. ARTICLE XIII TAXES Any and all taxes, including any interest and penalties with respect thereto, which may be levied or assessed under present or future laws or in respect of the Custody Account or any income thereof shall be charged to the Custody Account by Custodian and paid therefrom. ARTICLE XIV AUTHORIZED PERSONS; NOTICES 14.1 AUTHORIZED PERSONS. Custodian may rely upon and act in accordance with any notice, confirmation, instruction or other communication which is reasonably believed by Custodian to have been given or signed on behalf of the Company by one of the Authorized Persons designated in Schedule A hereto as it may from time to time be revised. The Company may revise Schedule A hereto at any time by notice in writing to Custodian given in accordance with Section 14.3 below, but no revision of Schedule A hereto shall be effective until Custodian actually receives such notice. 14.2 ORAL INSTRUCTIONS. Custodian may accept instructions orally communicated provided that such oral instructions are reasonably believed by it to have been given on behalf of Custodian by an Authorized Person. If a written instruction confirming an oral instruction is not received by Custodian prior to a transaction, it shall in no way affect the validity of the transaction authorized by such oral instruction or the authorization of Custodian to effect such transaction. To the extent such oral instruction varies from any written confirming instruction, Custodian shall advise Custodian of such variance but unless a confirming written instruction is timely received, such oral instruction shall govern. 14.3 ADDRESSES FOR NOTICES. Unless otherwise specified herein, all demands, notices, instructions, and other communications to be given hereunder shall be sent, delivered or given to the recipient at the address, or the relevant telephone number, set forth after its name hereinbelow: To the Company: PROGRESSIVE RETURN FUND, INC. 575 Lexington Avenue New York, NY 10022 Attention: RALPH W. BRADSHAW ----------------- Telephone: (212) 272 - 2093 Facsimile: (212) 272 - 5885 To Custodian: CUSTODIAL TRUST COMPANY 101 Carnegie Center Princeton, NJ 08540-6231 Attention: VICE PRESIDENT - TRUST OPERATIONS --------------------------------- Telephone: (609) 951-2320 Facsimile: (609) 951-2327 -20- or at such other address or telephone number as either party shall have provided to the other by notice given in accordance with this Section 14.3. Writing shall include transmissions by or through teletype, facsimile, central processing unit connection, on-line terminal and magnetic tape. (d) With the prior consent in writing of Custodian, the Company may give Remote Clearance Instructions (as defined hereinbelow) and Bulk Input Instructions (as defined hereinbelow) for the receipt, delivery or transfer of securities, provided that such Instructions are given in accordance with the procedures prescribed by Custodian from time to time as to content of instructions and their manner and timeliness of delivery by the Company. Custodian shall be entitled to conclusively assume that all Remote Clearance Instructions and Bulk Input Instructions have been given by an Authorized Person, and Custodian is hereby irrevocably authorized to act in accordance therewith. For purposes of this Agreement, "Remote Clearance Instructions" means instructions that are input directly via a remote terminal which is located on the premises of the Company or its agent and is linked to Custodian, and "Bulk Input Instructions" means instructions that are input by bulk input computer tape delivered to Custodian by messenger or transmitted to it via such transmission mechanism as the Company and Custodian shall from time to time agree upon. ARTICLE XV TERMINATION Either party hereto may terminate this Agreement by giving to the other party a notice in writing specifying the date of such termination, which shall be not less than sixty (60) days after the date of the giving of such notice. Upon the date set forth in such notice this Agreement shall terminate, and Custodian shall, upon receipt of a notice of acceptance by the successor custodian, on that date (A) deliver directly to the successor custodian or its agents all securities (other than securities held in a Book-Entry System or Securities Depository) and other assets then owned by the Company and held by Custodian as custodian, and (B) transfer any securities held in a Book-Entry System or Securities Depository to an account of or for the benefit of the Company, provided that the Company shall have paid to Custodian all fees, expenses and other amounts to the payment or reimbursement of which it shall then be entitled. ARTICLE XVI MISCELLANEOUS 16.1 BUSINESS DAYS. Nothing contained in this Agreement shall require Custodian to perform any function or duty on a day other than a Business Day. 16.2 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to the conflict of law principles thereof. 16.3 REFERENCES TO CUSTODIAN. The Company shall not circulate any printed matter which contains any reference to Custodian without the prior written approval of Custodian, excepting printed matter contained in the prospectus or statement of additional information of the Company and such other printed matter as merely identifies Custodian as Custodian for certain assets of the Company. The Company shall submit printed matter requiring approval to Custodian in draft form, allowing sufficient time for review by Custodian and its counsel prior to any deadline for printing. 16.4 NO WAIVER. No failure by either party hereto to exercise, and no delay by such party in exercising, any right hereunder shall operate as a waiver thereof. The exercise by either party hereto of any right hereunder shall not preclude the exercise of any other right, and the remedies provided herein are cumulative and not exclusive of any remedies provided at law or in equity. 16.5 AMENDMENTS. This Agreement cannot be changed orally and, except as otherwise provided herein with respect to the Schedules attached hereto, no amendment to this Agreement shall be effective unless evidenced by an instrument in writing executed by the parties hereto. -21- 16.6 COUNTERPARTS. This Agreement may be executed in one or more counterparts, and by the parties hereto on separate counterparts, each of which shall be deemed an original but all of which together shall constitute but one and the same instrument. 16.7 SEVERABILITY. If any provision of this Agreement shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions shall not be affected or impaired thereby. 16.8 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; PROVIDED, HOWEVER, that this Agreement shall not be assignable by either party hereto without the written consent of the other party hereto. Any purported assignment in violation of this Section 16.8 shall be void. 16.9 JURISDICTION. Any suit, action or proceeding with respect to this Agreement may be brought in the Supreme Court of the State of New York, County of New York, or in the United States District Court for the Southern District of New York, and the parties hereto hereby submit to the non-exclusive jurisdiction of such courts for the purpose of any such suit, action or proceeding, and hereby waive for such purpose any other preferential jurisdiction by reason of their present or future domicile or otherwise. 16.10 HEADINGS. The headings of sections in this Agreement are for convenience of reference only and shall not affect the meaning or construction of any provision of this Agreement. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed and delivered in its name and on its behalf by its representatives thereunto duly authorized, all as of the day and year first above written. PROGRESSIVE RETURN COMPANY, INC. By:___________________________ Authorized Officer CUSTODIAL TRUST COMPANY By:____________________________ Authorized Officer -22- SCHEDULE A SIGNATURES OF AUTHORIZED PERSONS Set forth below are the names and specimen signatures of the persons authorized by PROGRESSIVE RETURN FUND, INC. to administer the Custody Account of the Company NAME SIGNATURE - ------------------------------- ------------------------- - ------------------------------- ------------------------- - ------------------------------- ------------------------- - ------------------------------- ------------------------- - ------------------------------- ------------------------- -23- SCHEDULE B FEES AND CHARGES The Company shall pay Custodian the following fees and charges for holdings and transactions in the United States: (1) an annual fee of 0.015% (one and one-half basis points) per annum of the value of the assets in the Account; (2) a transaction charge of $10 for each receipt or delivery of book-entry securities into or from the Custody Account (but not for any such receipt or delivery in a repurchase transaction representing a cash sweep investment for the Company's account); (3) a transaction charge of $40 for each receipt or delivery of securities in physical form into or from the Custody Account; (4) a transaction charge for each repurchase transaction in the Custody Account which represents a cash sweep investment for the Company's account, computed at a rate of 0.10% (ten basis points) per annum on the amount of the purchase price paid by the Company in such repurchase transaction, on the basis of a 360-day year and for the actual number of days such repurchase transaction is outstanding; (5) a charge of $7 for each "free" transfer of funds from the Custody Account; (6) an administrative fee for each purchase in the Custody Account of shares or other interests in a money market or other Company, which purchase represents a cash sweep investment for the Company's account, computed for each day that there is a positive balance in such Company to equal 1/365th of 0.10% (ten basis points) on the amount of such positive balance for such day; and (7) a service charge for each holding of securities or other property sold by way of private placement or in such other manner as to require services by Custodian which in its reasonable judgment are materially in excess of those ordinarily required for the holding of publicly traded securities in the United States. INTERNATIONAL FEES. The Company shall pay Custodian fees for Foreign Assets maintained outside the United States and charges for transactions outside the United States (including, without limitation, charges for funds transfers and tax reclaims) in accordance with such schedule of fees and charges for each country in which Foreign Assets of such Portfolio are held as Custodian shall from time to time provide to the Company. Any asset-based fee shall be based upon the total market value of the applicable Foreign Assets as determined on the last Business Day of the month for which such fee is charged. There shall be a transaction charge of $30.00 for each receive or deliver of book-entry securities into or from the Custody Account which is settled through Euroclear or Clearstream (formerly CEDEL). -24- SCHEDULE C APPROVED FOREIGN CUSTODIANS AND SECURITIES DEPOSITORIES FOREIGN CUSTODIANS COUNTRIES FOREIGN SECURITIES DEPOSITORIES -25- EX-10.11 6 exh11.txt FORM OF CORPORATE OPINION EXHIBIT 11 FORM OF CORPORATE OPINION October __, 2002 Progressive Return Fund, Inc. c/o Bear Stearns Funds Management Inc. 383 Madison Avenue New York, New York 10179 Cornerstone Strategic Value Fund, Inc. c/o Bear Stearns Funds Management Inc. 383 Madison Avenue New York, New York 10179 Ladies and Gentlemen: We have acted as counsel to Progressive Return Fund, Inc. (the "Acquiring Fund"), a Maryland corporation, and Cornerstone Strategic Value Fund, Inc. (the "Target Fund") in connection with the Merger Agreement and Plan of Reorganization (the "Agreement") dated as of October __, 2002, between Acquiring Fund and the Target Fund. The Agreement describes a proposed transaction (the "Transaction") to occur on or about October __, 2002 (the "Exchange Date"), pursuant to which the Acquiring Fund will acquire substantially all of the assets of the Target Fund in exchange for shares of Common Stock in the Acquiring Fund (the "Acquiring Fund Shares") and the assumption by the Acquiring Fund of all of the liabilities of the Target Fund following which the Acquiring Fund Shares received by the Target Fund will be distributed by the Target Fund to its shareholders in liquidation and termination of the Target Fund. This opinion is furnished to you pursuant to the terms of the Agreement. Capitalized terms not defined herein are used herein as defined in the Agreement. In such capacity, we have examined either originals, copies or facsimile copies, certified, conformed or otherwise authenticated to our satisfaction, of such corporate records, agreements and instruments of the Acquiring Fund and Target Fund, certificates of officers of the Acquiring Fund and the Target Fund, certificates of public officials, and such other documents and records, including, but not limited to, the Agreement, the By-laws of each fund, as amended, Written Consents of the Board of Directors (the "Board") of each fund, and have made such other inquiries of law and fact, as we have deemed appropriate as a basis for the opinions hereinafter expressed. In all cases we have assumed the authenticity of original documents and the conformity to authentic originals of all copies examined by us. As to certain matters of fact material to this opinion, we have, where such facts were not independently known to us, relied without independent investigation upon the representations and warranties made by the each fund in certificates of the officers of each fund, and upon certificates of public officials. In the course of our representation of each fund, nothing has come to our attention which leads us to believe that any such reliance was unreasonable. Opinion number (iii) herein, which is qualified by our knowledge, is limited to the actual knowledge of facts on the part of the attorney in this Firm who has signed this opinion letter, who has had active involvement in negotiating the transactions contemplated by the Agreement or in preparing this opinion letter, or who has substantial responsibility for this Firm's representation of each fund, and, with respect to any portions herein so qualified, we have made no independent investigation or review for purposes of this opinion letter. The opinions expressed herein are limited to matters governed by the laws of the State of New York and the federal securities laws of the Unites States and the rules and regulations promulgated thereunder. Matters governed by the laws of the State of Maryland have been addressed in a separate opinion letter issued by The Law Offices of Stephanie A. Djinis, special Maryland counsel, a copy of which is attached hereto, the original having been provided directly to you. Based upon and subject to the foregoing, we are of the opinion that: (i) the Acquiring Fund and the Target Fund are each a duly registered, closed-end, management investment company, and its registration with the SEC as an investment company under the 1940 Act is in full force and effect; (ii) the Acquiring Fund Shares to be issued to the Target Fund and then distributed to the Target Fund shareholders pursuant to the Agreement are duly registered under the Securities Act of 1933, as amended, on the appropriate form, and are duly authorized and upon such issuance will be validly issued and outstanding, fully paid and non-assessable; (iii) to our knowledge, no stop order suspending the effectiveness thereof has been issued and no proceedings for that purpose have been instituted or are pending or threatened; and -2- (iv) we have participated in conferences with officers and other representatives of the Target Fund and the Acquiring Fund and the independent public accountants for each such Fund at which the contents of the proxy statement of the Target Fund and the prospectus and statement of additional information of the Acquiring Fund and related matters were discussed and, although this Firm does not pass upon nor assume any responsibility for the accuracy, completeness or fairness of the statements contained in the proxy statement, the prospectus or the statement of additional information of the Acquiring Fund, no facts came to our attention that would lead us to believe that either the proxy statement, at the time such proxy statement became effective and at the date hereof, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the prospectus and the statement of additional information of the Acquiring Fund, as of its date and at the date hereof, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. This opinion is rendered solely for the benefit of the Acquiring Fund and Target Fund in connection with the reorganization and liquidation of the Target Fund and may not be relied upon by any other person or for any other purpose without our prior written consent, and we consent to the filing of this opinion with the Securities and Exchange Commission in connection with the registration of the Acquiring Fund's shares. Very truly yours, SPITZER & FELDMAN P.C. -3- FORM OF LEGAL OPINION Spitzer & Feldman P.C. 405 Park Avenue New York, New York Ladies and Gentlemen: We have acted as special counsel in connection with your representation of Progressive Return Fund, Inc. (the "Acquiring Fund"), a Maryland corporation, and Corner Strategic Value Fund, Inc. (the "Target Fund"). We are rendering this opinion to address certain matters regarding the issuance of shares of common stock of Acquiring Fund ("Shares") arising under Maryland law for which a legal opinion is to be provided by your firm pursuant to the Merger Agreement and Plan of Reorganization ("Agreement") dated as of October __, 2002, between Acquiring Fund and the Target Fund. The Agreement provides for Target Fund to transfer all of its assets to Acquiring Fund in exchange solely for Acquiring Fund's shares and Acquiring Fund's assumption of the liabilities of Target Fund. In connection with this opinion, we have examined certified or other copies, believed by us to be genuine but whose genuineness has not been independently verified, of Acquiring Fund's Articles of Incorporation and By-Laws, the Agreement, minutes of meetings of Acquiring Fund's board of directors, a certificate of good standing of Acquiring Fund issued by the State of Maryland Department of Assessments and Taxation, and documentation regarding the number of shares of Acquiring Fund and Target Fund authorized and the number of shares outstanding as of [December 31, 2001.] Our opinion is limited to the laws (other than the conflict of law rules) of the State of Maryland in existence on the date hereof that in our experience are normally applicable to the issuance of shares of common stock by corporations. We have not relied upon any other records or documents of the Company in rendering this opinion. Based on the foregoing, as of the date hereof we are of the opinion that: the Acquiring Fund Shares to be issued and distributed to the shareholders of Target Fund under the Agreement, assuming their due delivery as contemplated by the Agreement and the receipt of consideration in exchange therefor as described therein, will be duly authorized and validly issued and outstanding and fully paid and non-assessable. This opinion is intended solely for your benefit and is not to be made available to or be relied upon by any other person, firm or entity without our prior written consent; we understand that you will rely upon this opinion in rendering your opinion under the Agreement as described above and you will file this opinion with the Securities and Exchange Commission in connection with the registration of the Acquiring Fund's shares. Very truly yours, EX-10.12 7 exh12.txt FORM OF TAX OPINION EXHIBIT 12 FORM OF TAX OPINION October __, 2002 Progressive Return Fund, Inc. c/o Bear Stearns Funds Management Inc. 383 Madison Avenue New York, New York 10179 Cornerstone Strategic Value Fund, Inc. c/o Bear Stearns Funds Management Inc. 383 Madison Avenue New York, New York 10179 Ladies and Gentlemen: We have acted as counsel to Progressive Return Fund, Inc. (the "Acquiring Fund"), a Maryland corporation and Cornerstone Strategic Value Fund, Inc. (the "Target Fund"), a Maryland corporation, in connection with the Merger Agreement and Plan of Reorganization (the "Agreement") dated as of October __, 2002 between the Acquiring Fund and the Target Fund. The Agreement describes a proposed transaction (the "Transaction") to occur on or about October __, 2002 (the "Exchange Date"), pursuant to which the Acquiring Fund will acquire substantially all of the assets of the Target Fund in exchange for shares of Common Stock in the Acquiring Fund (the "Acquiring Fund Shares") and the assumption by the Acquiring Fund of all of the liabilities of the Target Fund following which the Acquiring Fund Shares received by the Target Fund will be distributed by the Target Fund to its shareholders in liquidation and termination of the Target Fund. This opinion as to certain federal income tax consequences of the Transaction is furnished to you pursuant to the terms of the Agreement. Capitalized terms not defined herein are used herein as defined in the Agreement. The Target Fund is registered under the Investment Company Act of 1940, as amended (the " 1940 Act"), as a diversified closed-end management investment company. The Target Fund has elected to be a regulated investment company for federal income tax purposes under Section 851 of the Internal Revenue Code of 1986, as amended (the "Code"). The Acquiring Fund is registered under the 1940 Act as a non-diversified closed-end management investment company. The Acquiring Fund has registered as a closed-end investment company under the 1940 Act. Shares of the Acquiring Fund are redeemable at net asset value at each shareholder's option. In rendering our opinion, we have reviewed and relied upon the Agreement, the Proxy Statement/Prospectus and the Registration Statement (including the items incorporated by reference therein). We have relied, without independent verification, upon the factual statements made therein, and assume that there will be no change in material facts disclosed therein between the date of this letter and the date of closing of the transaction. We further assume that the transaction will be carried out in accordance with the Agreement: 1. The Target Fund will transfer to the Acquiring Fund all of its assets, and the Acquiring Fund will assume all of the liabilities of the Target Fund, as of the Exchange Date. 2. The fair market value of the Acquiring Fund Shares received by each Target Fund shareholder will be equal to the fair market value of the Target Fund shares surrendered in exchange therefor. The Target Fund shareholders will receive no consideration other than Acquiring Fund Shares (which may include fractional shares) in exchange for their shares of Common Stock in the Target Fund (the "Target Fund Shares"). 3. To the knowledge of the management of the Target Fund: (i) there is no plan or intention by any Target Fund shareholder who owns 5 % or more of the total outstanding Target Fund Shares; and (ii) there is no plan or intention on the part of the remaining Target Fund shareholders to sell, exchange, or otherwise dispose of a number of Acquiring Fund Shares received in the Transaction that would reduce the Target Fund shareholders' ownership of Acquiring Fund Shares to a number of Acquiring Fund Shares having a value, as of the date of the Transaction, of less than 50 percent of the value of all of the formerly outstanding Target Fund Shares as of the same date. For purposes of this representation, Acquiring Fund Shares or Target Fund Shares surrendered by Target Fund shareholders as a repurchase of the Target Fund or otherwise disposed of, where such dispositions, if any, appear to be initiated by Target Fund shareholders in connection with or as a result of the Agreement or the Transaction, will be treated as outstanding Target Fund Shares on the date of the Transaction. 4. The Acquiring Fund has no plan or intention to reacquire any of the Acquiring Fund Shares issued in the Transaction, except for Acquiring Fund Shares reacquired in the ordinary course of its business as a closed-end investment company pursuant to its share repurchase plan. -2- 5. The Acquiring Fund will acquire the fair market value of all of the net assets and gross assets held by the Target Fund immediately prior to the Transaction and the Target Fund will cease to exist. For purposes of this representation, (a) amounts paid by the Target Fund, out of the assets of the Target Fund, to the Target Fund shareholders as a repurchase of Target Fund Shares, where such repurchases, if any, appear to be initiated by Target Fund shareholders in connection with or as a result of the Agreement or the Transaction, and (b) amounts used to effect such repurchases and distributions (except for regular, normal dividends declared and paid in order to ensure the Target Fund's continued qualification as a regulated investment company and to avoid fund-level tax) made by the Target Fund immediately preceding the transfer will be included as assets of the Target Fund held immediately prior to the Transaction. Further, to the best of the knowledge of the managements of each of the Acquiring Fund and the Target Fund, this representation will remain true even if the amounts, if any, that the Acquiring Fund pays after the Transaction to Acquiring Fund shareholders who are former Target Fund shareholders as a repurchase of Acquiring Fund Shares received in exchange for Target Fund Shares, where such repurchases, if any, appear to be initiated by such shareholders in connection with or as a result of the Agreement or the Transaction, are considered to be assets of the Target Fund that were not transferred to Acquiring Fund. 6. The fair market value of the assets transferred to the Acquiring Fund by the Target Fund will equal or exceed the sum of the liabilities to be assumed by the Acquiring Fund. 7. The Acquiring Fund has no plan or intention to sell or otherwise dispose of any of the assets of the Target Fund acquired in the Transaction, except for dispositions made in the ordinary course of its business as an closed-end investment company (I e., dispositions made in the ordinary course of business and independent of the Transaction). 8. The liabilities of the Target Fund to be assumed by the Acquiring Fund were incurred by the Target Fund in the ordinary course of its business and are associated with the assets transferred to the Acquiring Fund. For purposes of this paragraph, expenses of the Transaction are not treated as liabilities. 9. All fees and expenses, including accounting expenses, portfolio transfer taxes (if any) or other similar expenses incurred in connection with the Reorganization will be paid by each party respectively. 10. For federal income tax purposes, the Target Fund qualifies as a regulated investment company, and the provisions of Sections 851 through 855 of the Code apply to the Target Fund for its current taxable year beginning January 1, 2002 and will continue to apply to it through the Exchange Date. 11. The Acquiring Fund intends to qualify as a regulated investment company for the fiscal year ending December 31, 2002. 12. The Acquiring Fund does not own, directly or indirectly, any Target Fund Shares. 13. There is no intercorporate indebtedness existing between the Target Fund and the Acquiring Fund. 14. The Target Fund will distribute the Acquiring Fund Shares it receives in the Transaction to its shareholders as provided in the Agreement. 15. The Target Fund is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. Based on the foregoing representations and our review of the documents and items referred to above, we are of the opinion that for federal income tax purposes: (i) the transfer by the Target Fund of substantially all of its assets to the Acquiring Fund, solely in exchange for Acquiring Fund Shares, is a reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"); (ii) no gain or loss will be recognized by the Target Fund upon the transfer of substantially all of the Target Fund's assets to the Acquiring Fund in exchange solely for Acquiring Fund Shares; (iii) no gain or loss will be recognized by the Acquiring Fund on receipt of the assets of the Target Fund in exchange for Acquiring Fund Shares and the assumption by the Acquiring Fund of the liabilities of the Target Fund; (iv) the basis of the assets of the Target Fund in the hands of the Acquiring Fund is, in each instance, the same as the basis of those assets in the hands of the Target Fund immediately prior to the Transaction; (v) the holding period of the Target Fund's assets in the hands of the Acquiring Fund includes the holding period during which the assets were held by the Target Fund; (vi) no gain or loss is recognized to the Target Fund shareholders upon the receipt of Acquiring Fund Shares solely in exchange for the Target Fund Shares; (vii) the basis of the Acquiring Fund Shares received by the Target Fund shareholders is, in each instance, the same as the basis of the Target Fund Shares surrendered in exchange therefor; and (viii) the holding period of the Acquiring Fund Shares received by the Target Fund shareholders includes the holding period during which Target Fund Shares surrendered and exchanged therefor were held, provided that such shares were held as a capital asset in the hands of the Target Fund shareholders on the Exchange Date. This opinion is rendered solely for the benefit of satisfying the conditions set forth in the Agreement and is intended solely for your benefit and may not be relied upon by any other person or for any other purpose without our prior written consent, and we consent to the filing of this opinion with the Securities and Exchange Commission in connection with the registration of the Acquiring Fund's shares. Very truly yours, EX-23 8 exh23.txt CONSENT OF INDEPENDENT AUDITOR CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the reference to our Firm, under the caption of "Experts" on Form N-14 of Progressive Return Fund, Inc. TAIT, WELLER & BAKER Philadelphia, Pennsylvania August 2, 2002 -----END PRIVACY-ENHANCED MESSAGE-----