As filed with the Securities and Exchange Commission on July 19, 1999
Registration No. 333-71215
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. [ X ] Post-Effective Amendment No. 1
INVESCO BOND FUNDS, INC.
(formerly INVESCO Income Funds, Inc.)
(Exact Name of Registrant as Specified in Charter)
7800 E. Union Avenue
Denver, Colorado 80237
(Address of Principal Executive Offices)
P.O. Box 173706, Denver, Colorado 80217-3706
(Mailing Address)
(303) 930-6300
(Registrant's Area Code and Telephone Number)
Glen A. Payne, Esq.
7800 E. Union Avenue
Denver, Colorado 80237
(Name and Address of Agent for Service)
Copies to:
Clifford J. Alexander, Esq.
Susan M. Casey, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, D.C. 20036-1800
Telephone: (202) 778-9036
Approximate Date of Proposed Public Offering: as soon as practicable
after this Registration Statement becomes effective under the Securities Act
of 1933.
It is proposed that this filing will become effective immediately upon
filing pursuant to paragraph 485(b).
Title of securities being registered: Common stock, par value $0.01 per
share.
<PAGE>
No filing fee is required because of reliance on Section 24(f) under the
Investment Company Act of 1940, as amended.
<PAGE>
Parts A and B were previously filed.
INVESCO BOND FUNDS, INC.
PART C
OTHER INFORMATION
Item 15. INDEMNIFICATION
---------------
Indemnification provisions for officers and directors of Registrant are
set forth in Article VII, Section 2 of the Articles of Incorporation, and are
hereby incorporated by reference. See Item 16(1) below. Under this Article,
officers and directors will be indemnified to the fullest extent permitted to
directors by the Maryland General Corporation Law, subject only to such
limitations as may be required by the Investment Company Act of 1940, as amended
("1940 Act"), and the rules thereunder. Under the 1940 Act, directors and
officers of Registrant cannot be protected against liability to Registrant or
its shareholders to which they would be subject because of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties of their office.
Registrant also maintains liability insurance policies covering its directors
and officers.
Item 16. EXHIBITS
--------
(1) Articles of Incorporation (Charter), filed April 2, 1993.(1)
(a) Articles Supplementary to Articles of Incorporation, dated October
28, 1998.(3)
(2) By-Laws, as amended July 21, 1993.(1)
(3) Voting trust agreement - none.
(4) (a) Agreement and Plan of Reorganization and Termination between
INVESCO Value Trust, on behalf of INVESCO Intermediate Government Bond
Fund and INVESCO Bond Funds, Inc., on behalf of U.S. Government
Securities Fund.(5)
(b) Agreement and Plan of Conversion and Termination between INVESCO
Value Trust, on behalf of Intermediate Government Bond Fund and
INVESCO Bond Funds, Inc., on behalf of Intermediate Government Bond
Fund.(5)
(5) Provisions of instruments defining the rights of holders of securities
are contained in Articles III, IV,VI, VIII of Registrant's Articles of
Incorporation as amended, and Articles I, V, VII, VIII, IX and X of
Registrant's By-Laws.
(6) Investment Advisory Agreement between Registrant and INVESCO Funds
Group, Inc. dated February 28, 1997.(2)
(7) (a) General Distribution Agreement with INVESCO Funds Group, Inc.
dated February 28, 1997.(2)
(b) General Distribution Agreement with INVESCO Distributors, Inc.
dated September 30, 1997.(2)
(8) (a) Defined Benefit Deferred Compensation Plan for Non-Interested
Directors and Trustees.(3)
(b) Amended Defined Compensation Plan for Non-Interested Directors
and Trustees.(3)
<PAGE>
(9) (a) Custody Agreement between Registrant and State Street Bank and
Trust Company dated July 1, 1994.(1)
(b) Amendment to Custody Agreement dated October 25, 1995.(1)
(c) Data Access Service Addendum dated May 19, 1997.(2)
(10) (a) Plan and Agreement of Distribution pursuant to Rule 12b-1 under
the Investment Company Act of 1940 dated April 30, 1993.(2)
(b) Amendment of Plan and Agreement of Distribution pursuant to
Rule 12b-1 dated July 19, 1995.(1)
(c) Amended Plan and Agreement of Distribution adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 dated January 1,
1997.(2)
(d) Amended Plan and Agreement of Distribution adopted pursuant
to Rule 12b-1 under the Investment Company Act of 1940 dated September
30, 1997.(2)
(11) Opinion and consent of Kirkpatrick & Lockhart LLP regarding the
legality of securities being registered.(4)
(12) Opinion and consent of Kirkpatrick & Lockhart LLP regarding certain
tax matters in connection with INVESCO U. S. Government Securities
Fund and INVESCO Intermediate Government Bond Fund (filed herewith).
(13) (a) Transfer Agency Agreement between Registrant and INVESCO Funds
Group, Inc. dated February 28, 1997.(2)
(b) Administrative Services Agreement between Registrant and INVESCO
Funds Group, Inc. dated February 28, 1997.(2)
(14) Consent of PricewaterhouseCoopers LLP.(5)
(15) Financial statements omitted from part B - none.
(16) Copies of manually signed Powers of Attorney - incorporated by
reference to Powers of Attorney previously filed with the Securities
and Exchange Commission on January 9, 1990, January 16, 1990, May 22,
1992, March 31, 1994, October 23, 1995, October 30, 1996 and
October 30, 1997.
(17) Additional Exhibits.
(a) Form of amended Proxy Cards. (5)
- ----------------
(1) Incorporated by reference from Post-Effective Amendment No. 36 to the
registration statement, filed October 30, 1996.
(2) Incorporated by reference from Post-Effective Amendment No. 37 to the
registration statement, filed October 30, 1997.
(3) Incorporated by reference from Post-Effective Amendment No. 38 to the
registration statement, filed October 29, 1998.
(4) Incorporated by reference from the Registration Statement on Form N-14,
filed January 22, 1999.
(5) Incorporated by reference from Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-14 filed on March 17, 1999.
<PAGE>
Item 17. UNDERTAKINGS
------------
(1) The undersigned Registrant agrees that prior to any public
re-offering of the securities registered through the use of the prospectus which
is a part of this Registration Statement by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c) of the Securities Act of
1933, the re-offering prospectus will contain the information called for by the
applicable registration form for re-offering by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new Registration Statement for
the securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, as amended, this Post-Effective
Amendment No. 1 to this Registration Statement on Form N-14 has been signed on
behalf of Registrant, in the City of Denver and the State of Colorado, on this
15th day of June, 1999.
ATTEST: INVESCO Bond Funds, Inc.
(formerly INVESCO Income Funds, Inc.)
/s/ Glen A. Payne By: /s/ Mark H. Williamson
- ------------------------- -----------------------------
Glen A. Payne, Secretary Mark H. Williamson, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to this Registration Statement on Form N-14 has
been signed below by the following persons in the capacities and on the dates
indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Mark H. Williamson President, Director and June 15, 1999
- ------------------------- Chief Executive Officer
Mark H. Williamson
/s/ Ronald L. Grooms Treasurer and Chief June 15, 1999
- ------------------------- Financial and Accounting
Ronald L. Grooms Officer
* Director June 15, 1999
- -------------------------
Victor L. Andrews
* Director June 15, 1999
- -------------------------
Bob R. Baker
* Director June 15, 1999
- -------------------------
Charles W. Brady
<PAGE>
* Director June 15, 1999
- -------------------------
Wendy L. Gramm
* Director June 15, 1999
- -------------------------
Lawrence H. Budner
* Director June 15, 1999
- -------------------------
Fred A. Deering
* Director June 15, 1999
- -------------------------
Larry Soll
* Director June 15, 1999
- -------------------------
Kenneth T. King
* Director June 15, 1999
- -------------------------
John W. McIntyre
By:
---------------------
Edward F. O'Keefe
Attorney in Fact
By: */s/ Glen A. Payne June 15, 1999
---------------------
Glen A. Payne
Attorney in Fact
* Original Powers of Attorney authorizing Edward F. O'Keefe and Glen A. Payne,
and each of them, to execute this Registration Statement on Form N-14 of the
Registrant on behalf of the above-named directors and officers of the Registrant
have been filed with the Securities and Exchange Commission on May 22, 1992,
June 9, 1992, October 13, 1992, July 26, 1994, June 27, 1995, July 12, 1995,
September 5, 1995, July 23, 1996 and September 26, 1997, respectively.
<PAGE>
INVESCO BOND FUNDS, INC.
INDEX OF EXHIBITS
-----------------
Exhibit 12 Opinion and consent of Kirkpatrick & Lockhart LLP regarding certain
tax matters in connection with INVESCO Intermediate Government Bond
Fund and INVESCO U.S. Government Securities Fund. (filed herewith).
Exhibit 12
KIRKPATRICK & LOCKHART LLP
1800 MASSACHUSETTS AVENUE, N.W.
2ND FLOOR
WASHINGTON, D.C. 20036-1800
TELEPHONE (202) 778-9000
FACSIMILE (202) 778-9100
www.kl.com
June 4, 1999
INVESCO Value Trust
INVESCO Bond Funds, Inc.
7800 East Union Avenue
Denver, Colorado 80237
Re: REORGANIZATION TO COMBINE A SERIES OF A
MASSACHUSETTS BUSINESS TRUST AND A SERIES OF A
MARYLAND CORPORATION
--------------------
Ladies and Gentleman:
INVESCO Value Trust, a Massachusetts business trust ("Trust"), on behalf
of INVESCO Intermediate Government Bond Fund, a segregated portfolio of assets
("series") thereof ("Target"), and INVESCO Bond Funds, Inc., a Maryland
corporation ("Corporation"), on behalf of its INVESCO U.S. Government Securities
Fund series ("Acquiring Fund"), have requested our opinion as to certain federal
income tax consequences of the proposed acquisition of Target by Acquiring Fund
pursuant to an Agreement and Plan of Reorganization and Termination between them
dated as of March 21, 1999 ("Plan").(1) Specifically, each Investment Company
has requested our opinion --
(1) that Acquiring Fund's acquisition of Target's assets in exchange
solely for voting shares of common stock of Acquiring Fund ("Acquiring
Fund Shares") and Acquiring Fund's assumption of Target's liabilities,
followed by Target's distribution of those shares PRO RATA to its
shareholders of record determined as of the Effective Time (as herein
defined) ("Shareholders") constructively in exchange for the Shareholders'
shares of beneficial interest in Target ("Target Shares") (such
transactions sometimes being referred to herein collectively as the
"Reorganization"), will qualify as a reorganization within the meaning of
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(1) Target and Acquiring Fund are sometimes referred to herein individually as a
"Fund" and collectively as the "Funds," and Trust and Corporation are sometimes
referred to herein individually as an "Investment Company" and collectively as
the "Investment Companies."
<PAGE>
section 368(a)(1)(C),(2) and each Fund will be "a party to a
reorganization" within the meaning of section 368(b);
(2) that neither the Funds nor the Shareholders will recognize gain
or loss on the Reorganization; and
(3) regarding the basis and holding period after the Reorganization
of the transferred assets and the Acquiring Fund Shares issued pursuant
thereto.
In rendering this opinion, we have examined (1) the Plan, (2) the
Prospectus/Proxy Statement dated March 23, 1999 ("Proxy Statement"), that was
furnished in connection with the solicitation of proxies by Trust's board of
trustees for use at a special meeting of Target's shareholders held on May 20,
1999 ("Shareholders' Meeting"), (3) each Fund's currently effective prospectus
and statement of additional information ("SAI"), and (4) other documents we have
deemed necessary or appropriate for the purposes hereof. As to various matters
of fact material to this opinion, we have relied, exclusively and without
independent verification, on statements of responsible officers of each
Investment Company and the representations described below and made in the Plan
(as contemplated in paragraph 6.6 thereof) (collectively, "Representations").
FACTS
-----
Trust is a Massachusetts business trust; Target is a series thereof.
Corporation is a Maryland corporation; Acquiring Fund is a series thereof. Each
Investment Company is registered with the Securities and Exchange Commission
("SEC") as open-end management investment company under the Investment Company
Act of 1940, as amended ("1940 Act"). Each Fund issues a single class of shares,
which are identical to each other.
The Reorganization, together with related acts necessary to consummate the
same ("Closing"), will take place on June 4, 1999, or such other date as to
which the Investment Companies agree. All acts taking place at the Closing shall
be deemed to take place simultaneously as of the close of business on the date
thereof or at such other time as to which the Investment Companies agree
("Effective Time").
The Funds' investment objectives, policies, and restrictions (which are
described in the Proxy Statement and the Funds' prospectuses and SAIs) are
substantially similar, and they have the same investment adviser, INVESCO Funds
Group, Inc. ("INVESCO"). At the Shareholders' Meeting, Target's shareholders
approved amendments to certain of its fundamental investment restrictions to
simplify and modernize them and make them more uniform with those of the other
funds in the INVESCO group of investment companies; similar restrictions apply
to Acquiring Fund as well.
- ------------------------
(2) All "section" references are to the Internal Revenue Code of 1986,as amended
("Code"), unless otherwise noted, and all "Treas. Reg. section" references are
to the regulations under the Code ("Regulations").
<PAGE>
For the reasons, and after consideration of the factors, described in the
Proxy Statement, each Investment Company's board of trustees/directors approved
the Plan, subject to approval of Target's shareholders. In doing so, each board,
including a majority of its members who are not "interested persons" (as that
term is defined in the 1940 Act) of either Investment Company or INVESCO,
determined that (1) the Reorganization is in its Fund's best interests, (2) the
terms of the Reorganization are fair and reasonable, and (3) the interests of
its Fund's shareholders will not be diluted as a result of the Reorganization.
The Plan, which specifies that it is intended to be a "plan of
reorganization" for federal income tax purposes, provides in relevant part for
the following:
1. The acquisition by Acquiring Fund of all assets, including all
cash, cash equivalents, securities, receivables (including interest and
dividends receivable), claims and rights of action, rights to register
shares under applicable securities laws, books and records, deferred and
prepaid expenses shown as assets on Target's books, and other property,
owned by Target at the Effective Time (collectively "Assets"), in exchange
solely for the following:
(a) the number of full and fractional (rounded to the third
decimal place) Acquiring Fund Shares determined by dividing the net
value of Target (computed as set forth in paragraph 2.1 of the Plan)
by the net asset value of an Acquiring Fund Share (computed as set
forth in paragraph 2.2 of the Plan), and
(b) Acquiring Fund's assumption of all of Target's
liabilities, debts, obligations, and duties of whatever kind or
nature, whether absolute, accrued, contingent, or otherwise, whether
or not arising in the ordinary course of business, whether or not
determinable at the Effective Time, and whether or not specifically
referred to in the Plan (collectively "Liabilities"),
2. The constructive distribution of such Acquiring Fund Shares to
the Shareholders,(3) and
3. The subsequent termination of Target.
The distribution described in 2. will be accomplished by Acquiring Fund's
transfer agent's opening accounts on Acquiring Fund's share transfer books in
the Shareholders' names and transferring such Acquiring Fund Shares thereto.
Each Shareholder's account will be credited with the respective PRO RATA number
of full and fractional (rounded to the third decimal place) Acquiring Fund
- -----------------------
(3) The Plan provides that, at the time of the Reorganization, the Target Shares
will in effect be constructively exchanged for Acquiring Fund Shares,
certificates for which will not be issued. Accordingly, Shareholders will not be
required to and will not make physical delivery of their Target Shares, nor will
they receive certificates for Acquiring Fund Shares, pursuant to the
Reorganization. Target Shares nevertheless will be treated as having been
exchanged for Acquiring Fund Shares, and the tax consequences to the
Shareholders will be unaffected by the absence of Acquiring Fund Share
certificates. SEE discussion at V. under "Analysis," below.
<PAGE>
Shares due that Shareholder. All outstanding Target Shares, including those
represented by certificates, simultaneously will be canceled on Target's share
transfer books.
REPRESENTATIONS
---------------
TRUST has represented and warranted to us as follows:
-----
1. Trust is a trust operating under a written declaration of trust
("Declaration of Trust"), the beneficial interest in which is divided into
transferable shares, that is duly organized and validly existing under the
laws of the Commonwealth of Massachusetts, and a copy of the Declaration
of Trust is on file with the Secretary of the Commonwealth of
Massachusetts. It is duly registered as an open-end management investment
company under the 1940 Act, and such registration will be in full force
and effect at the Effective Time. Target is a duly established and
designated series thereof;
2. Target is a "fund" as defined in section 851(g)(2); it qualified
for treatment as a regulated investment company under Subchapter M of the
Code ("RIC") for each past taxable year since it commenced operations and
will continue to meet all the requirements for such qualification for its
current taxable year; and it has no earnings and profits accumulated in
any taxable year in which the provisions of Subchapter M did not apply to
it. The Assets will be invested at all times through the Effective Time in
a manner that ensures compliance with the foregoing;
3. The Liabilities were incurred by Target in the ordinary course of
its business;
4. Target is not under the jurisdiction of a court in a proceeding
under Title 11 of the United States Code or similar case within the
meaning of section 368(a)(3)(A);
5. Not more than 25% of the value of Target's total assets
(excluding cash, cash items, and U.S. government securities) is invested
in the stock and securities of any one issuer, and not more than 50% of
the value of such assets is invested in the stock and securities of five
or fewer issuers; and
6. Target will be terminated as soon as reasonably practicable after
the Effective Time, but in all events within twelve months thereafter.
CORPORATION has represented and warranted to us as follows:
-----------
1. Corporation is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Maryland, and a copy
of its Articles of Incorporation is on file with the Secretary of State of
Maryland. It is duly registered as an open-end management investment
company under the 1940 Act, and such registration will be in full force
and effect at the Effective Time. Acquiring Fund is a duly established and
designated series thereof;
<PAGE>
2. Acquiring Fund is a "fund" as defined in section 851(g)(2); it
qualified for treatment as a RIC for each past taxable year since it
commenced operations and will continue to meet all the requirements for
such qualification for its current taxable year; Acquiring Fund intends to
continue to meet all such requirements for the next taxable year; and it
has no earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M did not apply to it;
3. No consideration other than Acquiring Fund Shares (and Acquiring
Fund's assumption of the Liabilities) will be issued in exchange for the
Assets in the Reorganization;
4. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares
issued in the ordinary course of its business as a series of an open-end
investment company; nor does Acquiring Fund have any plan or intention to
redeem or otherwise reacquire any Acquiring Fund Shares issued to the
Shareholders pursuant to the Reorganization, except to the extent it is
required by the 1940 Act to redeem any of its shares presented for
redemption at net asset value in the ordinary course of that business;
5. Following the Reorganization, Acquiring Fund (a) will continue
Target's "historic business" (within the meaning of Treas. Reg. ss.
1.368-1(d)(2)), (b) use a significant portion of Target's historic
business assets (within the meaning of Treas. Reg.ss. 1.368-1(d)(3)) in a
business, (c) has no plan or intention to sell or otherwise dispose of any
of the Assets, except for dispositions made in the ordinary course of that
business and dispositions necessary to maintain its status as a RIC, and
(d) expects to retain substantially all the Assets in the same form as it
receives them in the Reorganization, unless and until subsequent
investment circumstances suggest the desirability of change or it becomes
necessary to make dispositions thereof to maintain such status;
6. There is no plan or intention for Acquiring Fund to be dissolved
or merged into another corporation or a business trust or any "fund"
thereof (within the meaning of section 851(g)(2)) following the
Reorganization;
7. Immediately after the Reorganization, (a) not more than 25% of
the value of Acquiring Fund's total assets (excluding cash, cash items,
and U.S. government securities) will be invested in the stock and
securities of any one issuer and (b) not more than 50% of the value of
such assets will be invested in the stock and securities of five or fewer
issuers; and
8. Acquiring Fund does not directly or indirectly own, nor at the
Effective Time will it directly or indirectly own, nor has it at any time
during the past five years directly or indirectly owned, any shares of
Target.
EACH INVESTMENT COMPANY has represented and warranted to us as follows:
-----------------------
<PAGE>
1. The aggregate fair market value of the Acquiring Fund Shares,
when received by the Shareholders, will be approximately equal to the
aggregate fair market value of their Target Shares constructively
surrendered in exchange therefor;
2. Its management (a) is unaware of any plan or intention of
Shareholders to redeem, sell, or otherwise dispose of (i) any portion of
their Target Shares before the Reorganization to any person related
(within the meaning of Treas. Reg. section 1.368-1(e)(3)) to either Fund
or (ii) any portion of the Acquiring Fund Shares to be received by them in
the Reorganization to any person related (as so defined) to Acquiring
Fund, (b) does not anticipate dispositions of those Acquiring Fund Shares
at the time of or soon after the Reorganization to exceed the usual rate
and frequency of dispositions of shares of Target as a series of an
open-end investment company, (c) expects that the percentage of
Shareholder interests, if any, that will be disposed of as a result of or
at the time of the Reorganization will be DE MINIMIS, and (d) does not
anticipate that there will be extraordinary redemptions of Acquiring Fund
Shares immediately following the Reorganization;
3. The Shareholders will pay their own expenses, if any, incurred in
connection with the Reorganization;
4. Immediately following consummation of the Reorganization,
Acquiring Fund will hold substantially the same assets and be subject to
the same liabilities that Target held or was subject to immediately prior
thereto (in addition to the assets and liabilities Acquiring Fund held or
was subject to), plus any liabilities and expenses of the Funds incurred
in connection with the Reorganization;
5. The fair market value of the Assets on a going concern basis will
equal or exceed the Liabilities to be assumed by Acquiring Fund and those
to which the Assets are subject;
6. There is no intercompany indebtedness between the Funds that was
issued or acquired, or will be settled, at a discount;
7. Pursuant to the Reorganization, Target will transfer to Acquiring
Fund, and Acquiring Fund will acquire, at least 90% of the fair market
value of the net assets, and at least 70% of the fair market value of the
gross assets, held by Target immediately before the Reorganization. For
purposes of this representation, any amounts used by Target to pay its
Reorganization expenses and to make redemptions and distributions
immediately before the Reorganization (except (a) redemptions not made as
part of the Reorganization and (b) distributions made to conform to its
policy of distributing all or substantially all of its income and gains to
avoid the obligation to pay federal income tax and/or the excise tax under
section 4982) will be included as assets thereof held immediately before
the Reorganization;
8. None of the compensation received by any Shareholder who is an
employee of or service provider to Target will be separate consideration
for, or allocable to, any of the Target Shares held by such Shareholder;
<PAGE>
none of the Acquiring Fund Shares received by any such Shareholder will be
separate consideration for, or allocable to, any employment agreement,
investment advisory agreement, or other service agreement; and the
consideration paid to any such Shareholder will be for services actually
rendered and will be commensurate with amounts paid to third parties
bargaining at arm's-length for similar services;
9. Immediately after the Reorganization, the Shareholders will not
own shares constituting "control" of Acquiring Fund within the meaning of
section 304(c); and
10.Neither Fund will be reimbursed for any expenses incurred by it
or on its behalf in connection with the Reorganization unless those
expenses are solely and directly related to the Reorganization (determined
in accordance with the guidelines set forth in Rev. Rul. 73-54, 1973-1
C.B. 187).
OPINION
-------
Based solely on the facts set forth above, and conditioned on the
Representations being true at the time of the Closing and the Reorganization
being consummated in accordance with the Plan, our opinion (as explained more
fully in the next section of this letter) is as follows:
1. Acquiring Fund's acquisition of the Assets in exchange solely for
Acquiring Fund Shares and Acquiring Fund's assumption of the Liabilities,
followed by Target's distribution of those shares PRO RATA to the
Shareholders constructively in exchange for their Target Shares, will
qualify as a reorganization within the meaning of section 368(a)(1)(C),
and each Fund will be "a party to a reorganization" within the meaning of
section 368(b) of the Code;
2. Target will recognize no gain or loss on the transfer of the
Assets to Acquiring Fund in exchange solely for Acquiring Fund Shares and
Acquiring Fund's assumption of the Liabilities or on the subsequent
distribution of those shares to the Shareholders in constructive exchange
for their Target Shares;
3. Acquiring Fund will recognize no gain or loss on its receipt of
the Assets in exchange solely for Acquiring Fund Shares and its assumption
of the Liabilities;
4. Acquiring Fund's basis for the Assets will be the same as
Target's basis therefor immediately before the Reorganization, and
Acquiring Fund's holding period for the Assets will include Target's
holding period therefor;
5. A Shareholder will recognize no gain or loss on the constructive
exchange of all its Target Shares solely for Acquiring Fund Shares
pursuant to the Reorganization; and
6. A Shareholder's aggregate basis for the Acquiring Fund Shares to
be received by it in the Reorganization will be the same as the aggregate
basis for its Target Shares to be constructively surrendered in exchange
<PAGE>
for those Acquiring Fund Shares, and its holding period for those
Acquiring Fund Shares will include its holding period for those Target
Shares, provided they are held as capital assets by the Shareholder at the
Effective Time.
The foregoing opinion (1) is based on, and is conditioned on the continued
applicability of, the provisions of the Code and the Regulations, judicial
decisions, and rulings and other pronouncements of the Internal Revenue Service
("Service") in existence on the date hereof and (2) is applicable only to the
extent each Fund is solvent. We express no opinion about the tax treatment of
the transactions described herein if either Fund is insolvent.
ANALYSIS
--------
I. THE REORGANIZATION WILL QUALIFY AS A C REORGANIZATION, AND EACH
FUND WILL BE A PARTY TO A REORGANIZATION.
----------------------------------------
A. EACH FUND IS A SEPARATE CORPORATION.
-----------------------------------
A reorganization under section 368(a)(1)(C) (a "C Reorganization")
involves the acquisition by one corporation, in exchange solely for all or a
part of its voting stock, of substantially all of the properties of another
corporation. For a transaction to qualify under that section, therefore, both
entities involved therein must be corporations (or associations taxable as
corporations). Trust, however, is a Massachusetts business trust, not a
corporation, and each Fund is a separate series of an Investment Company.
Treasury Regulation section 301.7701-4(b) provides that certain
arrangements known as trusts (because legal title is conveyed to trustees for
the benefit of beneficiaries) will not be classified as trusts for purposes of
the Code because they are not simply arrangements to protect or conserve the
property for the beneficiaries. That section of the Regulations states that
these "business or commercial trusts" generally are created by the beneficiaries
simply as devices to carry on profit-making businesses that normally would have
been carried on through business organizations classified as corporations or
partnerships under the Code and concludes that the fact that any organization is
technically cast in the trust form will not change its real character if it "is
more properly classified as a business entity under [Treas. Reg.] Section
301.7701-2."(4) Furthermore, pursuant to Treas. Reg. Section 301.7701-4(c),
"[a]n `investment' trust will not be classified as a trust if there is a power
under the trust agreement to vary the investment of the certificate holders. SEE
COMMISSIONER V. NORTH AMERICAN BOND TRUST, 122 F.2d 545 (2d Cir. 1941), CERT.
DENIED, 314 U.S. 701 (1942)."
- --------------------
(4) On December 10, 1996, the Service adopted Regulations for classifying
business organizations (Treas. Reg. Sections 301.7701-1 through -3 and parts of
- -4, the so-called "check-the-box" regulations) to replace the provisions in the
then-existing Regulations that "have become increasingly formalistic. [The
check-the-box Regulations replace] those rules with a much simpler approach that
generally is elective." T.D. 8697, 1997-1 C.B. 215. Treasury Regulation section
301.7701-2(a) provides that "a BUSINESS ENTITY is any entity recognized for
federal tax purposes . . . that is not properly classified as a trust under
[Treas. Reg.] Section 301.7701-4 or otherwise subject to special treatment under
the . . . Code." Trust is not subject to any such special treatment.
<PAGE>
Based on these criteria, Trust does not qualify as a trust for federal
income tax purposes.(5) Trust is not simply an arrangement to protect or
conserve property for the beneficiaries but is designed to carry on a
profit-making business. Furthermore, while Trust is an "investment trust," there
is a power under the Declaration of Trust to vary its shareholders' investment
therein. Trust does not have a fixed pool of assets -- each series thereof is a
managed portfolio of securities, and each series' investment adviser has the
authority to buy and sell securities for it. Trust is not simply an arrangement
to protect or conserve the property for the beneficiaries but is designed to
carry on a profit-making business. Accordingly, we believe that Trust should not
be classified as a trust, and instead should be classified as a business entity,
for federal income tax purposes.
Treasury Regulation section 301.7701-2(a) provides that "[a] business
entity with two or more members is classified for federal tax purposes as either
a corporation or a partnership." The term "corporation" is defined for those
purposes (in Treas. Reg. Section 301.7701(2)(b)) to include corporations
denominated as such under the federal or state statute pursuant to which they
were organized and certain other entities. Any business entity that is not
classified as a corporation under that section of the Regulations (an "eligible
entity") and has at least two members can elect to be classified as either an
association (and thus a corporation) or a partnership. Treas. Reg. Section
301.7701-3(a).
An eligible entity in existence before January 1, 1997, the effective date
of the check-the-box Regulations, "will have the same classification that the
entity claimed under [the prior Regulations]," unless it elects otherwise.
Treas. Reg. Section 301.7701-3(b)(3)(i). Based on the reasoning stated in the
second preceding paragraph -- and the fact that that under the law that existed
before the check-the-box Regulations, the word "association" had been held to
include a Massachusetts business trust (SEE HECHT V. MALLEY, 265 U.S. 144
(1924)) -- Trust "claimed" classification under the prior Regulations as an
association taxable as a corporation. Moreover, Trust will not elect not to be
so classified. Accordingly, we believe that Trust will continue to be classified
as an association (and thus a corporation) for federal income tax purposes.
The Investment Companies as such, however, are not participating in the
Reorganization, but rather two separate series thereof (the Funds) are the
participants. Ordinarily, a transaction involving segregated pools of assets
such as the Funds could not qualify as a reorganization, because the pools would
not be separate taxable entities that constitute corporations. Under section
851(g), however, each Fund is treated as a separate corporation for all purposes
of the Code save the definitional requirement of section 851(a) (which is
satisfied by the respective Investment Companies). Accordingly, we believe that
each Fund is a separate corporation, and their shares are treated as shares of
corporate stock, for purposes of section 368(a)(1)(C).
- -------------------------
(5) Since New Fund will be considered separate from each other series
established under the Declaration of Trust for federal income tax purposes (see
the discussion in the last paragraph of I.A. below), the analysis in
the accompanying text applies equally to New Fund.
<PAGE>
B. TRANSFER OF "SUBSTANTIALLY ALL" OF TARGET'S PROPERTIES.
------------------------------------------------------
For an acquisition to qualify as a C Reorganization, the acquiring
corporation must acquire "substantially all of the properties" of the transferor
corporation in exchange solely for all or part of the acquiring corporation's
stock. For purposes of issuing private letter rulings, the Service considers the
transfer of at least 90% of the fair market value of the transferor's net
assets, and at least 70% of the fair market value of its gross assets, held
immediately before the reorganization to satisfy the "substantially all"
requirement. Rev. Proc. 77-37, 1977-2 C.B. 568. The Reorganization will involve
such a transfer. Accordingly, we believe that the Reorganization will involve
the transfer to Acquiring Fund of substantially all of Target's properties.
C. QUALIFYING CONSIDERATION.
------------------------
The acquiring corporation in an acquisition intended to qualify as a C
Reorganization must acquire at least 80% (by fair market value) of the
transferor's property solely for voting stock. Section 368(a)(2)(B)(iii). The
assumption of liabilities by the acquiring corporation or its acquisition of
property subject to liabilities normally are disregarded (section 368(a)(1)(C)),
but the amount of any such liabilities will be treated as money paid for the
transferor's property if the acquiring corporation exchanges any money or
property (other than its voting stock) therefor. Section 368(a)(2)(B). Because
Acquiring Fund will exchange only Acquiring Fund Shares, and no money or other
property, for the Assets, we believe that the Reorganization will satisfy the
solely-for-voting-stock requirement to qualify as a C Reorganization.
D. DISTRIBUTION BY TARGET.
----------------------
Section 368(a)(2)(G)(i) provides that a transaction will not qualify as a
C Reorganization unless the corporation whose properties are acquired
distributes the stock it receives and its other property in pursuance of the
plan of reorganization. Under the Plan -- which we believe constitutes a "plan
of reorganization" within the meaning of Treas. Reg. Section 1.368-2(g) --
Target will distribute all the Acquiring Fund Shares it receives to its
Shareholders in constructive exchange for their Target Shares; as soon as is
reasonably practicable thereafter, Target will be terminated. Accordingly, we
believe that the requirements of section 368(a)(2)(G)(i) will be satisfied.
E. REQUIREMENTS OF CONTINUITY.
--------------------------
Treasury Regulation section 1.368-1(b) sets forth two prerequisites to a
valid reorganization: (1) a continuity of the business enterprise through the
issuing corporation -- defined in the Regulation as "the acquiring corporation
(as that term is used in section 368(a))," with an exception not relevant here
- -- under the modified corporate form as described in Treas. Reg. Section
1.368-1(d) ("continuity of business enterprise") and (2) a continuity of
interest as described in Treas. Reg. Section 1.368-1(e) ("continuity of
interest").
1. CONTINUITY OF BUSINESS ENTERPRISE.
---------------------------------
To satisfy the continuity of business enterprise requirement of Treas.
Reg. Section 1.368-1(d)(1), the issuing corporation must either (i) continue the
<PAGE>
target corporation's historic business ("business continuity") or (ii) use a
significant portion of the target corporation's historic business assets in a
business ("asset continuity").
While there is no authority that deals directly with the continuity of
business enterprise requirement in the context of a transaction such as the
Reorganization, Rev. Rul. 87-76, 1987-2 C.B. 84, deals with a somewhat similar
situation. In that ruling, P was a RIC that invested exclusively in municipal
bonds. P acquired the assets of T in exchange for P common stock in a
transaction that was intended to qualify as a C Reorganization. Prior to the
exchange, T sold its entire portfolio of corporate stocks and bonds and
purchased a portfolio of municipal bonds. The Service held that this transaction
did not qualify as a reorganization for the following reasons: (1) because T had
sold its historic assets prior to the exchange, there was no asset continuity;
and (2) the failure of P to engage in the business of investing in corporate
stocks and bonds after the exchange caused the transaction to lack business
continuity as well.
The Funds' investment objectives, policies, and restrictions (including
amended fundamental restrictions approved at the Shareholders' Meeting) are
substantially similar, and they have the same investment adviser. Moreover,
after the Reorganization Acquiring Fund will continue Target's historic business
(within the meaning of Treas. Reg. ss. 1.368-1(d)(2)). Accordingly, there will
be business continuity.
Acquiring Fund not only will continue Target's historic business, but it
also will use in that business a significant portion of Target's historic
business assets (within the meaning of Treas. Reg. Section 1.368-1(d)(3)).
Accordingly, there will be asset continuity as well.
For all the foregoing reasons, we believe that the Reorganization will
satisfy the continuity of business enterprise requirement.
2. CONTINUITY OF INTEREST.
----------------------
Treasury Regulation section 1.368-1(e)(1)(i) provides that "[c]ontinuity
of interest requires that in substance a substantial part of the value of the
proprietary interests in the target corporation be preserved in the
reorganization. A proprietary interest in the target corporation is preserved
if, in a potential reorganization, it is exchanged for a proprietary interest in
the issuing corporation . . . ." That section of the Regulations goes on to
<PAGE>
provide that "[h]owever, a proprietary interest in the target corporation is not
preserved if, in connection with the potential reorganization, . . . stock of
the issuing corporation furnished in exchange for a proprietary interest in the
target corporation in the potential reorganization is redeemed. All facts and
circumstances must be considered in determining whether, in substance, a
proprietary interest in the target corporation is preserved."
For purposes of issuing private letter rulings, the Service considers
the continuity of interest requirement satisfied if ownership in an acquiring
corporation on the part of a transferor corporation's former shareholders is
equal in value to at least 50% of the value of all the formerly outstanding
shares of the transferor corporation. Rev. Proc. 77-37, SUPRA; BUT SEE Rev.
Rul. 56-345, 1956-2 C.B. 206 (continuity of interest was held to exist in a
reorganization of two RICs where immediately after the reorganization 26% of
the shares were redeemed to allow investment in a third RIC); SEE ALSO REEF
CORP. V. COMMISSIONER, 368 F.2d 125 (5th Cir. 1966), CERT. DENIED, 386 U.S.
1018 (1967) (a redemption of 48% of a transferor corporation's stock was not
a sufficient shift in proprietary interest to disqualify a transaction as a
reorganization under section 368(a)(1)(F) ("F Reorganization"), even though
only 52% of the transferor's shareholders would hold all the transferee's
stock); AETNA CASUALTY AND SURETY CO. V. U.S., 568 F.2d 811, 822-23 (2d Cir.
1976) (redemption of a 38.39% minority interest did not prevent a transaction
from qualifying as an F Reorganization); Rev. Rul. 61-156, 1961-2 C.B. 62 (a
transaction qualified as an F Reorganization even though the transferor's
shareholders acquired only 45% of the transferee's stock, while the remaining
55% of that stock was issued to new shareholders in a public underwriting
immediately after the transfer). Although shares of both Funds held by
Shareholders that are disposed of before or after the Reorganization will be
considered in determining satisfaction of the 50% standard, the Service has
recently issued private letter rulings that excepted from that determination
"shares which are required to be redeemed at the demand of shareholders by
. . . Target or by Acquiring in the ordinary course of their businesses as
open-end investment companies (or series thereof) pursuant to Section 22(e)
of the 1940 Act." Priv. Ltr. Ruls. 9823018 (Mar. 5, 1998) and 9822053 (Mar.
3, 1998).(6)
No minimum holding period for shares of an acquiring corporation is
imposed under the Code on the acquired corporation's shareholders. Rev. Rul.
66-23, 1966-1 C.B. 67, provides generally that "unrestricted rights of ownership
for a period of time sufficient to warrant the conclusion that such ownership is
definite and substantial" will suffice and that "ordinarily, the Service will
treat five years of unrestricted . . . ownership as a sufficient period" for
continuity of interest purposes. A preconceived plan or arrangement by or among
an acquired corporation's shareholders to dispose of more than 50% of an
acquiring corporation's shares could be problematic. Shareholders with no such
preconceived plan or arrangement, however, are basically free to sell any part
of the shares received by them in the reorganization without fear of breaking
continuity of interest, because the subsequent sale will be treated as an
independent transaction from the reorganization.
There is no plan or intention of Shareholders to redeem, sell, or
otherwise dispose of (i) any portion of their Target Shares before the
Reorganization to any person related (within the meaning of Treas. Reg. Section
1.368-1(e)(3)) to either Fund or (ii) any portion of the Acquiring Fund Shares
to be received by them in the Reorganization to any person related (as so
defined) to Acquiring Fund. Moreover, each Investment Company anticipates that
(a) dispositions of those Acquiring Fund Shares at the time of or soon after the
Reorganization will not exceed the usual rate and frequency of dispositions of
shares of Target as a series of an open-end investment company, (b) the
percentage of Shareholder interests, if any, that will be disposed of as a
result of or at the time of the Reorganization will be DE MINIMIS, and (c) there
- ------------------------
(6) Although, under section 6110(j)(3), a private letter ruling may not be
cited as precedent, tax practitioners look to such rulings as generally
indicative of the Service's views on the proper interpretation of the Code
and the Regulations. CF. ROWAN COMPANIES, INC. V. COMMISSIONER, 452 U.S. 247
(1981).
<PAGE>
will not be extraordinary redemptions of Acquiring Fund Shares immediately
following the Reorganization. Although Acquiring Fund's shares will be offered
for sale to the public on an ongoing basis after the Reorganization, sales of
those shares will arise out of a public offering separate and unrelated to the
Reorganization and not as a result thereof. SEE REEF CORP. V. COMMISSIONER, 368
F.2d at 134; Rev. Rul. 61-156, SUPRA. Similarly, although Shareholders may
redeem Acquiring Fund Shares pursuant to their rights as shareholders of a
series of an open-end investment company (SEE Priv. Ltr. Ruls. 9823018 and
9822053, SUPRA, and 8816064 (Jan. 28, 1988)), those redemptions will result from
the exercise of those rights in the course of Acquiring Fund's business as an
open-end series and not from the C Reorganization as such.
Accordingly, we believe that the Reorganization will satisfy the
continuity of interest requirement of Treas. Reg. ss. 1.368-1(b).
F. BUSINESS PURPOSE.
----------------
All reorganizations must meet the judicially imposed requirements of the
"business purpose doctrine," which was established in GREGORY V. HELVERING, 293
U.S. 465 (1935), and is now set forth in Treas. Reg. Sections 1.368-1(b), -1(c),
and -2(g) (the last of which provides that, to qualify as a reorganization, a
transaction must be "undertaken for reasons germane to the continuance of the
business of a corporation a party to the reorganization"). Under that doctrine,
a transaction must have a BONA FIDE business purpose (and not a purpose to avoid
federal income tax) to qualify as a valid reorganization. The substantial
business purposes of the Reorganization are described in the Proxy Statement.
Accordingly, we believe that the Reorganization is being undertaken for BONA
FIDE business purposes (and not a purpose to avoid federal income tax) and
therefore meets the requirements of the business purpose doctrine.
G. SATISFACTION OF SECTION 368(A)(2)(F).
------------------------------------
Under section 368(a)(2)(F), if two or more parties to a transaction
described in section 368(a)(1) (with an exception not relevant here) were
"investment companies" immediately before the transaction, then the transaction
shall not be considered a reorganization with respect to any such investment
company and its shareholders. But that section does not apply to a participating
investment company if, among other things, it is a RIC or --
(1) not more than 25% of the value of its total assets is invested in
the stock and securities of any one issuer and
(2) not more than 50% of the value of its total assets is invested in
the stock and securities of five or fewer issuers.
In determining total assets for these purposes, cash and cash items (including
receivables) and U.S. government securities are excluded. Section
368(a)(2)(F)(iv). Each Fund will meet the requirements to qualify for treatment
as a RIC for its respective current taxable year and will satisfy the foregoing
percentage tests. Accordingly, we believe that section 368(a)(2)(F) will not
cause the Reorganization to fail to qualify as a C Reorganization with respect
to either Fund.
For all the foregoing reasons, we believe that the Reorganization will
qualify as a C Reorganization.
<PAGE>
H. EACH FUND WILL BE A PARTY TO A REORGANIZATION.
---------------------------------------------
Section 368(b)(2) provides, in pertinent part, that in the case of a
reorganization involving the acquisition by one corporation of properties of
another -- and Treas. Reg. Section 1.368-2(f) further provides that if one
corporation transfers substantially all its properties to a second corporation
in exchange for all or a part of the latter's voting stock (I.E., a C
Reorganization) -- the term "a party to a reorganization" includes each
corporation. Pursuant to the Reorganization, Target is transferring all its
properties to Acquiring Fund in exchange for Acquiring Fund Shares. Accordingly,
we believe that each Fund will be "a party to a reorganization."
II. TARGET WILL RECOGNIZE NO GAIN OR LOSS.
-------------------------------------
Under sections 361(a) and (c), no gain or loss shall be recognized to a
corporation that is a party to a reorganization if, pursuant to the plan of
reorganization, (1) it exchanges property solely for stock or securities in
another corporate party to the reorganization and (2) distributes that stock or
securities to its shareholders. (Such a distribution is required by section
368(a)(2)(G)(i) for a reorganization to qualify as a C Reorganization.) Section
361(c)(4) provides that sections 311 and 336 (which require recognition of gain
on certain distributions of appreciated property) shall not apply to such a
distribution.
Section 357(a) provides in pertinent part that, except as provided in
section 357(b), if a taxpayer receives property that would be permitted to be
received under section 361 without recognition of gain if it were the sole
consideration and, as part of the consideration, another party to the exchange
assumes a liability of the taxpayer or acquires from the taxpayer property
subject to a liability, then that assumption or acquisition shall not be treated
as money or other property and shall not prevent the exchange from being within
section 361. Section 357(b) applies where the principal purpose of the
assumption or acquisition was a tax avoidance purpose or not a BONA FIDE
business purpose.
As noted above, it is our opinion that the Reorganization will qualify as
a C Reorganization, each Fund will be a party to a reorganization, and the Plan
constitutes a plan of reorganization. Target will exchange the Assets solely for
Acquiring Fund Shares and Acquiring Fund's assumption of the Liabilities and
then will be terminated pursuant to the Plan, distributing those shares to its
shareholders in constructive exchange for their Target Shares. As also noted
above, it is our opinion that the Reorganization is being undertaken for BONA
FIDE business purposes (and not a purpose to avoid federal income tax); we also
do not believe that the principal purpose of Acquiring Fund's assumption of the
Liabilities is avoidance of federal income tax on the proposed transaction.
Accordingly, we believe that Target will recognize no gain or loss on the
Reorganization.(7)
- ----------------------------
(7) Notwithstanding anything herein to the contrary, we express no opinion as to
the effect of the Reorganization on either Fund or any Shareholder with respect
to any Asset as to which any unrealized gain or loss is required to be
<PAGE>
III. ACQUIRING FUND WILL RECOGNIZE NO GAIN OR LOSS.
---------------------------------------------
Section 1032(a) provides that no gain or loss shall be recognized to a
corporation on the receipt by it of money or other property in exchange for its
stock. Acquiring Fund will issue Acquiring Fund Shares to Target in exchange for
the Assets, which consist of money and securities. Accordingly, we believe that
Acquiring Fund will recognize no gain or loss on the Reorganization.
IV. ACQUIRING FUND'S BASIS FOR THE ASSETS WILL BE A CARRYOVER BASIS, AND ITS
HOLDING PERIOD WILL INCLUDE TARGET'S HOLDING PERIOD.
---------------------------------------------------
Section 362(b) provides, in pertinent part, that the basis of property
acquired by a corporation in connection with a reorganization to which section
368 applies shall be the same as it would be in the hands of the transferor,
increased by the amount of gain recognized to the transferor on the transfer (a
"carryover basis"). As noted above, it is our opinion that the Reorganization
will qualify as such a reorganization and that Target will recognize no gain on
the Reorganization. Accordingly, we believe that Acquiring Fund's basis for the
Assets will be the same as Target's basis therefor immediately before the
Reorganization.
Section 1223(2) provides in general that the period for which a taxpayer
has held acquired property that has a carryover basis shall include the period
for which the property was held by the transferor. As noted above, it is our
opinion that Acquiring Fund's basis for the Assets will be a carryover basis.
Accordingly, we believe that Acquiring Fund's holding period for the Assets will
include Target's holding period therefor.
V. A SHAREHOLDER WILL RECOGNIZE NO GAIN OR LOSS.
--------------------------------------------
Under section 354(a)(1), no gain or loss shall be recognized if stock in a
corporation that is a party to a reorganization is exchanged pursuant to a plan
of reorganization solely for stock in that corporation or another corporate
party to the reorganization. Pursuant to the Plan, the Shareholders will receive
solely Acquiring Fund Shares for their Target Shares. As noted above, it is our
opinion that the Reorganization will qualify as a C Reorganization, each Fund
will be a party to a reorganization, and the Plan constitutes a plan of
reorganization. Although section 354(a)(1) requires that the transferor
corporation's shareholders exchange their shares therein for shares of the
acquiring corporation, the courts and the Service have recognized that the Code
does not require taxpayers to perform useless gestures to come within the
statutory provisions. SEE, E.G., EASTERN COLOR PRINTING CO., 63 T.C. 27, 36
(1974); DAVANT V. COMMISSIONER, 366 F.2d 874 (5th Cir. 1966). Therefore,
although Shareholders will not actually surrender Target Share certificates in
exchange for Acquiring Fund Shares, their Target Shares will be canceled on the
issuance of Acquiring Fund Shares to them (all of which will be reflected on
Acquiring Fund's books) and will be treated as having been exchanged therefor.
SEE Rev. Rul. 81-3, 1981-1 C.B. 125; Rev. Rul. 79-257, 1979-2 C.B. 136.
Accordingly, we believe that a Shareholder will recognize no gain or loss on the
constructive exchange of all its Target Shares solely for Acquiring Fund Shares
pursuant to the Reorganization.
- --------------------------------------------------------------------------------
recognized for federal income tax purposes at the end of a taxable year (or on
the termination or transfer thereof) under a mark-to-market system of
accounting.
<PAGE>
VI. A SHAREHOLDER'S BASIS FOR ACQUIRING FUND SHARES WILL BE A SUBSTITUTED
BASIS, AND ITS HOLDING PERIOD THEREFOR WILL INCLUDE ITS HOLDING PERIOD FOR
ITS TARGET SHARES.
-----------------
Section 358(a)(1) provides, in pertinent part, that in the case of an
exchange to which section 354 applies, the basis of the property permitted to be
received thereunder without the recognition of gain or loss shall be the same as
the basis of the property exchanged therefor, decreased by, among other things,
the fair market value of any other property and the amount of any money received
in the exchange and increased by the amount of any gain recognized on the
exchange by the shareholder ( a "substituted basis"). As noted above, it is our
opinion that the Reorganization will qualify as a C Reorganization and, under
section 354, a Shareholder will recognize no gain or loss on the constructive
exchange of all its Target Shares solely for Acquiring Fund Shares in the
Reorganization. No property will be distributed to the Shareholders other than
Acquiring Fund Shares, and no money will be distributed to them pursuant to the
Reorganization. Accordingly, we believe that a Shareholder's basis for the
Acquiring Fund Shares it receives in the Reorganization will be the same as the
basis for its Target Shares to be constructively surrendered in exchange for
those Acquiring Fund Shares.
Section 1223(1) provides in general that the period for which a taxpayer
has held property received in an exchange that has a substituted basis shall
include the period for which the taxpayer held the property exchanged therefor
if the latter property was a capital asset (as defined in section 1221) at the
time of the exchange. As noted above, it is our opinion that a Shareholder will
have a substituted basis for the Acquiring Fund Shares it receives in the
Reorganization. Accordingly, we believe that a Shareholder's holding period for
the Acquiring Fund Shares it receives in the Reorganization will include its
holding period for the Target Shares constructively surrendered in exchange
therefor, provided those Target Shares were capital assets on the Closing Date.
We hereby consent to the references to our firm in "Part I: The
Reorganization" of the Proxy Statement in (1) the section entitled "Synopsis"
under the caption "Federal Income Tax Consequences of the Reorganization" and
(2) the section entitled "The Proposed Transaction" under the caption "Federal
Income Tax Considerations."
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By: /s/ Theodore L. Press
---------------------
Theodore L. Press
