As filed with the Securities and Exchange Commission on September 25, 2000
Registration Nos. 333-39636
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM N-14
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
Pre-effective Amendment No.____ Post-Effective Amendment No.1
(Check appropriate box or boxes)
Federated Investment Series Funds, Inc.
(Exact name of registrant as specified in charter)
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7000
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 1-800-341-7400
John W. McGonigle, Esquire
Federated Investors Towers
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
Robert J. Zutz, Esquire
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036-1800
(Names and Addresses of Agents for Service of Process)
For the new shares of Federated Bond Fund (Class A), the date of the public
offering of those shares was September 15, 2000. The public offering of shares
of Registrant's series is on-going. The title of securities being registered is
shares of capital and common stock.
It is proposed that this filing will become effective immediately upon filing
pursuant to Rule 485(b) under the Securities Act of 1933.
No filing fee is due because of Registrant's reliance on Section 24(f) of the
Investment Company Act of 1940, as amended.
<PAGE>
FEDERATED INVESTMENT SERIES FUNDS, INC.
CONTENTS OF POST-EFFECTIVE AMENDMENT NO. 1 TO THE
REGISTRATION STATEMENT ON FORM N-14
This Registration Statement consists of the following papers and documents:
Cover Sheet
Contents of Registration Statement
o Part C - Other Information
Signature Page
Exhibits
The sole purpose of this filing is to file as an exhibit the opinion
and consent of counsel supporting the tax matters and consequences to
shareholders of the reorganization described in Registrant's Registration
Statement, filed on Form N-14 on June 19, 2000, as required by Item 16(12) of
Form N-14. Parts A and B to this Registration Statement are incorporated by
reference to the Combined Prospectus and Proxy Statement and Statement of
Additional Information, each dated July 20, 2000, filed with the Securities and
Exchange Commission under Rule 497 on July 31, 2000, File No. 33-48847, EDGAR
Accession No. 0000898432-00-000534.
<PAGE>
PART C
------
Information required to be included in Part C is set forth
under the appropriate item, so numbered, in Part C of this Registration
Statement.
FEDERATED INVESTMENT SERIES FUNDS, INC.
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION; (1)
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ITEM 16. EXHIBITS
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(1) (a) Copy of Articles of Incorporation of the Registrant; (1)
(i) Conformed copy of Articles Supplementary, dated
July 1, 1993; (2)
(ii) Conformed copy of Articles Supplementary, dated
May 20, 1994; (2)
(iii) Conformed copy of Articles Supplementary, dated
May 18, 1995; (2)
(iv) Conformed copy of Articles of Amendment, dated
March 29, 1996; (2)
(v) Conformed copy of Articles Supplementary, dated
November 15, 1996; (2)
(vi) Conformed copy of Certificate of Correction, dated
February 28, 1997; (2)
(vii) Conformed copy of Certificate of Correction, dated
February 28, 1997; (2)
(2) (a) Copy of By-Laws of the Registrant; (1)
(i) Copy of Amendment No.1 to the By-Laws of Registrant; (3)
(ii) Copy of Amendment No.2 to the By-Laws of Registrant; (3)
(iii) Copy of Amendment No.3 to the By-Laws of Registrant; (3)
(3) Voting Trust Agreements - none.
(4) A copy of the Agreement and Plan of Reorganization is included as
Exhibit A to the Combined Proxy Statement and Prospectus of this
Registration Statement. (9)
(5) (i) Copies of Specimen Certificates for Shares of Capital Stock of
Federated Bond Fund; (4)
(6) (a) Conformed copy of Investment Advisory Contract of the
Registrant; (5)
(7) (a) Copy of Distributor's Contract of Registrant; (6)
(i) Conformed copy of Exhibits C and D to Distributor's
Contract; (7)
(ii) Conformed copy of Exhibits E, F, and G to Distributor's
Contract; (4)
(8) Bonus, Profit-Sharing or Pension Plans - none.
(9) (a) Conformed copy of Custodian Agreement of the Registrant;(5)
(b) Conformed copy of State Street Domestic Custody Fee
Schedule; (8)
<PAGE>
(c) Amended and Restated Agreement for Fund Accounting Services,
Administrative Services, Transfer Agency Services, and Custody
Services Procurement; (3)
(d) The Registrant hereby incorporates by reference the conformed
copy of the Shareholder Services Sub-Contract between Fidelity
and Federated Shareholder Services from Item 24(b)(9)(iii) of
the Federated GNMA Trust Registration Statement on Form N-1A,
filed with the Commission on March 25, 1996 (File Nos. 2-75670
and 811-3375);
(e) Conformed copy of Amended and Restated Shareholder Services
Agreement; (8)
(10) (a) Copy of Distribution Plan; (6)
(i) Conformed Copy of Exhibits B and C to Distribution
Plan; (7)
(ii) Conformed Copy of Exhibits D, E, and F to Distribution
Plan; (4)
(11) Conformed copy of the Opinion of Counsel as to legality of shares being
registered; (9)
(12) Conformed copy of the Opinion and Consent of Kirkpatrick & Lockhart LLP
regarding certain tax matters; (filed herewith)
(13) None.
(14) Conformed copy of Consent of Independent Auditors; (10)
(15) Financial Statements omitted from Part B - none.
(16) (a) Conformed Copy of Power of Attorney; (2)
(ii) Conformed Copy of Power of Attorney of Chief Investment
Officer of the Registrant (2)
(iii) Conformed Copy of Power of Attorney of Trustee John F.
Cunningham; (2)
(iv) Conformed Copy of Power of Attorney of Trustee Charles F.
Mansfield, Jr.; (2)
(v) Conformed Copy of Power of Attorney of Trustee John S.
Walsh. (12)
(17) Form of Proxy; (9)
--------------------------------------------------------------------------------
(1) Response is incorporated by reference to Registrant's Initial
Registration Statement on Form N-1A filed August 21, 1992. (File
No. 33-48847)
(2) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 18 on Form N-1A filed October 29, 1999 (File
No. 33-48847)
(3) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 16 on Form N-1A filed October 30, 1998 (File
No. 33-48847)
(4) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 7 on Form N-1A filed July 27, 1995 (File No.
33-48847)
(5) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 4 on Form N-1A filed December 29, 1993 (File
No. 33-48847)
(6) Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on Form N-1A filed September 8, 1992. (File
No. 33-48847)
(7) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 5 on Form N-1A filed December 23, 1994 (File
No. 33-48847)
(8) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 13 on Form N-1A filed October 24, 1997 (File
No. 33-48847)
(9) Response is incorporated by reference to Registrant's Registration
Statement on Form N-14, filed June 19, 2000. (File No. 333-39636).
<PAGE>
(10) Previously filed in Registrant's Registration Statement on Form N-14,
filed June 19, 2000. (File No. 333-39636).
ITEM 17. UNDERTAKINGS
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(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus which is
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, as amended, the reoffering prospectus will
contain the information called for by the applicable registration form
for the reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the
applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
Registration Statement and will not be used until the amendment is
effective, and that in determining liability under the Securities Act
of 1933, as amended, 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 initial
BONA FIDE offering of them.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, INVESTMENT SERIES FUNDS, INC.,
certifies that it meets all of the requirements for effectiveness of this
Post-Effective Amendment No. 1 to its Registration Statement on Form N-14
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Pittsburgh and Commonwealth
of Pennsylvania, on the 25th day of September, 2000.
FEDERATED INVESTMENT SERIES FUNDS, INC.
BY: /s/ C. Grant Anderson
C. Grant Anderson, Assistant Secretary
Attorney in Fact for John F. Donahue
September 25, 2000
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed below by the following
person in the capacity and on the date indicated:
NAME TITLE DATE
By: /s/ C. Grant Anderson Attorney In Fact September 25, 2000
C. Grant Anderson For the Persons
ASSISTANT SECRETARY Listed Below
NAME TITLE
John F. Donahue* Chairman and Director
(Chief Executive Officer)
J. Christopher Donahue* President and Director
Richard J. Thomas* Treasurer
(Principal Financial and
Accounting Officer)
William D. Dawson, III* Chief Investment Officer
Thomas G. Bigley* Director
John T. Conroy, Jr.* Director
<PAGE>
Nicholas P. Constantakis* Director
John F. Cunningham* Director
Lawrence D. Ellis, M.D.* Director
Peter E. Madden* Director
Charles F. Mansfield, Jr.* Director
John E. Murray, Jr.* Director
Marjorie P. Smuts* Director
John S. Walsh* Director
*By Power of Attorney
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Kirkpatrick & Lockhart LLP 1800 Massachusetts Avenue, NW
Second Floor
Washington, DC 20036-1800
202.778.9000
www.kl.com
Theodore L. Press
Tel: 202.778.9025
Fax: 202.778.9100
[email protected]
September 15, 2000
IAI Investment Funds I, Inc.
601 Second Avenue South
Suite 3600
Minneapolis, Minnesota 55402
Federated Investment Series Funds, Inc.
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237
Re: REORGANIZATION TO COMBINE A SERIES OF A MINNESOTA
CORPORATION AND A SERIES OF A MARYLAND CORPORATION
--------------------------------------------------
Ladies and Gentleman:
IAI Investment Funds I, Inc., a Minnesota corporation ("Corporation"), on
behalf of IAI Bond Fund, a segregated portfolio of assets ("series") thereof
("Target"), and Federated Investment Series Funds, Inc., a Maryland corporation
("Federated"), on behalf of its Federated Bond 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 July 20, 2000
("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 Class A shares of common stock of Acquiring Fund
("Acquiring Fund Shares"), 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 their shares of common stock of Target ("Target Shares")
(such transactions sometimes being referred to herein collectively as the
"Reorganization"), will qualify as a reorganization within the meaning of
--------
1/ Target and Acquiring Fund are sometimes referred to herein individually as a
"Fund" and collectively as the "Funds," and Corporation and Federated are
sometimes referred to herein individually as an "Investment Company" and
collectively as the "Investment Companies."
<PAGE>
Kirkpatrick & Lockhart LLP
IAI INVESTMENT FUNDS I, INC.
FEDERATED INVESTMENT SERIES FUNDS, INC.
September 15, 2000
Page 2
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 July 20, 2000, that was furnished in
connection with the solicitation of proxies by Corporation's board of directors
for use at a special meeting of Target's shareholders held on September 8, 2000
("Proxy Statement"), (3) each Fund's currently effective prospectus and
statement of additional information, 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) or in letters from the Investment Companies dated
September 14, 2000 (collectively, "Representations").
FACTS
Corporation is a Minnesota corporation, and Target is a series thereof.
Federated is a Maryland corporation, and Acquiring is a series thereof. Each
Investment Company is registered with the Securities and Exchange Commission as
an open-end management investment company under the Investment Company Act of
1940, as amended ("1940 Act").
Target has a single class of shares. Acquiring Fund's shares are divided
into multiple classes, including Class A shares. Only Acquiring Fund Shares
(I.E., Class A shares), which are substantially similar to the Target Shares,
are involved in the Reorganization.
The Reorganization, together with related acts necessary to consummate the
same ("Closing"), will take place on or about the date hereof. All acts taking
place at the Closing will be deemed to take place simultaneously as of the close
---------
2/ All "section" references are to the Internal Revenue Code of 1986, as amended
("Code"), unless otherwise noted, and all "Treas. Reg.ss." references are to the
regulations under the Code ("Regulations").
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Kirkpatrick & Lockhart LLP
IAI INVESTMENT FUNDS I, INC.
FEDERATED INVESTMENT SERIES FUNDS, INC.
September 15, 2000
Page 3
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) are substantially similar. For the reasons,
and after consideration of the factors, described in the Proxy Statement, each
Investment Company's board of 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 Investment Advisers, Inc. or Federated
Investment Management Company, the investment adviser of Target and Acquiring
Fund, respectively -- 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, and is adopted as, a
"plan of reorganization" within the meaning of the Regulations, 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 number of full and fractional (rounded to the third decimal
place) Acquiring Fund Shares determined by dividing the value of the
Assets by the net asset value ("NAV") of an Acquiring Fund Share (both
computed as set forth in paragraph 2.1 of the Plan),
(2) The constructive distribution of such Acquiring Fund Shares to
the Shareholders,3/ and
-----------
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>
Kirkpatrick & Lockhart LLP
IAI INVESTMENT FUNDS I, INC.
FEDERATED INVESTMENT SERIES FUNDS, INC.
September 15, 2000
Page 4
(3) The termination of Target as soon as reasonably practicable
after that distribution.
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 the 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 Shares
due that Shareholder. All outstanding Target Shares, including those represented
by certificates, simultaneously will be canceled on Target's share transfer
books.
REPRESENTATIONS
CORPORATION has represented and warranted to us as follows:
(1) Corporation is a corporation that is duly organized, validly
existing, and in good standing under the laws of the State of Minnesota;
its articles of incorporation are on file with the Secretary of the State
of Minnesota; it is duly registered as an open-end management investment
company under the 1940 Act, and such registration is in full force and
effect; and 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; the Assets will be invested at all times through the
Effective Time in a manner that ensures compliance with the foregoing; and
Target has no earnings and profits accumulated in any taxable year in
which the provisions of Subchapter M did not apply to it;
(3) Target is not under the jurisdiction of a court in a "title 11
or similar case" (within the meaning of section 368(a)(3)(A));
(4) 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;
(5) During the five-year period ending on the date of the Closing,
neither Target nor any person "related" (as defined in Treas. Reg.ss.
1.368-1(e)(3) without regard to Treas. Reg.ss. 1.368-1(e)(3)(i)(A)) to
Target will have directly or through any transaction, agreement, or
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Kirkpatrick & Lockhart LLP
IAI INVESTMENT FUNDS I, INC.
FEDERATED INVESTMENT SERIES FUNDS, INC.
September 15, 2000
Page 5
arrangement with any other person, (a) acquired Target Shares with
consideration other than Acquiring Fund Shares or Target Shares, except
for shares redeemed in the ordinary course of Target's business as a
series of an open-end investment company as required by the 1940 Act, or
(b) made distributions with respect to Target Shares, except for (i)
dividends qualifying for the deduction for dividends paid (as defined in
section 561) referred to in sections 852(a)(1) and 4982(c)(1)(A) and (ii)
additional distributions, to the extent they do not exceed 50% of the
value (without giving effect to such distributions) of the proprietary
interest in Target on such date; and
(6) Target will be liquidated as soon as reasonably practicable
after the Effective Time, but in all events within 12 months thereafter.
FEDERATED has represented and warranted to us as follows:
(1) Federated is a corporation that is duly organized, validly
existing, and in good standing under the laws of the State of Maryland;
its Articles of Incorporation are on file with the Department of
Assessments and Taxation 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; and Acquiring Fund
is a duly established and designated series thereof;
(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; it 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 will be issued
in exchange for the Assets in the Reorganization;
(4) 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;
(5) 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;
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Kirkpatrick & Lockhart LLP
IAI INVESTMENT FUNDS I, INC.
FEDERATED INVESTMENT SERIES FUNDS, INC.
September 15, 2000
Page 6
(6) 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;
(7) 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, or any person "related"
(within the meaning of Treas. Reg. ss. 1.368-1(e)(3)) to 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 NAV in the ordinary course of that
business; and
(8) Following the Reorganization, Acquiring Fund (a) will continue
Target's "historic business" (within the meaning of Treas. Reg.ss.
1.368-1(d)(2)) and (b) will 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.
EACH INVESTMENT COMPANY has represented and warranted to us as follows:
(1) The fair market value of the Acquiring Fund Shares received by
each Shareholder will be approximately equal to the fair market value of
its Target Shares constructively surrendered in exchange thereof;
(2) The Shareholders will pay their own expenses, if any, incurred
in connection with the Reorganization;
(3) There is no intercompany indebtedness between the Funds that was
issued or acquired, or will be settled, at a discount;
(4) 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 the 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 in the
ordinary course of its business required by section 22(e) of the 1940 Act
and (b) regular, normal dividend 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
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Kirkpatrick & Lockhart LLP
IAI INVESTMENT FUNDS I, INC.
FEDERATED INVESTMENT SERIES FUNDS, INC.
September 15, 2000
Page 7
section 4982) after the date of the Plan will be included as assets held
thereby immediately before the Reorganization;
(5) 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;
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;
(6) Immediately after the Reorganization, the Shareholders will not
own shares constituting "control" (within the meaning of section 304(c))
of Acquiring Fund;
(7) 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, 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);
(2) Target will recognize no gain or loss on the transfer of the
Assets to Acquiring Fund in exchange solely for Acquiring Fund Shares 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;
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Kirkpatrick & Lockhart LLP
IAI INVESTMENT FUNDS I, INC.
FEDERATED INVESTMENT SERIES FUNDS, INC.
September 15, 2000
Page 8
(4) Acquiring Fund's basis in the Assets will be the same as
Target's basis therein 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 in the Acquiring Fund Shares it
receives in the Reorganization will be the same as the aggregate basis in
the Target Shares it constructively surrenders in exchange for those
Acquiring Fund Shares, and its holding period for those Acquiring Fund
Shares will include its holding period for those Target Shares, provided
the Shareholder holds them as capital assets at the Effective Time.
Our opinion 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. All the foregoing authorities are subject to
change or modification that can be applied retroactively and thus also could
affect our opinion; we assume no responsibility to update our opinion with
respect to any such change or modification. Our opinion also is applicable only
to the extent each Fund is solvent, and we express no opinion about the tax
treatment of the transactions described herein if either Fund is insolvent. Our
opinion is solely for the addressees' information and use and may not be relied
on for any purpose by any other person without our express written consent.
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). Although each Investment Company is a corporation, they as such
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
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requirement of section 851(a) (which is satisfied by the respective Investment
Companies). Accordingly, we believe that each Fund is a separate corporation,
and its shares are treated as shares of corporate stock, for purposes of section
368(a)(1)(C).
B. TRANSFER OF "SUBSTANTIALLY ALL" OF TARGET'S PROPERTIES.
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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.
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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).
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. ss. 1.368-2(g) -- Target
will distribute all the Acquiring Fund Shares it receives to the 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.
--------------------------
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.ss. 1.368-1(d)
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("continuity of business enterprise") and (2) a continuity of interest as
described in Treas. Reg.ss. 1.368-1(e) ("continuity of interest").
1. CONTINUITY OF BUSINESS ENTERPRISE.
---------------------------------
To satisfy the continuity of business enterprise requirement of Treas.
Reg. ss. 1.368-1(d)(1), the issuing corporation must either (i) continue the
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 are
substantially similar. 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.ss. 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.
----------------------
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 goes on to provide that
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"[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.4/ Although shares of both the target and
acquiring corporations held by the target corporation's shareholders that are
disposed of before or after the transaction 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 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); cf. Priv. Ltr. Rul. 199941046 (July
16, 1999) (redemption of a target RIC shareholder's shares, amounting to 42% of
the RIC's value, and other "shares redeemed in the ordinary course of Target's
business as an open-end investment company pursuant to section 22(e) . . ."
excluded from determination of whether the target or a related person acquired
its shares with consideration other than target or acquiring fund shares).5/
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4/ 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).
5/ Although, under section 6110(k)(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).
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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 such a series and not from the C
Reorganization as such.
Accordingly, we believe that the Reorganization will satisfy the
continuity of interest requirement.
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. ss.ss. 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.
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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.
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. ss. 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.
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 then will be terminated pursuant to the Plan,
distributing those shares to the 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
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federal income tax). Accordingly, we believe that Target will recognize no gain
or loss on the Reorganization.6/
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 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 IN 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 in the
Assets will be the same as Target's basis therein 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 transferor held the property. As noted above, it is our opinion
that Acquiring Fund's basis in 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
-------------
6/ 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
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.
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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 share transfer 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.
VI. A SHAREHOLDER'S BASIS IN 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 in the
Acquiring Fund Shares it receives in the Reorganization will be the same as the
basis in its Target Shares it constructively surrenders 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) in the
taxpayer's hands at the time of the exchange. SEE Treas. Reg. ss. 1.1223-1(a).
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
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Fund Shares it receives in the Reorganization will include its holding period
for the Target Shares it constructively surrenders in exchange for those
Acquiring Fund Shares, provided the Shareholder holds them as capital assets at
the Effective Time.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By: /s/ Theodore L. Press
------------------------
Theodore L. Press