As filed with the Securities and Exchange Commission on August 6, 1999
Registration No. 333-76495
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
UNITED ASSET STRATEGY FUND, INC.
(Exact Name of Registrant as Specified in Charter)
6300 Lamar Avenue
Overland Park, Kansas 66202
(Address of Principal Executive Offices)
P.O. Box 29217, Shawnee Mission, Kansas 66201-9217
(Mailing Address)
(913) 236-2000
(800) 366-5465
(Registrant's Area Code and Telephone Number)
Helge K. Lee, Esq.
Kristen A. Richards, Esq.
6300 Lamar Avenue
Overland Park, Kansas 66202
(Name and Address of Agent for Service)
Copies to:
Clifford J. Alexander, Esq.
Catherine S. Bardsley, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, D.C. 20036-1800
Telephone: (202) 778-9068
It is proposed that this filing will become effective immediately upon
filing pursuant to Rule 485(b).
<PAGE>
UNITED ASSET STRATEGY FUND, INC.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following papers and documents:
o Cover Sheet
o Contents of Registration Statement
o United Asset Strategy Fund
Part A - Prospectus/Proxy Statement*
Part B - Statement of Additional Information*
o Part C - Other Information
o Signature Page
o Exhibits
* Previously filed in Registrant's Registration Statement on Form N-14,
SEC File No. 333-76495, on April 16, 1999.
<PAGE>
PART C
OTHER INFORMATION
Item 15. Indennification
---------------
Reference is made to Article X of the Articles of Incorporation of
Registrant filed December 1, 1998 as EX-99.B1-charter to Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A, Article IX of the
By-Laws, filed December 27, 1996 as EX-99.B2-asbylaws as Post-Effective
Amendment No. 4 to the Registration Statement on Form N-1A, and to Article II of
the Underwriting Agreement, filed July 14, 1994 as EX-99.B6-asua to
Post-Effective Amendment No. 1 to the Registration Statement on Form N-1A, each
of which provides indemnification. Also refer to Section 2-418 of the Maryland
General Corporation Law regarding indemnification of directors, officers,
employees and agents.
Item 16. Exhibits
--------
(1) (a) Articles of Incorporation, filed October 3, 1994 as
EX-99.B1-asarticles to the initial Registration Statement on
Form N-1A.*
(b) Articles Supplementary, filed December 28, 1995 as
EX-99.B1-asartsup to Post-Effective Amendment No. 3 to the
Registration Statement on Form N-1A.*
(2) By-Laws, filed December 27, 1996 as EX-99.B2-asbylaws to
Post-Effective Amendment No. 4 to the Registration Statement on
Form N-1A.*
(3) Voting trust agreement - not applicable.
(4) Form of Agreement and Plan of Reorganization and Termination, filed
April 16, 1999 as Appendix A to the Registration Statement on
Form N-14.*
(5) Instruments Defining the Rights of Shareholders - not applicable.
(6) Investment Management Agreement, filed October 3, 1994 as
EX-99.B5-asima to the initial Registration Statement on Form N-1A.*
(7) Underwriting Agreement, filed March 7, 1995 as EX-99.B6-asua to
Pre-Effective Amendment No. 2 to the Registration Statement on
Form N-1A.*
(8) Bonus, Profit Sharing, Pension or Similar Contracts - not
applicable.
(9) Custodian Agreement, as amended, filed December 1, 1998 as
EX-99.B8-asca to Post-Effective Amendment No. 7 to the Registration
Statement on Form N-1A.*
<PAGE>
(10) (a) Service Plan, as restated, filed July 14, 1995 as EX-99.B15-assp to
Post-Effective Amendment No. 1 to the Registration Statement on
Form N-1A.*
(b) Distribution and Service Plan for Class A shares, filed December 29,
1997 as EX-99.B15-asdsp to Post-Effective Amendment No. 6 to the
Registration Statement on Form N-1A.*
(c) Multiple Class Plan, as amended, filed December 28, 1995 as
EX-99.B18-asmcp to Post-Effective Amendment No. 3 to the Registration
Statement on Form N-1A.*
(11) Opinion and consent of Kirkpatrick & Lockhart LLP regarding the
legality of securities being registered, filed April 16, 1999 as
EX-99.11 to the Registration Statement on Form N-14.*
(12) Opinion and consent of Kirkpatrick & Lockhart LLP regarding certain
tax matters in connection with United Asset Strategy Fund is filed
electronically herewith.
(13) (a) Shareholder Servicing Agreement, filed December 1, 1998 as
EX-99.B9-asssa to Post-Effective Amendment No. 7 to the Registration
Statement on Form N-1A.*
(b) Accounting Services Agreement, filed October 3, 1994 as
EX-99.B9-asasa to the initial Registration Statement on Form N-1A.*
(c) Service Agreement, filed October 3, 1994 as EX-99.B9-assa to the
initial Registration Statement on Form N-1A.*
(d) Amendment to Service Agreement, filed July 14, 1995 as
EX-99.B9-assaam to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-1A.*
(e) Fund NAV Application, filed March 7, 1995 as EX-99.B9-asnavapp to
Pre-Effective Amendment No. 2 to the Registration Statement on Form
N-1A.*
(f) Fund Class A Application, as amended, filed May 30, 1997 as
EX-99.B9-asappca to Post-Effective Amendment No. 5 to the
Registration Statement on Form N-1A.*
(g) Fund Class Y Application, filed July 14, 1995 as EX-99.B9-ascyapp to
Post-Effective Amendment No. 1 to the Registration Statement on Form
N-1A.*
(h) Class Y Letter of Understanding, filed December 27, 1996 as
EX-99.B9-aslou to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A.*
<PAGE>
(14) (a) Consent of Deloitte & Touche LLP, Independent Accountants, pertaining
to United Gold & Government Fund, Inc., filed April 16, 1999 as
EX-99.14 to the Registration Statement on Form N-14.
(b) Consent of Deloitte & Touche LLP, Independent Accountants,
pertaining to United Asset Strategy Fund, Inc., filed April 16, 1999
as EX-99.14 to the Registration Statement on Form N-14.
(15) Financial statements omitted from part B - not applicable.
(16) Copy of manually signed Power of Attorney, filed April 16, 1999 as
part of the Registration Statement on Form N-14.*
(17) Additional Exhibits.
(a) Form of Proxy Card, filed April 16, 1999 as part of the Registration
Statement on Form N-14.*
*is incorporated herein by reference.
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 to the Registration Statement on Form N-14 has been signed on behalf
of Registrant, in the City of Overland Park, and State of Kansas, on this 30th
day of July 1999.
UNITED ASSET STRATEGY FUND, INC.
(Registrant)
By: /s/ Robert L. Hechler
--------------------------------
Robert L. Hechler, President
Attest: /s/ Kristen A. Richards
--------------------------------
Kristen A. Richards, Assistant
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement on Form N-14 has been
signed below by the following persons in the capacities and on the date
indicated:
Signature Title Date
- --------- ----- ----
/s/ Keith A. Tucker * Chairman of the Board July 30, 1999
- -----------------------------
Keith A. Tucker
/s/ Robert L. Hechler * President, Principal July 30, 1999
- ----------------------------- Financial Officer and
Robert L. Hechler Director
/s/ Henry J. Herrmann * Vice President and July 30, 1999
- ----------------------------- Director
Henry J. Herrmann
/s/ Theodore W. Howard * Vice President, Treasurer July 30, 1999
- ----------------------------- and Principal Accounting
Theodore W. Howard Officer
<PAGE>
Signature Title Date
- --------- ----- ----
/s/ James A. Concannon * Director July 30, 1999
- -----------------------------
James A. Concannon
/s/ John A. Dillingham * Director July 30, 1999
- -----------------------------
John A. Dillingham
/s/ David P. Gardner * Director July 30, 1999
- -----------------------------
David P. Gardner
/s/ Linda K. Graves * Director July 30, 1999
- -----------------------------
Linda K. Graves
/s/ Joseph Harroz, Jr. * Director July 30, 1999
- -----------------------------
Joseph Harroz, Jr.
/s/ John F. Hayes * Director July 30, 1999
- -----------------------------
John F. Hayes
/s/ Glendon E. Johnson * Director July 30, 1999
- -----------------------------
Glendon E. Johnson
/s/ William T. Morgan * Director July 30, 1999
- -----------------------------
William T. Morgan
/s/ Ronald C. Reimer * Director July 30, 1999
- -----------------------------
Ronald C. Reimer
/s/ Frank J. Ross, Jr. * Director July 30, 1999
- -----------------------------
Frank J. Ross, Jr.
/s/ Eleanor B. Schwartz * Director July 30, 1999
- -----------------------------
Eleanor B. Schwartz
<PAGE>
Signature Title Date
- --------- ----- ----
/s/ Frederick Vogel III * Director July 30, 1999
- -----------------------------
Frederick Vogel III
* Signed by Kristen A. Richards on July 30, 1999, pursuant to a Power of
Attorney filed April 16, 1999 as part of the Registrant's Registration
Statement on Form N-14, SEC File No. 333-76495.
<PAGE>
EXHIBIT INDEX
Exhibit
- -------
(12) Opinion and consent of Kirkpatrick & Lockhart LLP regarding certain
tax matters in connection with United Asset Strategy Fund, Inc.
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
THEODORE L. PRESS
(202) 778-9025
[email protected]
VIA EDGAR
- ---------
June 30, 1999
United Gold & Government Fund, Inc.
United Asset Strategy Fund, Inc.
6300 Lamar Avenue
Overland Park, Kansas 66202
Re: Reorganization to Combine Two Maryland Corporations
---------------------------------------------------
Ladies and Gentleman:
United Gold & Government Fund, Inc. ("Target") and United Asset Strategy
Fund, Inc. ("Acquiring Fund"), each a Maryland corporation (sometimes referred
to herein individually as a "Fund" and collectively as the "Funds"), 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 April 9, 1999
("Plan"). Specifically, each Fund 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 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 section 368(a)(1)(C),1 and each
Fund will be "a party to a reorganization" within the meaning of
section 368(b);
- --------
1 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>
(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 May 17, 1999 ("Proxy Statement"), that was
furnished in connection with the solicitation of proxies by Target's board of
directors for use at a special meeting of Target's shareholders held on June 22,
1999, (3) each Fund's currently effective prospectuses 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 Fund and the
representations described below and made in the Plan (as contemplated in
paragraph 6.6 thereof) (collectively, "Representations").
FACTS
-----
Each Fund is a Maryland corporation 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").
Acquiring Fund Shares are currently divided into two classes, designated
Class A and Class Y shares ("Class A Acquiring Fund Shares" and "Class Y
Acquiring Fund Shares," respectively). The classes differ as follows:
(1) Class A Acquiring Fund Shares are offered at net asset value ("NAV") plus
a front-end sales charge ("FESC") and are subject to a service fee ("Rule
12b-1 Fee"), at the annual rate of up to 0.25% of its average daily net
assets, imposed pursuant to a plan of distribution adopted in accordance
with Rule 12b-1 under the Investment Company Act of 1940, as amended
("1940 Act"); and
(2) Class Y Acquiring Fund Shares are offered at NAV but are not subject to
either a FESC or a Rule 12b-1 Fee.
Target Shares also are divided into two classes, likewise designated Class A and
Class Y shares ("Class A Target Shares" and "Class Y Target Shares,"
respectively). Each class of Target Shares is substantially similar to the
correspondingly designated class of Acquiring Fund Shares.
The Reorganization, together with related acts necessary to consummate the
same ("Closing"), will take place on June 30, 1999, or such other date as to
which the Funds 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 Funds agree ("Effective Time").
The Funds' investment goals are similar, and they have the same investment
manager, Waddell & Reed Investment Management Company ("WRIMCO"). Acquiring
Fund's investment policies (which are described in the Proxy Statement and its
<PAGE>
prospectuses and SAI) are broader than those of Target.
For the reasons, and after consideration of the factors, described in the
Proxy Statement, each Fund'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 Fund, WRIMCO, or Waddell & Reed, Inc. (the distributor of
each Fund's shares), 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) (i) Class A Acquiring Fund Shares determined by
dividing the net value of Target (computed as set forth in paragraph
2.1 of the Plan) ("Target Value") attributable to the Class A Target
Shares by the NAV (computed as set forth in paragraph 2.2 of the
Plan) of a Class A Acquiring Fund Share and (ii) Class Y Acquiring
Fund Shares determined by dividing the Target Value attributable to
the Class Y Target Shares by the NAV (as so computed) of a Class Y
Acquiring Fund Share, 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,2 and
_____________________________
2 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>
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
Shares due that Shareholder, by class (I.E., the account for a Shareholder of
Class A Target Shares shall be credited with the respective PRO RATA number of
Class A Acquiring Fund Shares due that Shareholder, and the account for a
Shareholder of Class Y Target Shares shall be credited with the respective PRO
RATA number of Class Y 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
---------------
Target has represented and warranted to us as follows:
------
1. Target 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;
2. Target 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.
Acquiring Fund has represented and warranted to us as follows:
--------------
1. Acquiring Fund 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
<PAGE>
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;
2. Acquiring Fund 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 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.
<PAGE>
Each Fund has represented and warranted to us as follows:
---------
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.ss. 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 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;
<PAGE>
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;
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
<PAGE>
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
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. Transfer of "Substantially All" Of Target's Properties.
------------------------------------------------------
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 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.
B. 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). 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.
C. Distribution by Target.
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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
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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.
D. Requirements of Continuity.
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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. ss. 1.368-1(d)
("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. Section 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 goals are similar, and they have the same investment
manager. Moreover, after the Reorganization Acquiring Fund, which has broader
investment policies than Target, 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.
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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
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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
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).3
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
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3 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>
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 (1) any portion of their Target Shares before the
Reorganization to any person related (within the meaning of Treas. Reg. ss.
1.368-1(e)(3)) to either Fund or (2) 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 Fund 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
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 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 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 company 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).
E. Business Purpose.
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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.
F. 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 --
<PAGE>
(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.
G. Each Fund Will Be a Party to a Reorganization.
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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.
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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
<PAGE>
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.4
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
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4 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.
<PAGE>
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.
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.
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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.
<PAGE>
We hereby consent to the references to our firm in the part of the Proxy
Statement entitled "Reorganization Proposal" 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
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Theodore L. Press
