FORM OF AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION
THIS AGREEMENT AND PLAN OF REORGANIZATION AND TERMINATION ("Agreement") is
made as of _____________ __, 2002, between USAA INVESTMENT TRUST, a
Massachusetts business trust ("Trust"), on behalf of USAA Income Strategy Fund,
a segregated portfolio of assets ("series") thereof ("Target"), and USAA MUTUAL
FUND, INC., a Maryland corporation ("Corporation"), on behalf its USAA Income
Fund series ("Acquiring Fund"). (Target and Acquiring Fund are sometimes
referred to herein individually as a "Fund" and collectively as the "Funds,"
and Trust and Corporation are sometimes referred to herein individually as an
"Investment Company" and collectively as the "Investment Companies.") All
agreements, representations, actions, and obligations described herein made or
to be taken or undertaken by either Fund are made and shall be taken or
undertaken by Corporation on behalf of Acquiring Fund and by Trust on behalf of
Target.
The Investment Companies wish to effect a reorganization described in
section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended ("Code"),
and intend this Agreement to be, and adopt it as, a "plan of reorganization"
within the meaning of the regulations under the Code ("Regulations"). The
reorganization will involve the transfer of Target's assets to Acquiring Fund
in exchange solely for voting shares of common stock of Acquiring Fund, par
value $0.001 per share ("Acquiring Fund Shares"), and Acquiring Fund's
assumption of Target's liabilities, followed by the constructive distribution
of those shares PRO RATA to the holders of shares of beneficial interest in
Target ("Target Shares") in exchange therefor, all on the terms and conditions
set forth herein. The foregoing transactions are referred to herein
collectively as the "Reorganization."
Target and Acquiring Fund each has a single class of shares (the Target
Shares and the Acquiring Fund Shares, respectively), which are substantially
similar to each other.
In consideration of the mutual promises contained herein, the parties
agree as follows:
1. PLAN OF REORGANIZATION AND TERMINATION
1.1. Target agrees to assign, sell, convey, transfer, and deliver all of
its assets described in paragraph 1.2 ("Assets") to Acquiring Fund. Acquiring
Fund agrees in exchange therefor --
(a) to issue and deliver to Target the number of full and fractional
(rounded to the third decimal place) Acquiring Fund Shares determined by
dividing the net value of Target (computed as set forth in paragraph 2.1)
by the net asset value ("NAV") of an Acquiring Fund Share (computed as set
forth in paragraph 2.2), and
(b) to assume all of Target's liabilities described in paragraph 1.3
("Liabilities").
Such transactions shall take place at the Closing (as defined in paragraph
3.1).
1.2. The Assets shall include 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 (as defined in paragraph
3.1).
1.3. The Liabilities shall include 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 this Agreement. Notwithstanding the foregoing,
Target agrees to use its best efforts to discharge all its known Liabilities
before the Effective Time.
1.4. At or immediately before the Effective Time, Target shall declare and
pay to its shareholders a dividend and/or other distribution in an amount large
enough so that it will have distributed substantially all (and in any event not
less than 90%) of its investment company taxable income (computed without
regard to any deduction for dividends paid) and substantially all of its
realized net capital gain, if any, for the current taxable year through the
Effective Time.
1.5. At the Effective Time (or as soon thereafter as is reasonably
practicable), Target shall distribute the Acquiring Fund Shares it receives
pursuant to paragraph 1.1 to its shareholders of record, determined as of the
Effective Time (each a "Shareholder" and collectively "Shareholders"), in
constructive exchange for their Target Shares. Such distribution shall be
accomplished by Corporation'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 shall 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 any represented by certificates, shall
simultaneously be canceled on Target's share transfer books. Acquiring Fund
shall not issue certificates representing the Acquiring Fund Shares issued in
connection with the Reorganization.
1.6. As soon as reasonably practicable after distribution of the Acquiring
Fund Shares pursuant to paragraph 1.5, but in all events within six months
after the Effective Time, Target shall be terminated as a series of Trust and
any further actions shall be taken in connection therewith as required by
applicable law.
1.7. Any reporting responsibility of Target to a public authority is and
shall remain its responsibility up to and including the date on which it is
terminated.
1.8. Any transfer taxes payable on issuance of Acquiring Fund Shares in a
name other than that of the registered holder on Target's books of the Target
Shares
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constructively exchanged therefor shall be paid by the person to whom such
Acquiring Fund Shares are to be issued, as a condition of such transfer.
2. VALUATION
2.1. For purposes of paragraph 1.1(a), Target's net value shall be (a) the
value of the Assets computed as of the close of regular trading on the New York
Stock Exchange ("NYSE") on the date of the Closing ("Valuation Time"), using
the valuation procedures set forth in its then-current prospectus and statement
of additional information ("SAI"), less (b) the amount of the Liabilities as of
the Valuation Time.
2.2. For purposes of paragraph 1.1(a), the NAV of an Acquiring Fund Share
shall be computed as of the Valuation Time, using the valuation procedures set
forth in Acquiring Fund's then-current prospectus and SAI.
2.3. All computations pursuant to paragraphs 2.1 and 2.2 shall be made by
or under the direction of State Street Bank and Trust Company.
3. CLOSING AND EFFECTIVE TIME
3.1. The Reorganization, together with related acts necessary to
consummate the same ("Closing"), shall occur at the Investment Companies'
principal office on or about April 26, 2002, or at such other place and/or on
such other date as to which they may agree. All acts taking place at the
Closing shall be deemed to take place simultaneously as of the close of
business on the date thereof or at such other time as to which the Investment
Companies may agree ("Effective Time"). If, immediately before the Valuation
Time, (a) the NYSE is closed to trading or trading thereon is restricted or (b)
trading or the reporting of trading on the NYSE or elsewhere is disrupted, so
that accurate appraisal of Target's net value and the NAV of an Acquiring Fund
Share is impracticable, the Effective Time shall be postponed until the first
business day after the day when such trading shall have been fully resumed and
such reporting shall have been restored.
3.2. Trust's fund accounting and pricing agent shall deliver at the
Closing a certificate of an authorized officer verifying that the information
(including adjusted basis and holding period, by lot) concerning the Assets,
including all portfolio securities, transferred by Target to Acquiring Fund, as
reflected on Acquiring Fund's books immediately after the Closing, does or will
conform to such information on Target's books immediately before the Closing.
Trust's custodian shall deliver at the Closing a certificate of an authorized
officer stating that (a) the Assets it holds will be transferred to Acquiring
Fund at the Effective Time and (b) all necessary taxes in conjunction with the
delivery of the Assets, including all applicable federal and state stock
transfer stamps, if any, have been paid or provision for payment has been made.
3.3. Trust shall deliver to Corporation at the Closing a list of the names
and addresses of the Shareholders and the number of outstanding Target Shares
owned by each Shareholder, all as of the Effective Time, certified by Trust's
Secretary or Assistant Secretary. Corporation's transfer agent shall deliver at
the Closing a certificate as to the opening of accounts in the Shareholders'
names on Acquiring Fund's share transfer
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books. Corporation shall issue and deliver a confirmation to Trust evidencing
the Acquiring Fund Shares to be credited to Target at the Effective Time or
provide evidence satisfactory to Trust that such Acquiring Fund Shares have
been credited to Target's account on Acquiring Fund's books. At the Closing,
each party shall deliver to the other bills of sale, checks, assignments, stock
certificates, receipts, or other documents the other party or its counsel
reasonably requests.
3.4. Each Investment Company shall deliver to the other at the Closing
a certificate executed in its name by its President or a Vice President in form
and substance satisfactory to the recipient and dated the Effective Time, to
the effect that the representations and warranties it made in this Agreement
are true and correct at the Effective Time except as they may be affected by
the transactions contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES
4.1. Trust represents and warrants as follows:
4.1.1. Trust is a trust operating under a written declaration of
trust, the beneficial interest in which is divided into transferable
shares ("Business Trust"), that is duly organized and validly existing
under the laws of the Commonwealth of Massachusetts; and a copy of Trust's
First Amended and Restated Master Trust Agreement ("Trust Agreement") is
on file with the Secretary of the Commonwealth of Massachusetts;
4.1.2. Trust is duly registered as an open-end management investment
company under the Investment Company Act of 1940, as amended ("1940 Act"),
and such registration is in full force and effect;
4.1.3. Target is a duly established and designated series of Trust;
4.1.4. At the Closing, Target will have good and marketable title to
the Assets and full right, power, and authority to sell, assign, transfer,
and deliver the Assets free of any liens or other encumbrances (except
securities that are subject to "securities loans" as referred to in
section 851(b)(2) of the Code); and on delivery and payment for the
Assets, Acquiring Fund will acquire good and marketable title thereto;
4.1.5. Target's current prospectus and SAI conform in all material
respects to the applicable requirements of the Securities Act of 1933, as
amended ("1933 Act"), and the 1940 Act and the rules and regulations
thereunder and do not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading;
4.1.6. Target is not in violation of, and the execution and delivery
of this Agreement and consummation of the transactions contemplated hereby
will not conflict with or violate, Massachusetts law or any provision of
the Trust Agreement
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or Trust's By-Laws or of any agreement, instrument, lease, or other
undertaking to which Target is a party or by which it is bound or result
in the acceleration of any obligation, or the imposition of any penalty,
under any agreement, judgment, or decree to which Target is a party or by
which it is bound, except as otherwise disclosed in writing to and
accepted by Corporation;
4.1.7. Except as otherwise disclosed in writing to and accepted by
Corporation, all material contracts and other commitments of or applicable
to Target (other than this Agreement and investment contracts, including
options, futures, and forward contracts) will be terminated, or provision
for discharge of any liabilities of Target thereunder will be made, at or
prior to the Effective Time, without either Fund's incurring any liability
or penalty with respect thereto and without diminishing or releasing any
rights Target may have had with respect to actions taken or omitted or to
be taken by any other party thereto prior to the Closing;
4.1.8. Except as otherwise disclosed in writing to and accepted by
Corporation, no litigation, administrative proceeding, or investigation of
or before any court or governmental body is presently pending or (to
Trust's knowledge) threatened against Trust with respect to Target or any
of its properties or assets that, if adversely determined, would
materially and adversely affect Target's financial condition or the
conduct of its business; and Trust knows of no facts that might form the
basis for the institution of any such litigation, proceeding, or
investigation and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that
materially or adversely affects its business or its ability to consummate
the transactions contemplated hereby;
4.1.9. The execution, delivery, and performance of this Agreement
have been duly authorized as of the date hereof by all necessary action on
the part of Trust's board of trustees, which has made the determinations
required by Rule 17a-8(a) under the 1940 Act; and this Agreement
constitutes a valid and legally binding obligation of Target, enforceable
in accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium,
and similar laws relating to or affecting creditors' rights and by general
principles of equity;
4.1.10. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the Securities Exchange Act of
1934, as amended ("1934 Act"), or the 1940 Act for the execution or
performance of this Agreement by Trust, except for (a) the filing with the
Securities and Exchange Commission ("SEC") of a registration statement by
Corporation on Form N-14 relating to the Acquiring Fund Shares issuable
hereunder, and any supplement or amendment thereto ("Registration
Statement"), including therein a prospectus and information statement
("Prospectus/Statement"), and (b) such consents, approvals,
authorizations, and filings as have been made or received or as may be
required subsequent to the Effective Time;
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4.1.11. On the effective date of the Registration Statement and at
the Effective Time, the Prospectus/Statement will (a) comply in all
material respects with the applicable provisions of the 1933 Act, the 1934
Act, and the 1940 Act and the regulations thereunder and (b) not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
misleading; provided that the foregoing shall not apply to statements in
or omissions from the Prospectus/Statement made in reliance on and in
conformity with information furnished by Corporation for use therein;
4.1.12. Target incurred the Liabilities in the ordinary course of its
business; and there are no Liabilities other than Liabilities disclosed or
provided for in Trust's financial statements referred to in paragraph
4.1.18 and Liabilities incurred by Target in the ordinary course of its
business subsequent to November 30, 2001, or otherwise disclosed to
Corporation, none of which has been materially adverse to the business,
assets, or results of Target's operations;
4.1.13. Target is a "fund" as defined in section 851(g)(2) of the
Code; 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;
4.1.14. 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) of the
Code);
4.1.15. 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;
4.1.16. During the five-year period ending at the Effective Time, (a)
neither Target nor any person "related" (as defined in section
1.368-1(e)(3) of the Regulations) to Target will have acquired Target
Shares, either directly or through any transaction, agreement, or
arrangement with any other person, 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 section 22(e) of the 1940 Act, and (b) no distributions
will have been made with respect to Target Shares, other than normal,
regular dividend distributions made pursuant to Target's historic
dividend-paying practice that qualify for the deduction for dividends paid
(as defined in section 561 of the Code) referred to in sections 852(a)(1)
and 4982(c)(1)(A) of the Code;
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4.1.17. Target's federal income tax returns, and all applicable state
and local tax returns, for all taxable years through and including the
taxable year ended May 31, 2001, have been timely filed and all taxes
payable pursuant to those returns have been timely paid; and
4.1.18. Trust's audited financial statements for the year ended May
31, 2001, and unaudited financial statements for the six months ended
November 30, 2001, to be delivered to Corporation, fairly represent
Target's financial position as of each such date and the results of its
operations and changes in its net assets for the periods then ended.
4.2. Corporation represents and warrants as follows:
4.2.1. Corporation is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Maryland; and its
Articles of Incorporation are on file with the Department of Assessments
and Taxation of Maryland;
4.2.2. Corporation is duly registered as an open-end management
investment company under the 1940 Act, and such registration is in full
force and effect;
4.2.3. Acquiring Fund is a duly established and designated series of
Corporation;
4.2.4. 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;
4.2.5. The Acquiring Fund Shares to be issued and delivered to Target
hereunder will, at the Effective Time, have been duly authorized and, when
issued and delivered as provided herein (including the receipt of
consideration in exchange therefor exceeding their par value), will be
duly and validly issued and outstanding shares of Acquiring Fund, fully
paid and non-assessable;
4.2.6. Acquiring Fund's current prospectuses and SAI conform in all
material respects to the applicable requirements of the 1933 Act and the
1940 Act and the rules and regulations thereunder and do not include any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
4.2.7. Acquiring Fund is not in violation of, and the execution and
delivery of this Agreement and consummation of the transactions
contemplated hereby will not conflict with or violate, Maryland law or any
provision of Corporation's Articles of Incorporation or By-Laws or of any
provision of any agreement, instrument, lease, or other undertaking to
which Acquiring Fund is a party or by which it is bound or result in the
acceleration of any obligation, or the imposition of any penalty, under
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any agreement, judgment, or decree to which Acquiring Fund is a party or
by which it is bound, except as otherwise disclosed in writing to and
accepted by Trust;
4.2.8. Except as otherwise disclosed in writing to and accepted by
Trust, no litigation, administrative proceeding, or investigation of or
before any court or governmental body is presently pending or (to
Corporation's knowledge) threatened against Corporation with respect to
Acquiring Fund or any of its properties or assets that, if adversely
determined, would materially and adversely affect Acquiring Fund's
financial condition or the conduct of its business; Corporation knows of
no facts that might form the basis for the institution of any such
litigation, proceeding, or investigation and is not a party to or subject
to the provisions of any order, decree, or judgment of any court or
governmental body that materially or adversely affects its business or its
ability to consummate the transactions contemplated hereby;
4.2.9. The execution, delivery, and performance of this Agreement
have been duly authorized as of the date hereof by all necessary action on
the part of Corporation's board of directors (together with Trust's board
of trustees, the "Boards"), which has made the determinations required by
Rule 17a-8(a) under the 1940 Act; and this Agreement constitutes a valid
and legally binding obligation of Acquiring Fund, enforceable in
accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium,
and similar laws relating to or affecting creditors' rights and by general
principles of equity;
4.2.10. No governmental consents, approvals, authorizations, or
filings are required under the 1933 Act, the 1934 Act, or the 1940 Act for
the execution or performance of this Agreement by Corporation, except for
(a) the filing with the SEC of the Registration Statement and a
post-effective amendment to Corporation's registration statement on Form
N1-A and (b) such consents, approvals, authorizations, and filings as have
been made or received or as may be required subsequent to the Effective
Time;
4.2.11. On the effective date of the Registration Statement and at
the Effective Time, the Prospectus/Statement will (a) comply in all
material respects with the applicable provisions of the 1933 Act, the 1934
Act, and the 1940 Act and the regulations thereunder and (b) not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
misleading; provided that the foregoing shall not apply to statements in
or omissions from the Prospectus/Statement made in reliance on and in
conformity with information furnished by Trust for use therein;
4.2.12. Acquiring Fund is a "fund" as defined in section 851(g)(2) of
the Code; it qualified for treatment as a RIC for each past taxable year
since it commenced operations and will continue to meet all the
requirements for such qualification for its current taxable year;
Acquiring Fund intends to continue to meet
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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 of the Code did not apply to it;
4.2.13. Acquiring Fund has no plan or intention to issue additional
Acquiring Fund Shares following the Reorganization except for shares
issued in the ordinary course of its business as a series of an open-end
investment company; nor does Acquiring Fund have any plan or intention to
redeem or otherwise reacquire any Acquiring Fund Shares issued to the
Shareholders pursuant to the Reorganization, except to the extent it is
required by the 1940 Act to redeem any of its shares presented for
redemption at NAV in the ordinary course of that business;
4.2.14. Following the Reorganization, Acquiring Fund (a) will
continue Target's "historic business" (within the meaning of section
1.368-1(d)(2) of the Regulations) and (b) will use a significant portion
of Target's "historic business assets" (within the meaning of section
1.368-1(d)(3) of the Regulations) in a business; moreover, Acquiring Fund
(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;
4.2.15. 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) of the Code)
following the Reorganization;
4.2.16. 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;
4.2.17. Acquiring Fund does not directly or indirectly own, nor at
the Effective Time will it directly or indirectly own, nor has it directly
or indirectly owned at any time during the past five years, any shares of
Target;
4.2.18. 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 section 1.368-1(e)(3) of the Regulations) to
Acquiring Fund, have any plan or intention to acquire -- during the
five-year period beginning at the Effective Time, either directly or
through any transaction, agreement, or arrangement with any other person
-- with consideration other than Acquiring Fund Shares, any Acquiring Fund
Shares issued to the Shareholders pursuant to the Reorganization, except
for
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redemptions in the ordinary course of such business as required by
section 22(e) of the 1940 Act;
4.2.19. During the five-year period ending at the Effective Time,
neither Acquiring Fund nor any person "related" (as defined in section
1.368-1(e)(3) of the Regulations) to Acquiring Fund will have acquired
Target Shares with consideration other than Acquiring Fund Shares;
4.2.20. Acquiring Fund's federal income tax returns, and all
applicable state and local tax returns, for all taxable years through and
including the taxable year ended July 31, 2001, have been timely filed and
all taxes payable pursuant to such returns have been timely paid;
4.2.21. Corporation's audited financial statements for the year ended
July 31, 2001, and unaudited financial statements for the six months ended
January 31, 2001, to be delivered to Trust, fairly represent Acquiring
Fund's financial position as of each such date and the results of its
operations and changes in its net assets for the periods then ended; and
4.2.22. If the Reorganization is consummated, Acquiring Fund will
treat each Shareholder that receives Acquiring Fund Shares in connection
with the Reorganization as having made a minimum initial purchase of such
shares for the purpose of making additional investments therein,
regardless of the value of the shares so received.
4.3. Each Fund represents and warrants as follows:
4.3.1. 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 therefor;
4.3.2. 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 section 1.368-1(e)(3) of the Regulations) to either
Fund or (ii) any portion of the Acquiring Fund Shares to be received by
them in the Reorganization to any person related (as so defined) to
Acquiring Fund, (b) does not anticipate dispositions of those Acquiring
Fund Shares at the time of or soon after the Reorganization to exceed the
usual rate and frequency of dispositions of shares of Target as a series
of an open-end investment company, (c) expects that the percentage of
Shareholder interests, if any, that will be disposed of as a result of or
at the time of the Reorganization will be DE MINIMIS, and (d) does not
anticipate that there will be extraordinary redemptions of Acquiring Fund
Shares immediately following the Reorganization;
4.3.3. The Shareholders will pay their own expenses, if any, incurred
in connection with the Reorganization;
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4.3.4. 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;
4.3.5. There is no intercompany indebtedness between the Funds that
was issued or acquired, or will be settled, at a discount;
4.3.6. 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
section 4982 of the Code) will be included as assets held thereby
immediately before the Reorganization;
4.3.7. 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;
4.3.8. Immediately after the Reorganization, the Shareholders will
not own shares constituting "control" (within the meaning of section
304(c) of the Code) of Acquiring Fund;
4.3.9. 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) ("Reorganization Expenses"); and
4.3.10. The aggregate value of the acquisitions, redemptions, and
distributions limited by paragraphs 4.1.16, 4.2.18, and 4.2.19 will not
exceed 50% of the value (without giving effect to such acquisitions,
redemptions, and distributions) of the proprietary interest in Target at
the Effective Time
5. COVENANTS
5.1. Each Fund covenants to operate its respective business in the
ordinary course between the date hereof and the Closing, it being understood
that:
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(a) such ordinary course will include declaring and paying customary
dividends and other distributions and such changes in operations as are
contemplated by each Fund's normal business activities and
(b) each Fund will retain exclusive control of the composition of its
portfolio until the Closing; provided that Target shall not dispose of
more than an insignificant portion of its historic business assets (as
defined above) during such period without Acquiring Fund's prior consent
and the Investment Companies shall coordinate the Funds' respective
portfolios so that the transfer of the Assets to Acquiring Fund will not
cause it to fail to be in compliance with all of its investment policies
and restrictions immediately after the Closing.
5.2. Target covenants that the Acquiring Fund Shares to be delivered
hereunder are not being acquired for the purpose of making any distribution
thereof, other than in accordance with the terms hereof.
5.3. Target covenants that it will assist Corporation in obtaining
information Corporation reasonably requests concerning the beneficial ownership
of Target Shares.
5.4. Target covenants that its books and records (including all books and
records required to be maintained under the 1940 Act and the rules and
regulations thereunder) will be turned over to Corporation at the Closing.
5.5. Each Fund covenants to cooperate in preparing the
Prospectus/Statement in compliance with applicable federal securities laws.
5.6. Each Fund covenants that it will, from time to time, as and when
requested by the other Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take or cause to
be taken such further action, as the other Fund may deem necessary or desirable
in order to vest in, and confirm to, (a) Acquiring Fund, title to and
possession of all the Assets, and (b) Target, title to and possession of the
Acquiring Fund Shares to be delivered hereunder, and otherwise to carry out the
intent and purpose hereof.
5.7. Acquiring Fund covenants to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act, and such
state securities laws it may deem appropriate in order to continue its
operations after the Effective Time.
5.8. Subject to this Agreement, each Fund covenants to take or cause to be
taken all actions, and to do or cause to be done all things, reasonably
necessary, proper, or advisable to consummate and effectuate the transactions
contemplated hereby.
6. CONDITIONS PRECEDENT
Each Fund's obligations hereunder shall be subject to (a) performance by
the other Fund of all its obligations to be performed hereunder at or before
the Effective Time, (b) all representations and warranties of the other Fund
contained herein being true and correct
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in all material respects as of the date hereof and, except as they may be
affected by the transactions contemplated hereby, as of the Effective Time,
with the same force and effect as if made at and as of the Effective Time, and
(c) the following further conditions that, at or before the Effective Time:
6.1. This Agreement and the transactions contemplated hereby shall have
been duly adopted and approved by both Boards.
6.2. All necessary filings shall have been made with the SEC and state
securities authorities, and no order or directive shall have been received that
any other or further action is required to permit the parties to carry out the
transactions contemplated hereby. The Registration Statement shall have become
effective under the 1933 Act, no stop orders suspending the effectiveness
thereof shall have been issued, and the SEC shall not have issued an
unfavorable report with respect to the Reorganization under section 25(b) of
the 1940 Act nor instituted any proceedings seeking to enjoin consummation of
the transactions contemplated hereby under section 25(c) of the 1940 Act. All
consents, orders, and permits of federal, state, and local regulatory
authorities (including the SEC and state securities authorities) deemed
necessary by either Investment Company to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain same would not involve a risk of a material
adverse effect on the assets or properties of either Fund, provided that either
Investment Company may for itself waive any of such conditions.
6.3. At the Effective Time, no action, suit, or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or to obtain damages or other relief in connection with,
the transactions contemplated hereby.
6.4. Trust shall have received an opinion of Xxxxxxxxxxx & Xxxxxxxx LLP
("Counsel") substantially to the effect that:
6.4.1. Acquiring Fund is a duly established series of Corporation, a
corporation duly organized, validly existing, and in good standing under
the laws of the State of Maryland with power under its Articles of
Incorporation to own all its properties and assets and, to Counsel's
knowledge, to carry on its business as presently conducted;
6.4.2. This Agreement (a) has been duly authorized, executed, and
delivered by Corporation on behalf of Acquiring Fund and (b) assuming due
authorization, execution, and delivery of this Agreement by Trust on
behalf of Target, is a valid and legally binding obligation of Corporation
with respect to Acquiring Fund, enforceable in accordance with its terms,
except as the same may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium, and similar laws relating to or
affecting creditors' rights and by general principles of equity;
6.4.3. The Acquiring Fund Shares to be issued and distributed to the
Shareholders under this Agreement, assuming their due delivery as
contemplated
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by this Agreement and the receipt of consideration in exchange therefor
exceeding their par value, will be duly authorized and validly issued and
outstanding and fully paid and non-assessable;
6.4.4. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate Corporation's Articles of Incorporation or By-Laws or any
provision of any agreement (known to Counsel, without any independent
inquiry or investigation) to which Corporation (with respect to Acquiring
Fund) is a party or by which it is bound or (to Counsel's knowledge,
without any independent inquiry or investigation) result in the
acceleration of any obligation, or the imposition of any penalty, under
any agreement, judgment, or decree to which Corporation (with respect to
Acquiring Fund) is a party or by which it is bound, except as set forth in
such opinion or as otherwise disclosed in writing to and accepted by
Trust;
6.4.5. To Counsel's knowledge (without any independent inquiry or
investigation), no consent, approval, authorization, or order of any court
or governmental authority is required for the consummation by Corporation
on behalf of Acquiring Fund of the transactions contemplated herein,
except such as have been obtained under the 1933 Act, the 1934 Act, and
the 1940 Act and such as may be required under state securities laws;
6.4.6. Corporation is registered with the SEC as an investment
company, and to Counsel's knowledge no order has been issued or proceeding
instituted to suspend such registration; and
6.4.7. To Counsel's knowledge (without any independent inquiry or
investigation), (a) no litigation, administrative proceeding, or
investigation of or before any court or governmental body is pending or
threatened as to Corporation (with respect to Acquiring Fund) or any of
its properties or assets attributable or allocable to Acquiring Fund and
(b) Corporation (with respect to Acquiring Fund) is not a party to or
subject to the provisions of any order, decree, or judgment of any court
or governmental body that materially and adversely affects Acquiring
Fund's business, except as set forth in such opinion or as otherwise
disclosed in writing to and accepted by Trust.
In rendering such opinion, Counsel may (1) rely, as to matters governed by the
laws of the State of Maryland, on an opinion of competent Maryland counsel, (2)
make assumptions regarding the authenticity, genuineness, and/or conformity of
documents and copies thereof without independent verification thereof, (3)
limit such opinion to applicable federal and state law, and (4) define the word
"knowledge" and related terms to mean the knowledge of attorneys then with
Counsel who have devoted substantive attention to matters directly related to
this Agreement and the Reorganization.
6.5. Corporation shall have received an opinion of Counsel substantially
to the effect that:
14
6.5.1. Target is a duly established series of Trust, a Business Trust
duly organized and validly existing under the laws of the Commonwealth of
Massachusetts with power under the Trust Agreement to own all its
properties and assets and, to Counsel's knowledge, to carry on its
business as presently conducted;
6.5.2. This Agreement (a) has been duly authorized, executed, and
delivered by Trust on behalf of Target and (b) assuming due authorization,
execution, and delivery of this Agreement by Corporation on behalf of
Acquiring Fund, is a valid and legally binding obligation of Trust with
respect to Target, enforceable in accordance with its terms, except as the
same may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, and similar laws relating to or affecting
creditors' rights and by general principles of equity;
6.5.3. The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, materially
violate the Trust Agreement or Trust's By-Laws or any provision of any
agreement (known to Counsel, without any independent inquiry or
investigation) to which Trust (with respect to Target) is a party or by
which it is bound or (to Counsel's knowledge, without any independent
inquiry or investigation) result in the acceleration of any obligation, or
the imposition of any penalty, under any agreement, judgment, or decree to
which Trust (with respect to Target) is a party or by which it is bound,
except as set forth in such opinion or as otherwise disclosed in writing
to and accepted by Corporation;
6.5.4. To Counsel's knowledge (without any independent inquiry or
investigation), no consent, approval, authorization, or order of any court
or governmental authority is required for the consummation by Trust on
behalf of Target of the transactions contemplated herein, except such as
have been obtained under the 1933 Act, the 1934 Act, and the 1940 Act and
such as may be required under state securities laws;
6.5.5. Trust is registered with the SEC as an investment company, and
to Counsel's knowledge no order has been issued or proceeding instituted
to suspend such registration; and
6.5.6. To Counsel's knowledge (without any independent inquiry or
investigation), (a) no litigation, administrative proceeding, or
investigation of or before any court or governmental body is pending or
threatened as to Trust (with respect to Target) or any of its properties
or assets attributable or allocable to Target and (b) Trust (with respect
to Target) is not a party to or subject to the provisions of any order,
decree, or judgment of any court or governmental body that materially and
adversely affects Target's business, except as set forth in such opinion
or as otherwise disclosed in writing to and accepted by Corporation.
In rendering such opinion, Counsel may (1) rely, as to matters governed by the
laws of the Commonwealth of Massachusetts, on an opinion of competent
Massachusetts counsel,
15
(2) make assumptions regarding the authenticity, genuineness, and/or conformity
of documents and copies thereof without independent verification thereof, (3)
limit such opinion to applicable federal and state law, and (4) define the word
"knowledge" and related terms to mean the knowledge of attorneys then with
Counsel who have devoted substantive attention to matters directly related to
this Agreement and the Reorganization.
6.6. Each Investment Company shall have received an opinion of Counsel,
addressed to and in form and substance reasonably satisfactory to it, as to the
federal income tax consequences mentioned below ("Tax Opinion"). In rendering
the Tax Opinion, Counsel may rely as to factual matters, exclusively and
without independent verification, on the representations made in this
Agreement, which Counsel may treat as representations and warranties made to
it, and in separate letters addressed to Counsel and the certificates delivered
pursuant to paragraph 3.4. The Tax Opinion shall be substantially to the effect
that, based on the facts and assumptions stated therein and conditioned on
consummation of the Reorganization in accordance with this Agreement, for
federal income tax purposes:
6.6.1. 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) of
the Code, and each Fund will be "a party to a reorganization" within the
meaning of section 368(b) of the Code;
6.6.2. 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;
6.6.3. 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;
6.6.4. 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;
6.6.5. 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
6.6.6. A Shareholder's aggregate basis in the Acquiring Fund Shares
it receives in the Reorganization will be the same as the aggregate basis
for its 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 held them as capital assets at the Effective Time.
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Notwithstanding subparagraphs 6.6.2 and 6.6.4, the Tax Opinion may state that
no opinion is expressed as to the effect of the Reorganization on the Funds 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
xxxx-to-market system of accounting.
At any time before the Closing, either Investment Company may waive any of
the foregoing conditions (except that set forth in paragraph 6.1) if, in the
judgment of its Board, such waiver will not have a material adverse effect on
its Fund's shareholders' interests.
7. BROKERAGE FEES AND EXPENSES
7.1. Each Investment Company represents and warrants to the other that
there are no brokers or finders entitled to receive any payments in connection
with the transactions provided for herein.
7.2. Each Fund will bear half of the total Reorganization Expenses.
8. ENTIRE AGREEMENT; NO SURVIVAL
Neither party has made any representation, warranty, or covenant not set
forth herein, and this Agreement constitutes the entire agreement between the
parties. The representations, warranties, and covenants contained herein or in
any document delivered pursuant hereto or in connection herewith shall not
survive the Closing.
9. TERMINATION OF AGREEMENT
This Agreement may be terminated at any time at or prior to the Effective
Time:
9.1. By either Fund (a) in the event of the other Fund's material breach
of any representation, warranty, or covenant contained herein to be performed
at or prior to the Effective Time, (b) if a condition to its obligations has
not been met and it reasonably appears that such condition will not or cannot
be met, or (c) if the Closing has not occurred on or before June 29, 2001; or
9.2. By the parties' mutual agreement.
In the event of termination under paragraphs 9.1(c) or 9.2, there shall be no
liability for damages on the part of either Fund, or the directors/trustees or
officers of either Investment Company, to the other Fund.
10. AMENDMENT
This Agreement may be amended, modified, or supplemented at any time
in any manner mutually agreed on in writing by the parties; provided that no
such amendment shall have a material adverse effect on the Shareholders'
interests.
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11. MISCELLANEOUS
11.1. This Agreement shall be governed by and construed in accordance with
the internal laws of the State of Maryland; provided that, in the case of any
conflict between such laws and the federal securities laws, the latter shall
govern.
11.2. Nothing expressed or implied herein is intended or shall be
construed to confer upon or give any person, firm, trust, or corporation other
than the parties and their respective successors and assigns any rights or
remedies under or by reason of this Agreement.
11.3 The parties acknowledge that Trust is a Business Trust. Notice is
hereby given that this instrument is executed on behalf of Trust's trustees
solely in their capacities as trustees, and not individually, and that Trust's
obligations under this instrument are not binding on or enforceable against any
of its trustees, officers, or shareholders or any other series of Trust but are
only binding on and enforceable against Targets' assets and property. Acquiring
Fund agrees that, in asserting any rights or claims under this Agreement, it
shall look only to Target's assets and property in settlement of such rights or
claims and not to such trustees, officers, or shareholders..
11.4. This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been executed by each Investment
Company and delivered to the other party hereto. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
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IN WITNESS WHEREOF, each party has caused this Agreement to be executed
and delivered by its duly authorized officers as of the day and year first
written above.
USAA INVESTMENT TRUST,
on behalf of its series,
USAA Income Strategy Fund
By:
-------------------------
Xxxxxxxxxxx X. Xxxxx
President
USAA MUTUAL FUND, INC.,
on behalf of its series,
USAA Income Fund
By:
-------------------------
Xxxxxxxxxxx X. Xxxxx
President
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