As filed with the Securities and Exchange Commission on June 30, 2005
Securities Act File No. 333-
Investment Company Act File No. 811-06567
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO.
[ ] POST-EFFECTIVE AMENDMENT NO.
(CHECK APPROPRIATE BOX OR BOXES)
VAN KAMPEN MUNICIPAL OPPORTUNITY TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
(800) 341-2929
(AREA CODE AND TELEPHONE NUMBER)
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
AMY R. DOBERMAN, ESQ.
MANAGING DIRECTOR
VAN KAMPEN INVESTMENTS INC.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
WAYNE W. WHALEN, ESQ.
CHARLES B. TAYLOR, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
333 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60606
(312) 407-0700
================================================================================
Approximate Date of Proposed Offering: As soon as practicable after this
Registration Statement is declared effective.
==============================================================================================================================
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
------------------------------------------------------------------------------------------------------------------------------
TITLE OF SECURITIES AMOUNT BEING PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
BEING REGISTERED REGISTERED OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION FEE
UNIT PRICE
------------------------------------------ ----------------- --------------------- ----------------------- -------------------
Common Shares ($0.01 par value) 1,000 $ 14.91(1) $ 14,910 $ 117.70
------------------------------------------ ----------------- --------------------- ----------------------- -------------------
Auction Preferred Shares ($0.01 par value) 40 25,000 $ 1,000,000 $ 117.70
------------------------------------------ ----------------- --------------------- ----------------------- -------------------
(1) Average of high and low reported price for common shares on June 24, 2005.
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
EXPLANATORY NOTE
This Registration Statement is organized as follows:
o Questions and Answers to Shareholders of Van Kampen Advantage Municipal
Income Trust and Van Kampen Municipal Opportunity Trust
o Notice of Special Meeting of Shareholders of Van Kampen Advantage
Municipal Income Trust and Van Kampen Municipal Opportunity Trust
o Joint Proxy Statement/Prospectus of Van Kampen Advantage Municipal
Income Trust and Van Kampen Municipal Opportunity Trust
o Statement of Additional Information regarding the Reorganization of Van
Kampen Advantage Municipal Income Trust into Van Kampen Municipal
Opportunity Trust
o Part C Information
o Exhibits
-- AUGUST 2005 --
--------------------------------------------------------------------------------
IMPORTANT NOTICE
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TO SHAREHOLDERS OF VAN KAMPEN
ADVANTAGE MUNICIPAL INCOME TRUST
AND
VAN KAMPEN MUNICIPAL
OPPORTUNITY TRUST
--------------------------------------------------------------------------------
QUESTIONS & ANSWERS
---------------------------------------
Although we recommend that you read the complete Joint Proxy Statement/
Prospectus, we have provided for your convenience a brief overview of the issues
to be voted on.
---------------------------------------
Q WHY IS A SHAREHOLDER
MEETING BEING HELD?
A Shareholders of
Van Kampen Advantage Municipal Income Trust: You are being asked to vote on a
reorganization (the "Reorganization") of Van Kampen Advantage Municipal Income
Trust (the "Target Fund") into Van Kampen Municipal Opportunity Trust (the
"Acquiring Fund"), a closed-end investment company that pursues the same
investment objective and has similar investment policies as the Target Fund.
Shareholders of Van Kampen Municipal Opportunity Trust: You are being asked to
vote on the issuance of common shares of beneficial interest by the Acquiring
Fund in connection with the Reorganization.
Q WHY IS THE
REORGANIZATION BEING RECOMMENDED?
A The Board of Trustees of
each Fund has determined that the Reorganization will benefit common
shareholders of the Target Fund and the Acquiring Fund. The Target Fund and the
Acquiring Fund are similar. Each Fund seeks to provide common shareholders with
a high level of current income exempt from federal income tax, consistent with
preservation of capital. Each Fund invests primarily in municipal securities
rated investment grade at the time of investment. Each Fund is managed by the
same investment advisory personnel. After the Reorganization, it is anticipated
that common shareholders of each Fund will experience a reduced annual operating
expense ratio, as certain fixed
administrative costs will be spread across the combined fund's larger
asset base. It is not anticipated that the Reorganization will directly
benefit holders of preferred shares of the Funds; however, it is
anticipated that preferred shareholders will not be adversely effected by
the Reorganization, and none of the expenses of the Reorganization will
be borne by preferred shareholders.
Q HOW WILL THE
REORGANIZATION AFFECT ME?
A Assuming shareholders of
the Target Fund approve the Reorganization and shareholders of the Acquiring
Fund approve the issuance of common shares of beneficial interest by that Fund,
the assets and liabilities of the Target Fund will be combined with those of the
Acquiring Fund and the Target Fund will dissolve.
Shareholders of the Target Fund: You will become a shareholder of the Acquiring
Fund. If you are a holder of common shares of the Target Fund, you will receive
newly-issued common shares of the Acquiring Fund, and if you are a holder of
preferred shares of the Target Fund, you will receive newly-issued preferred
shares of the Acquiring Fund. The aggregate net asset value of the common shares
you receive in the Reorganization will equal the aggregate net asset value of
the common shares you own immediately prior to the Reorganization less the costs
of the Reorganization (though you may receive cash for fractional shares). The
aggregate liquidation preference of the preferred shares you receive in the
Reorganization will equal the aggregate liquidation preference of the preferred
shares you own immediately prior to the Reorganization. No certificates for
shares of the Acquiring Fund will be issued in connection with the
Reorganization, although such certificates will be available upon request.
Shareholders of the Acquiring Fund: You will remain a shareholder of the
Acquiring Fund.
Q WILL I HAVE TO PAY ANY
SALES LOAD, COMMISSION OR OTHER SIMILAR FEE IN CONNECTION WITH THE
REORGANIZATION?
A You will pay no sales loads
or commissions in connection with the Reorganization. However, if the
Reorganization is completed, the costs associated with the Reorganization,
including the costs associated with the shareholder meeting, will be borne by
the common shareholders of the Target Fund and the Acquiring Fund in proportion
to their projected annual expense savings as a result of the Reorganization.
Q WILL I HAVE TO PAY ANY
FEDERAL TAXES AS A RESULT OF THE REORGANIZATION?
A The Reorganization is
intended to qualify as a "reorganization" within the meaning of Section
368(a)(1) of the Internal Revenue Code of 1986, as amended. If the
Reorganization so qualifies, in general, a shareholder of the Target Fund will
recognize no gain or loss upon the receipt of shares of the Acquiring Fund in
connection with the Reorganization. Additionally, the Target Fund will not
recognize any gain or loss as a result of the transfer of all of its assets and
liabilities in exchange for the shares of the Acquiring Fund or as a result of
its dissolution. Neither the Acquiring Fund nor its shareholders will recognize
any gain or loss in connection with the Reorganization.
Q WHY IS THE VOTE OF
COMMON SHAREHOLDERS OF THE ACQUIRING FUND BEING SOLICITED?
A Although the Acquiring
Fund will continue its legal existence and operations after the Reorganization,
the rules of the New York Stock Exchange and the Chicago Stock Exchange, on
which the Acquiring Fund's common shares are listed, require the common
shareholders of the Acquiring Fund to approve the issuance of additional common
shares of beneficial interest by the Acquiring Fund in connection with the
Reorganization. If the issuance of additional common shares of the Acquiring
Fund is not approved, the Reorganization will not occur.
Q HOW DOES THE BOARD OF
TRUSTEES OF MY FUND SUGGEST I VOTE?
A After careful consideration,
the Board of Trustees of each Fund recommends that you vote "FOR" each of the
items proposed.
Q HOW DO I VOTE MY PROXY?
A You may cast your vote by
mail, phone or internet. To vote by mail, please mark your vote on the enclosed
proxy card and sign, date and return the card in the postage-paid envelope
provided. If you choose to vote via phone or internet, please refer to the
instructions found on the proxy card accompanying this Joint Proxy
Statement/Prospectus. To vote by phone or internet, you will need the "control
number" that appears on the proxy card.
Q WHOM DO I CONTACT FOR
FURTHER INFORMATION?
A You can contact your
financial adviser for further information. You may also call Van Kampen's Client
Relations Department at (800) 341-2929 (Telecommunication Device for the Deaf
users may call (800) 421-2833) or visit our web site at www.vankampen.com where
you can send us an e-mail message by selecting "Contact Us."
ABOUT THE PROXY CARD
--------------------------------------------------------------------------------
Please vote on each issue using blue or black ink to mark an X in one of the
boxes provided on the proxy card.
SHAREHOLDERS OF VAN KAMPEN ADVANTAGE MUNICIPAL INCOME TRUST:
APPROVAL OF REORGANIZATION - mark "For," "Against" or "Abstain."
COMMON SHAREHOLDERS OF VAN KAMPEN MUNICIPAL OPPORTUNITY TRUST:
APPROVAL OF ISSUANCE OF COMMON SHARES - mark "For," "Against" or "Abstain."
Sign, date and return the proxy card in the enclosed postage-paid envelope. All
registered owners of an account, as shown in the address, must sign the card.
When signing as attorney, trustee, executor, administrator, custodian, guardian
or corporate officer, please indicate your full title.
[X] PLEASE MARK
VOTES AS IN
THIS EXAMPLE
VAN KAMPEN XXXXX
JOINT SPECIAL MEETING OF SHAREHOLDERS
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
FOR AGAINST ABSTAIN
1. The proposal to [ ] [ ] [ ] 2. The proposal to approve the issuance of
approve the Common Shares.
Reorganization.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
----------------------------------
Please be sure to sign and date this Proxy, Date 3. To transact such other business as may
properly come before the meeting or any
adjournment thereof.
Shareholder sign here Co-owner sign here
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
SAMPLE
VAN KAMPEN ADVANTAGE MUNICIPAL
INCOME TRUST
AND
VAN KAMPEN MUNICIPAL OPPORTUNITY TRUST
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(800) 341-2929
NOTICE OF JOINT SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 23, 2005
Notice is hereby given that a joint special meeting of shareholders (the
"Special Meeting") of Van Kampen Advantage Municipal Income Trust (the "Target
Fund") and Van Kampen Municipal Opportunity Trust (the "Acquiring Fund") will be
held at the offices of Van Kampen Investments Inc., 1 Parkview Plaza, Oakbrook
Terrace, Illinois 60181-5555, on September 23, 2005 at 10:00 a.m. for the
following purposes:
For shareholders of the Target Fund:
1. To approve an Agreement and Plan of Reorganization (the "Reorganization
Agreement") between the Target Fund and Acquiring Fund, the termination
of the Target Fund's registration under the Investment Company Act of
1940, as amended, and the dissolution of the Target Fund under applicable
state law;
For common shareholders of the Acquiring Fund:
2. To approve the issuance of additional common shares of the Acquiring Fund
in connection with the Reorganization Agreement; and
For shareholders of both funds:
3. To transact such other business as may properly be presented at the
Special Meeting or any adjournment thereof.
Shareholders of record as of the close of business on July 29, 2005 are
entitled to vote at the Special Meeting or any adjournment thereof.
THE BOARD OF TRUSTEES OF EACH FUND REQUESTS THAT YOU VOTE YOUR SHARES BY
INDICATING YOUR VOTING INSTRUCTIONS ON THE ENCLOSED PROXY CARD, DATING AND
SIGNING SUCH PROXY CARD AND RETURNING IT IN THE ENVELOPE PROVIDED, WHICH IS
ADDRESSED FOR YOUR CONVENIENCE AND NEEDS NO POSTAGE IF MAILED IN THE UNITED
STATES, OR BY RECORDING YOUR VOTING INSTRUCTIONS BY TELEPHONE OR VIA THE
INTERNET.
THE BOARD OF TRUSTEES OF THE TARGET FUND RECOMMENDS THAT YOU CAST YOUR VOTE:
- FOR THE REORGANIZATION AGREEMENT AS DESCRIBED IN THE JOINT PROXY
STATEMENT/PROSPECTUS.
THE BOARD OF TRUSTEES OF THE ACQUIRING FUND RECOMMENDS THAT YOU CAST YOUR
VOTE:
- FOR THE ISSUANCE OF ADDITIONAL COMMON SHARES OF THE ACQUIRING FUND IN
CONNECTION WITH THE REORGANIZATION AGREEMENT AS DESCRIBED IN THE JOINT
PROXY STATEMENT/PROSPECTUS.
IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK THAT
YOU MAIL YOUR PROXY CARD PROMPTLY OR RECORD YOUR VOTING INSTRUCTIONS BY
TELEPHONE OR VIA THE INTERNET.
For the Board of Trustees,
Lou Anne McInnis
Assistant Secretary
Van Kampen Advantage Municipal
Income Trust
Van Kampen Municipal Opportunity Trust
, 2005
------------------
YOUR VOTE IS IMPORTANT.
PLEASE VOTE PROMPTLY BY SIGNING AND RETURNING THE
ENCLOSED PROXY CARD OR BY RECORDING YOUR VOTING INSTRUCTIONS BY
TELEPHONE OR VIA THE INTERNET NO MATTER HOW MANY SHARES YOU OWN.
THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE.
THIS PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE
THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JUNE 30, 2005
JOINT PROXY STATEMENT/PROSPECTUS
VAN KAMPEN ADVANTAGE MUNICIPAL INCOME TRUST
AND
VAN KAMPEN MUNICIPAL OPPORTUNITY TRUST
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(800) 341-2929
JOINT SPECIAL MEETING OF SHAREHOLDERS
SEPTEMBER 23, 2005
This Joint Proxy Statement/Prospectus is furnished to you as a shareholder of
Van Kampen Advantage Municipal Income Trust (the "Target Fund") and/or Van
Kampen Municipal Opportunity Trust (the "Acquiring Fund"). A joint special
meeting of shareholders of the funds (the "Special Meeting") will be held at the
offices of Van Kampen Investments Inc., 1 Parkview Plaza, Oakbrook Terrace,
Illinois 60181-5555 on September 23, 2005 at 10:00 a.m. to consider the items
listed below and discussed in greater detail elsewhere in this Joint Proxy
Statement/Prospectus. If you are unable to attend the Special Meeting or any
adjournment thereof, the Board of Trustees of each fund requests that you vote
your shares by completing and returning the enclosed proxy card or by recording
your voting instructions by telephone or via the internet. The approximate
mailing date of this Joint Proxy Statement/Prospectus and accompanying form of
proxy is , 2005.
The purposes of the Special Meeting are:
For shareholders of the Target Fund:
1. To approve an Agreement and Plan of Reorganization (the "Reorganization
Agreement") between the Target Fund and the Acquiring Fund, the
termination of the Target Fund's registration under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the dissolution of
the Target Fund under applicable state law;
For common shareholders of the Acquiring Fund:
2. To approve the issuance of additional common shares of the Acquiring Fund
in connection with the Reorganization Agreement; and
For shareholders of both funds:
3. To transact such other business as may properly be presented at the
Special Meeting or any adjournment thereof.
The Reorganization Agreement that you are being asked to consider involves a
transaction that will be referred to in this Joint Proxy Statement/Prospectus as
the "Reorganization." The Reorganization seeks to combine two similar funds to
achieve certain economies of scale and other operational efficiencies. Each fund
pursues the same investment objective to seek to provide common shareholders
with a high level of current income exempt from federal income tax, consistent
with preservation of capital. Each fund invests primarily in municipal
securities rated investment grade at the time of investment. The Target Fund and
the Acquiring Fund are sometimes referred to herein each as a "Fund" and
collectively as the "Funds."
In the Reorganization, the Acquiring Fund will acquire substantially all of
the assets and assume substantially all of the liabilities of the Target Fund in
exchange for an equal aggregate value of newly issued common shares of
beneficial interest of the Acquiring Fund, par value $0.01 per share ("Acquiring
Fund Common Shares") and newly-issued auction preferred shares of the Acquiring
Fund with a par value of $0.01 per share and a liquidation preference of $25,000
per share ("Acquiring Fund APS"). The Target Fund will distribute Acquiring Fund
Common Shares to holders of common shares of the Target Fund ("Target Fund
Common Shares") (Target Fund Common Shares and Acquiring Fund Common Shares are
sometimes referred to herein collectively as "Common Shares") and Acquiring Fund
APS to holders of auction preferred shares of the Target Fund ("Target Fund
APS") (Target Fund APS and Acquiring Fund APS are sometimes referred to herein
collectively as "Preferred Shares" or "APS"), and will then terminate its
registration under the 1940 Act, and dissolve under applicable state law. The
aggregate net asset value of Acquiring Fund Common Shares received in the
Reorganization will equal the aggregate net asset value of Target Fund Common
Shares held immediately prior to the Reorganization less the costs of the
Reorganization (though common shareholders may receive cash for their fractional
shares). The aggregate liquidation preference of the Acquiring Fund APS received
in the Reorganization will equal the aggregate liquidation preference of the
Target Fund APS held immediately prior to the Reorganization. The Acquiring Fund
will continue to operate after the Reorganization as a registered closed-end
investment company with the investment objective and policies described in this
Joint Proxy Statement/Prospectus.
In connection with the Reorganization, common shareholders of the Acquiring
Fund are being asked to approve the issuance of additional Acquiring Fund Common
Shares.
The Board of Trustees of each Fund has determined that including both
proposals in one Joint Proxy Statement/Prospectus will reduce costs and is in
the best interests of each Fund's shareholders.
2
In the event that Target Fund shareholders do not approve the Reorganization
or Acquiring Fund common shareholders do not approve the issuance of Acquiring
Fund Common Shares, the Target Fund will continue to exist and the Board of
Trustees of the Target Fund (the "Target Fund Board") will consider what
additional action, if any, to take.
This Joint Proxy Statement/Prospectus sets forth concisely the information
shareholders of the Funds should know before voting on the proposals and
constitutes an offering of Acquiring Fund Common Shares and Acquiring Fund APS.
Please read it carefully and retain it for future reference. A Statement of
Additional Information, dated , 2005, relating to this Joint Proxy
Statement/Prospectus (the "Reorganization Statement of Additional Information")
has been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated herein by reference. If you wish to request the Reorganization
Statement of Additional Information, please ask for the "Reorganization
Statement of Additional Information." Copies of each Fund's most recent annual
report and semi-annual report can be obtained on a web site maintained by Van
Kampen Investments Inc. at www.vankampen.com. In addition, each Fund will
furnish, without charge, a copy of the Reorganization Statement of Additional
Information, its most recent annual report and any more recent semi-annual
report to any shareholder upon request. Any such request should be directed to
the Van Kampen Client Relations Department by calling (800) 341-2929 (TDD users
may call (800) 421-2833) or by writing to the respective Fund at 1 Parkview
Plaza, P.O. Box 5555, Oakbrook Terrace, Illinois 60181-5555. The address of the
principal executive offices of the Funds is 1221 Avenue of the Americas, New
York, New York 10020, and the telephone number is (800) 341-2929.
The Funds are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, file reports,
proxy statements, proxy material and other information with the SEC. Materials
filed with the SEC can be reviewed and copied at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549 or downloaded from the SEC's
web site at www.sec.gov. Information on the operation of the SEC's Public
Reference Room may be obtained by calling the SEC at (202) 942-8090. You can
also request copies of these materials, upon payment at the prescribed rates of
a duplicating fee, by electronic request to the SEC's e-mail address
(publicinfo@sec.gov) or by writing the Public Reference Branch, Office of
Consumer Affairs and Information Services, SEC, Washington, DC, 20549-0102.
The Acquiring Fund Common Shares are listed on the New York Stock Exchange
(the "NYSE") and the Chicago Stock Exchange (the "CHX") under the ticker symbol
"VMO" and will continue to be so listed subsequent to the Reorganization. The
Target Fund Common Shares are listed on the NYSE and the CHX under the ticker
symbol "VKA." Reports, proxy statements and other
3
information concerning the Funds may be inspected at the offices of the NYSE, 20
Broad Street, New York, New York 10005.
This Joint Proxy Statement/Prospectus serves as a prospectus of the Acquiring
Fund in connection with the issuance of the Acquiring Fund Common Shares and the
Acquiring Fund APS in the Reorganization. No person has been authorized to give
any information or make any representation not contained in this Joint Proxy
Statement/Prospectus and, if so given or made, such information or
representation must not be relied upon as having been authorized. This Joint
Proxy Statement/Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities in any jurisdiction in which, or
to any person to whom, it is unlawful to make such offer or solicitation.
The Board of Trustees of each Fund knows of no business other than that
discussed above that will be presented for consideration at the Special Meeting.
If any other matter is properly presented, it is the intention of the persons
named in the enclosed proxy to vote in accordance with their best judgment.
---------------------
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus is , 2005.
4
TABLE OF CONTENTS
PAGE
----
SUMMARY..................................................... 7
PROPOSAL 1: REORGANIZATION OF THE TARGET FUND............... 14
RISK FACTORS AND SPECIAL CONSIDERATIONS..................... 14
Market Risk............................................... 15
Interest Rate Risk........................................ 15
Credit Risk............................................... 15
Income Risk............................................... 16
Call Risk................................................. 16
Municipal Securities Risk................................. 16
Risks of Using Strategic Transactions..................... 16
Manager Risk.............................................. 17
Market Discount Risk...................................... 17
Leverage Risk............................................. 17
Anti-Takeover Provisions.................................. 19
Special Risks Related to Preferred Shares................. 19
COMPARISON OF THE FUNDS..................................... 20
Investment Objective and Policies......................... 20
Other Investment Practices and Policies................... 25
Investment Restrictions................................... 27
Management of the Funds................................... 29
Other Service Providers................................... 32
Capitalization............................................ 32
Additional Information about Common Shares of the Funds... 34
Additional Information about Preferred Shares of the
Funds................................................... 37
Governing Law............................................. 41
Certain Provisions of the Declarations of Trust........... 42
Conversion to Open-End Fund............................... 43
Voting Rights............................................. 44
Financial Highlights...................................... 45
INFORMATION ABOUT THE REORGANIZATION........................ 47
General................................................... 47
Terms of the Reorganization Agreement..................... 49
Material U.S. Federal Income Tax Consequences of the
Reorganization.......................................... 50
Shareholder Approval...................................... 52
5
PAGE
----
PROPOSAL 2: ISSUANCE OF ADDITIONAL ACQUIRING FUND COMMON
SHARES.................................................... 53
Shareholder Approval...................................... 53
OTHER INFORMATION........................................... 54
Voting Information and Requirements....................... 54
Shareholder Information................................... 56
Section 16(a) Beneficial Ownership Reporting Compliance... 56
Shareholder Proposals..................................... 56
Solicitation of Proxies................................... 56
Legal Matters............................................. 57
Other Matters to Come Before the Meeting.................. 57
EXHIBIT I: DESCRIPTION OF SECURITIES RATINGS................ I-1
6
------------------------------------------------------------------------------
SUMMARY
------------------------------------------------------------------------------
The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement/Prospectus and is qualified in its entirety by reference
to the more complete information contained in this Joint Proxy
Statement/Prospectus and in the Reorganization Statement of Additional
Information. Shareholders should read the entire Joint Proxy
Statement/Prospectus carefully.
PROPOSAL 1: REORGANIZATION OF THE TARGET FUND
THE PROPOSED REORGANIZATION. The Board of Trustees of each Fund, including the
trustees who are not "interested persons," as defined in the 1940 Act, of each
Fund, has unanimously approved the Reorganization Agreement. If the shareholders
of the Target Fund approve the Reorganization Agreement and the common
shareholders of the Acquiring Fund approve the issuance of additional Acquiring
Fund Common Shares (see "Proposal 2: Issuance of Additional Acquiring Fund
Common Shares"). Acquiring Fund Common Shares and Acquiring Fund APS will be
issued to holders of Target Fund Common Shares and Target Fund APS,
respectively, in exchange for substantially all of the assets of the Target Fund
and the assumption of substantially all of the liabilities of the Target Fund.
The Target Fund will then terminate its registration under the 1940 Act and
dissolve under applicable state law. The aggregate net asset value of Acquiring
Fund Common Shares received in the Reorganization will equal the aggregate net
asset value of Target Fund Common Shares held immediately prior to the
Reorganization, less the costs of the Reorganization (though holders of Target
Fund Common Shares may receive cash for their fractional shares). The aggregate
liquidation preference of Acquiring Fund APS received in the Reorganization will
equal the aggregate liquidation preference of Target Fund APS held immediately
prior to the Reorganization.
BACKGROUND AND REASONS FOR THE PROPOSED REORGANIZATION. The Reorganization
seeks to combine two similar Funds to achieve certain economies of scale and
other operational efficiencies. Each Fund is registered as a diversified,
closed-end management investment company under the 1940 Act. Each Fund invests
primarily in municipal securities rated investment grade at the time of
investment. The investment objective of each Fund is to seek to provide common
shareholders with a high level of current income exempt from federal income tax,
consistent with preservation of capital. Each Fund intends to achieve its
objective primarily by investing in a diversified portfolio of municipal
securities which such Fund's investment adviser believes does not involve undue
risk to income or principal. Each Fund may invest in municipal securities
subject to the alternative minimum tax provisions of federal tax law. The Funds
are managed by the same investment advisory personnel.
7
The proposed Reorganization will combine the assets of these similar funds by
reorganizing the Target Fund into the Acquiring Fund. The Target Fund Board,
based upon its evaluation of all relevant information, anticipates that the
Reorganization will benefit holders of Target Fund Common Shares. The Board of
Trustees of the Acquiring Fund (the "Acquiring Fund Board"), based upon its
evaluation of all relevant information, anticipates that the Reorganization will
benefit holders of Acquiring Fund Common Shares. The Board of Trustees of each
Fund believes, based on data presented by Van Kampen Asset Management,
investment adviser to each of the Funds (the "Adviser"), that holders of Common
Shares of each Fund will experience a reduced annual operating expense ratio as
a result of the Reorganization. The combined fund resulting from the
Reorganization will have a larger asset base than either of the Funds has
currently; certain fixed administrative costs, such as costs of printing
shareholder reports and proxy statements, legal expenses, audit fees, mailing
costs and other expenses, will be spread across this larger asset base, thereby
lowering the expense ratio for common shareholders of the combined fund.
The table below illustrates the anticipated reduction in operating expenses
expected as a result of the Reorganization. The table sets forth (i) the fees,
expenses and distributions to preferred shareholders paid by the Target Fund for
the 12-month period ended January 31, 2005, (ii) the fees, expenses and
distributions to preferred shareholders paid by the Acquiring Fund for the
12-month period ended January 31, 2005 and (iii) the pro forma fees, expenses
and distributions to preferred shareholders for the Acquiring Fund for the
12-month period ended January 31, 2005, assuming the Reorganization had been
completed at the beginning of such period. As shown below, the Reorganization is
expected to result
8
in decreased total annual expenses for shareholders of each Fund (although such
savings will not be immediately realized (see footnote (c) to the table).
FEE, EXPENSE AND DISTRIBUTIONS ON PREFERRED SHARES TABLE FOR COMMON SHAREHOLDERS
OF THE FUNDS AS OF JANUARY 31, 2005
ACTUAL PRO FORMA
------------------------ -----------
VAN KAMPEN
ADVANTAGE VAN KAMPEN VAN KAMPEN
MUNICIPAL MUNICIPAL MUNICIPAL
INCOME OPPORTUNITY OPPORTUNITY
TRUST TRUST TRUST
---------- ----------- -----------
Common Shareholder Transaction
Expenses(a):
Maximum Sales Load (as a percentage
of offering price)(b)(c)........... None None None
Dividend Reinvestment Plan Fees...... None None None
Annual Expenses (as a percentage of net
assets attributable to common
shares):
Investment Advisory Fees(d).......... 0.88% 0.87% 0.88%
Interest Payments on Borrowed
Funds.............................. 0.00% 0.00% 0.00%
Other Expenses....................... 0.30% 0.30% 0.25%
---- ---- ----
Total Annual Expenses(d)............. 1.18% 1.17% 1.13%
---- ---- ----
Distributions:
Distributions on Preferred
Shares(e).......................... 0.75% 0.76% 0.76%
---- ---- ----
Total Annual Expenses and
Distributions on Preferred
Shares............................. 1.93% 1.93% 1.89%
---- ---- ----
---------------
(a)No expense information is presented with respect to Preferred Shares because
holders of Preferred Shares do not bear any transaction or operating expenses
of either Fund and will not bear any of the Reorganization expenses or any
transaction or operating expenses of the combined fund.
(b)Common Shares purchased in the secondary market may be subject to
brokerage commissions or other charges. No sales load will be charged on the
issuance of common shares in the Reorganization. Common Shares are not
available for purchase from the Funds but may be purchased through a broker-
dealer subject to individually negotiated commission rates.
(c)In connection with the Reorganization, there are certain other transaction
expenses which include, but are not limited to: all costs related to the
preparation, printing and distributing of this Joint Proxy
Statement/Prospectus to shareholders; costs related to preparation and
distribution of materials distributed to each Fund's Board; all expenses
incurred in connection with the preparation of the Reorganization Agreement
and registration statement on
9
Form N-14; SEC and state securities commission filing fees; legal and audit
fees; portfolio transfer taxes (if any); and any similar expenses incurred in
connection with the Reorganization. In accordance with applicable SEC rules,
the Board of Trustees of each Fund reviewed the fees and expenses that will
be borne directly or indirectly by the Funds in connection with the
Reorganization. After considering various alternatives for allocating these
costs, the Board of Trustees of each Fund agreed that, in the event the
Reorganization is approved and completed, the expenses of the Reorganization
will be shared by the Target Fund and the Acquiring Fund in proportion to
their projected annual expense savings as a result of the Reorganization. The
table below summarizes each Fund's net assets (Common Shares only) at January
31, 2005, projected annual expense savings to each Fund as a result of the
Reorganization, allocation of Reorganization expenses between the Funds in
dollars and percentages, an estimated pay-back period (in years) and the
resulting effect on each Fund's net asset value per Common Share at January
31, 2005. The projected annual expense savings are generally not expected to
be immediately realized. If a shareholder sells his or her Common Shares
prior to the estimated pay-back period, then that shareholder may not realize
any of the projected expense savings resulting from the reduced expense ratio
of the combined fund. The net asset value per Common Share of each Fund will
be reduced at the closing date of the Reorganization to reflect the
allocation of Reorganization expenses to each Fund. The reduction in net
asset value per Common Share resulting from the allocation of Reorganization
expenses, when compared to the relative net asset sizes of the Funds involved
in the Reorganization, will be greater in the Acquiring Fund than the Target
Fund. In the event the Reorganization is not completed, the Adviser will bear
the costs associated with the Reorganization. The numbers presented in the
table are estimates; actual results may differ.
PROJECTED REORGANIZATION ESTIMATED REDUCTION TO NET
NET ASSETS ANNUAL EXPENSE PAYBACK ASSET VALUE
(COMMON EXPENSE ALLOCATION IN PERIOD (IN PER COMMON
FUND SHARES ONLY) SAVINGS DOLLARS/PERCENTAGE YEARS) SHARE
---- ------------ --------- ------------------ ---------- ----------------
Target Fund $325,753,719 $130,301 $222,000/50% 1.70 $0.01
Acquiring Fund $262,463,268 $131,232 $222,000/50% 1.69 $0.01
Total Expenses $ 444,000
---------------
(d)Expense information has been restated to reflect permanent reductions
made to administrative fees of each Fund effective as of June 1, 2004 and
permanent reductions made to management fees of each Fund effective as of
November 1, 2004. If assets attributable to Preferred Shares were included,
the investment advisory fee would be 0.55% for each Fund and for the
Acquiring Fund on a proforma basis.
(e)In seeking to enhance the income for its common shareholders, each of
the Funds uses preferred shares as financial leverage. Leverage created
10
by borrowing or other forms of indebtedness would create interest expenses
which would, if used by the Funds, be charged to common shareholders (shown
above as "Interest Payments on Borrowed Funds"). Leverage created by
preferred shares creates dividend payments and/or capital gains distributions
to preferred shareholders which are charged to common shareholders (shown
above as "Distributions on Preferred Shares"). The dividend rates are based
on periodic auctions as described herein and thus will differ based on
varying market conditions at the times of such auctions.
EXAMPLE. The following example is intended to help you compare the costs of
investing in the Acquiring Fund pro forma after the Reorganization, with the
costs of investing in the Target Fund and the Acquiring Fund without the
Reorganization. An investor would pay the following expenses on a $1,000
investment, assuming (1) the operating expense ratio for each Fund (as a
percentage of net assets attributable to Common Shares) set forth in the table
above and (2) a 5% annual return throughout the period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Van Kampen Advantage Municipal Income
Trust................................ $12 $37 $65 $143
Van Kampen Municipal Opportunity
Trust................................ $12 $37 $64 $142
Pro Forma--Van Kampen Municipal
Opportunity Trust.................... $12 $36 $62 $137
The example set forth above assumes the reinvestment of all dividends and
distributions and uses a 5% annual rate of return as mandated by SEC
regulations. The example should not be considered a representation of past or
future expenses or annual rates of return. Actual expenses or annual rates of
return may be more or less than those assumed for purposes of the example.
FURTHER INFORMATION REGARDING THE REORGANIZATION. The Target Fund Board has
determined that the Reorganization is in the best interests of holders of Target
Fund Common Shares and that the interests of such shareholders will not be
diluted as a result of the Reorganization. Similarly, the Board of Trustees of
the Acquiring Fund has determined that the Reorganization is in the best
interests of holders of Acquiring Fund Common Shares and that the interests of
such shareholders will not be diluted as a result of the Reorganization. It is
not anticipated that the Reorganization will directly benefit the holders of
Preferred Shares of either Fund; however, the Reorganization will not adversely
affect the holders of Preferred Shares of either Fund and the expenses of the
Reorganization will not be borne by the holders of Preferred Shares of either
Fund. As a result of the Reorganization, however, a shareholder of either Fund
will hold a reduced
11
percentage of ownership in the larger combined fund than he or she did in either
of the separate Funds.
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code" or "Code"). If the Reorganization so qualifies, in
general, a shareholder of the Target Fund will recognize no gain or loss upon
the receipt of shares of the Acquiring Fund in connection with the
Reorganization. Additionally, the Target Fund will not recognize any gain or
loss as a result of the transfer of all of its assets and liabilities in
exchange for the shares of the Acquiring Fund or as a result of its dissolution.
Neither the Acquiring Fund nor its shareholders will recognize any gain or loss
in connection with the Reorganization.
The Target Fund Board requests that shareholders of the Target Fund approve
the proposed Reorganization at the Special Meeting to be held on September 23,
2005. Shareholder approval of the Reorganization requires the affirmative vote
of shareholders of the Target Fund representing more than 50% of the outstanding
Target Fund Common Shares and Target Fund Preferred Shares entitled to vote,
each voting separately as a class. Subject to the requisite approval of the
shareholders of each Fund with regard to the Reorganization, it is expected that
the closing date of the transaction (the "Closing Date") will be after the close
of business on or about , 2005, but it may be at a different
time as described herein.
The Target Fund Board recommends that you vote "FOR" the proposed
Reorganization.
PROPOSAL 2: ISSUANCE OF ACQUIRING FUND COMMON SHARES
In connection with the proposed Reorganization described under "Proposal 1:
Reorganization of the Target Fund," the Acquiring Fund will issue additional
Acquiring Fund Common Shares and list such shares on the NYSE and CHX. The
Acquiring Fund will acquire substantially all of the assets and assume
substantially all of the liabilities of the Target Fund in exchange for the
newly-issued Acquiring Fund Common Shares and newly-issued Acquiring Fund APS.
The Reorganization will result in no reduction of net asset value of the
Acquiring Fund Common Shares, other than the costs of the Reorganization. No
gain or loss will be recognized by the Acquiring Fund or its shareholders in
connection with the Reorganization. The Acquiring Fund Board, based upon its
evaluation of all relevant information, anticipates that the Reorganization will
benefit holders of Acquiring Fund Common Shares. In particular, the Acquiring
Fund Board believes, based on data presented by the Adviser, that the Acquiring
Fund will experience a reduced annual operating expense ratio as a result of the
Reorganization.
12
The Acquiring Fund Board requests that shareholders of the Acquiring Fund
approve the issuance of additional Acquiring Fund Common Shares at the Special
Meeting to be held on September 23, 2005. Shareholder approval of the issuance
of additional Acquiring Fund Common Shares requires the affirmative vote of a
majority of the votes cast on the proposal, provided that the total votes cast
on the proposal represents more than 50% in interest of all securities entitled
to vote on the proposal. Subject to the requisite approval of the shareholders
of each Fund with regard to the Reorganization, it is expected that the Closing
Date will be after the close of business on or about , 2005,
but it may be at a different time as described herein.
The Acquiring Fund Board recommends that you vote "FOR" the issuance of
additional Acquiring Fund Common Shares in connection with the Reorganization.
13
------------------------------------------------------------------------------
PROPOSAL 1: REORGANIZATION OF THE TARGET FUND
------------------------------------------------------------------------------
The Reorganization seeks to combine two similar Funds to achieve certain
economies of scale and other operational efficiencies. Each Fund is registered
as a diversified, closed-end management investment company under the 1940 Act.
Each Fund pursues the same investment objective to seek to provide common
shareholders with a high level of current income exempt from federal income tax,
consistent with preservation of capital. Each Fund invests primarily in
municipal securities rated investment grade at the time of investment. The Funds
are managed by the same investment advisory personnel.
In the Reorganization, the Acquiring Fund will acquire substantially all of
the assets and assume substantially all of the liabilities of the Target Fund in
exchange for an equal aggregate value of Acquiring Fund Common Shares and
Acquiring Fund APS. The Target Fund will distribute Acquiring Fund Common Shares
to holders of Target Fund Common Shares and Acquiring Fund APS to holders of
Target Fund APS, and will then terminate its registration under the 1940 Act and
dissolve under applicable state law. The aggregate net asset value of Acquiring
Fund Common Shares received in the Reorganization will equal the aggregate net
asset value of the Target Fund Common Shares held immediately prior to the
Reorganization less the costs of the Reorganization (though holders of Target
Fund Common Shares may receive cash for their fractional shares). The aggregate
liquidation preference of Acquiring Fund APS received in the Reorganization will
equal the aggregate liquidation preference of Target Fund APS held immediately
prior to the Reorganization. The Acquiring Fund will continue to operate as a
registered closed-end investment company with the investment objective and
policies described in this Joint Proxy Statement/Prospectus.
The Target Fund Board, based upon its evaluation of all relevant information,
anticipates that the common shareholders of the Target Fund will benefit from
the Reorganization. In particular, the Target Fund Board believes, based on data
presented by the Adviser, that common shareholders of the Target Fund will
experience a reduced annual operating expense ratio as a result of the
Reorganization. The combined fund resulting from the Reorganization will have a
larger asset base than either Fund has currently; certain fixed administrative
costs, such as costs of printing shareholder reports and proxy statements, legal
expenses, audit fees, mailing costs and other expenses, will be spread across
this larger asset base, thereby lowering the expense ratio for common
shareholders of the combined fund.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Because each Fund, under normal market conditions, invests substantially all
of its assets in municipal securities rated investment grade at the time of
investment,
14
any risks inherent in such investments are equally applicable to both Funds and
will apply to the combined fund after the Reorganization. The Reorganization
itself is not expected to adversely affect the rights of holders of Common
Shares or Preferred Shares of either Fund or to create additional risks.
MARKET RISK
Market risk is the possibility that the market values of securities owned by
each Fund will decline. The prices of debt securities tend to fall as interest
rates rise, and such declines tend to be greater among debt securities with
longer maturities. Market risk is often greater among certain types of debt
securities, such as zero coupon bonds which do not make regular interest
payments but are instead bought at a discount to their face values and paid in
full upon maturity. As interest rates change, these securities often fluctuate
more in price than securities that make regular interest payments and therefore
subject the Funds to greater market risk than a fund that does not own these
types of securities. When-issued and delayed delivery transactions are subject
to changes in market conditions from the time of the commitment until
settlement. This may adversely affect the prices or yields of the securities
being purchased. The greater the Funds' outstanding commitments for these
securities, the greater the Funds' exposure to market price fluctuations.
INTEREST RATE RISK
Interest rate risk is the risk that prices of municipal securities generally
increase when interest rates decline and decrease when interest rates increase.
Prices of longer-term securities generally change more in response to interest
rate changes than prices of shorter-term securities.
CREDIT RISK
Credit risk refers to an issuer's ability to make timely payments of interest
and principal. The degree of credit risk depends on both the financial condition
of the issuer and the terms of the obligation. Under normal market conditions,
each Fund invests substantially all of its assets in municipal securities rated
investment grade at the time of investment. However, to the extent that a Fund
may hold securities rated below investment grade, it may be subject to a higher
level of credit risk than a fund that holds solely investment grade securities.
Securities rated BBB by Standard & Poor's ("S&P") or Baa by Moody's Investors
Service, Inc. ("Moody's") are in the lowest of the four investment grades and
are considered by the rating agencies to be medium-grade obligations which
possess speculative characteristics so that changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity of the issuer
to make principal and interest payments than in the case of higher-rated
securities. The credit quality of non-investment grade securities is considered
speculative by recognized rating
15
agencies with respect to the issuer's continuing ability to pay interest and
principal. Lower-grade securities may have less liquidity and a higher incidence
of default than higher-grade securities. A Fund may incur higher expenditures to
protect its interests in such securities. The credit risks and market prices of
lower-grade securities generally are more sensitive to negative issuer
developments, such as reduced revenues or increased expenditures, or adverse
economic conditions, such as a recession, than are higher-grade securities.
INCOME RISK
The income shareholders receive from a Fund is based primarily on interest
rates, which can vary widely over the short- and long-term. If interest rates
drop, your income from such Fund may drop as well.
CALL RISK
If interest rates fall, it is possible that issuers of securities with high
interest rates will prepay or "call" their securities before their maturity
dates. In this event, the proceeds from the called securities would likely be
reinvested by the Funds in securities bearing the new, lower interest rates,
resulting in a possible decline in the Funds' income and distributions to
shareholders.
MUNICIPAL SECURITIES RISK
Under normal market conditions, the Funds invest primarily in municipal
securities. The yields of municipal securities may move differently and
adversely compared to the yields of overall debt securities markets. Although
the interest received from municipal securities generally is exempt from federal
income tax, each Fund may invest in municipal securities that pay interest that
is subject to the federal alternative minimum tax. The Acquiring Fund may invest
all or a substantial portion of its total assets in municipal securities that
pay interest that is subject to the federal alternative minimum tax. In
addition, there could be changes in applicable tax laws or tax treatments that
reduce or eliminate the current federal income tax exemption on municipal
securities or otherwise adversely affect the current federal or state tax status
of municipal securities.
RISKS OF USING STRATEGIC TRANSACTIONS
Each Fund may engage in certain transactions ("Strategic Transactions")
designed to, among other things, reduce its exposure to interest rate movements.
For example, each Fund may purchase and sell exchange-listed and over-the-
counter put and call options on securities, financial futures and other
financial instruments, purchase and sell financial futures contracts and enter
into various interest rate transactions such as swaps, caps, floors or collars.
If a Fund incorrectly forecasts market values, interest rates or other factors,
that Fund's performance
16
could suffer as a result of its Strategic Transactions. Each Fund also may
suffer a loss if the other party to the Strategic Transaction fails to meet its
obligations. The Funds are not required to use Strategic Transactions and may
choose not to do so.
MANAGER RISK
As with any managed fund, the investment adviser to each Fund may not be
successful in selecting the best-performing securities or investment techniques,
and a Fund's performance may lag behind that of similar funds.
MARKET DISCOUNT RISK
Whether investors will realize gains or losses upon the sale of shares of a
Fund will depend upon the market price of the shares at the time of original
purchase and subsequent sale, which may be less or more than such Fund's net
asset value per share. Since the market price of the shares will be affected by
such factors as the relative demand for and supply of the shares in the market,
general market and economic conditions and other factors beyond the control of
the Funds, the Funds cannot predict whether shares of the Funds will trade at,
below or above net asset value. Shares of closed-end funds often trade at a
discount to their net asset values, and the Funds' shares may trade at such a
discount.
In order to reduce or eliminate a market value discount from net asset value,
the Board of Trustees of a Fund may, subject to the terms of its Preferred
Shares, authorize such Fund from time to time to repurchase its Common Shares in
the open market or to tender for its Common Shares at net asset value. The Board
of Trustees of each Fund, in consultation with the Adviser, reviews on a
quarterly basis the possibility of open-market repurchases and/or tender offers
for such Fund's Common Shares. Subject to its borrowing restrictions, a Fund may
incur debt to finance such repurchases, which entails risks. The ability of a
Fund to enter into tender offers and the common share repurchases may be limited
by the 1940 Act asset coverage requirements and any additional asset coverage
requirements which may be imposed by a rating agency in connection with any
rating of the Preferred Shares. No assurance can be given that the Board of
Trustees of a Fund will, in fact, authorize such Fund to undertake such
repurchases and/or tender offers or that, if undertaken, such actions would
result in such Fund's Common Shares trading at a price which is equal or close
to net asset value.
LEVERAGE RISK
Use of leverage, through the issuance of Preferred Shares, involves certain
risks to holders of Common Shares of the Funds. For example, each Fund's
issuance of Preferred Shares may result in higher volatility of the net asset
value of its Common Shares and potentially more volatility in the market value
of its Common Shares. In addition, changes in the short-term and medium-term
dividend rates on, and the
17
amount of taxable income allocable to, the Preferred Shares of a Fund will
affect the yield to holders of Common Shares of a Fund. In certain
circumstances, when a Fund is required to allocate taxable income to holders of
its Preferred Shares, a Fund may be required to make an additional distribution
to such holders in an amount approximately equal to the tax liability resulting
from the allocation (an "Additional Dividend"). Leverage will allow holders of
each Fund's Common Shares to realize a higher current rate of return than if a
Fund were not leveraged as long as such Fund, while accounting for its costs and
operating expenses, is able to realize a higher net return on its investment
portfolio than the then-current dividend rate (and any Additional Dividend) paid
on its Preferred Shares. Similarly, since a pro rata portion of each Fund's net
realized capital gains is generally payable to holders of a Fund's Common
Shares, the use of leverage will increase the amount of such gains distributed
to holders of a Fund's Common Shares. However, short-term, medium-term and
long-term interest rates change from time to time as do their relationships to
each other (i.e., the slope of the yield curve) depending upon such factors as
supply and demand forces, monetary and tax policies and investor expectations.
Changes in any or all of such factors could cause the relationship between
short-term, medium-term and long-term rates to change (i.e., to flatten or to
invert the slope of the yield curve) so that short-term and medium-term rates
may substantially increase relative to the long-term obligations in which each
Fund may be invested. To the extent that the current dividend rate (and any
Additional Dividend) on a Fund's Preferred Shares approaches the net return on
such Fund's investment portfolio, the benefit of leverage to holders of Common
Shares of such Fund will be decreased. If the current dividend rate (and any
Additional Dividend) on the Preferred Shares of a Fund were to exceed the net
return on such Fund's portfolio, holders of Common Shares of such Fund would
receive a lower rate of return than if the Fund were not leveraged. Similarly,
since both the costs of issuing Preferred Shares and any decline in the value of
a Fund's investments (including investments purchased with the proceeds from any
Preferred Shares offering) will be borne entirely by holders of such Fund's
Common Shares, the effect of leverage in a declining market would result in a
greater decrease in net asset value to holders of Common Shares than if a Fund
were not leveraged. If a Fund is liquidated, holders of that Fund's Preferred
Shares will be entitled to receive liquidating distributions before any
distribution is made to holders of Common Shares of such Fund.
In an extreme case, a decline in net asset value could affect a Fund's ability
to pay dividends on its Common Shares. Failure to make such dividend payments
could adversely affect a Fund's qualification as a regulated investment company
under the federal tax laws. However, each Fund intends to take all measures
necessary to make required Common Share dividend payments. If a Fund's current
investment income is ever insufficient to meet dividend payments on either its
Common Shares or its Preferred Shares, such Fund may have to liquidate certain
of
18
its investments. In addition, each Fund has the authority to redeem its
Preferred Shares for any reason and may be required to redeem all or part of its
Preferred Shares in the following circumstances:
- if the asset coverage for the Preferred Shares declines below 200%, either
as a result of a decline in the value of a Fund's portfolio investments or
as a result of the repurchase of Common Shares in tender offers or
otherwise, or
- in order to maintain the asset coverage guidelines established by Moody's
and S&P in rating the Preferred Shares.
Redemption of the Preferred Shares or insufficient investment income to make
dividend payments, may reduce the net asset value of a Fund's Common Shares and
require a Fund to liquidate a portion of its investments at a time when it may
be disadvantageous to do so.
ANTI-TAKEOVER PROVISIONS
The Declaration of Trust of each Fund (in each case, the "Declaration of
Trust") includes provisions that could limit the ability of other entities or
persons to acquire control of that Fund or to change the composition of its
Board of Trustees. Such provisions could limit the ability of common
shareholders to sell their Common Shares at a premium over prevailing market
prices by discouraging a third party from seeking to obtain control of either
Fund.
SPECIAL RISKS RELATED TO PREFERRED SHARES
AUCTION RISK. The dividend rate for the Preferred Shares of each Fund normally
is set through an auction process. In the auction, holders of Preferred Shares
may indicate the dividend rate at which they would be willing to hold or sell
their shares or purchase additional shares. An auction fails if there are more
Preferred Shares offered for sale than there are buyers, in which case holders
of Preferred Shares may not be able to sell their shares. Also, if holders of
Preferred Shares place bids to retain shares at an auction only at a specified
dividend rate and that rate exceeds the rate set at the auction, they will not
retain their shares. Additionally, if holders of Preferred Shares buy shares or
elect to retain shares without specifying a dividend rate below which they would
not wish to buy or continue to hold those shares, they could receive a lower
rate of return on their shares than the market rate. Finally, the dividend
period for the Preferred Shares may be changed by a Fund, subject to certain
conditions, including notice to preferred shareholders, which could also affect
the liquidity of an investment in Preferred Shares.
SECONDARY MARKET RISK. Broker-dealers may maintain a secondary trading market
in the Preferred Shares outside of auctions; however, they are not obligated to
do so and there can be no assurance that such a secondary market will develop
or, if it does develop, that it will provide holders of Preferred Shares with a
liquid
19
trading market. It may not be possible to sell Preferred Shares between
auctions, or it may only be possible to sell them for a price less than their
liquidation preference plus any accumulated dividends. An increase in the level
of interest rates likely will have an adverse effect on the secondary market
price of the Preferred Shares. Preferred Shares may only be transferred outside
of auctions to or through broker-dealers or other persons as a Fund permits.
RATINGS AND ASSET COVERAGE RISKS. Although the Preferred Shares of each Fund
have been rated "Aaa" by Moody's and "AAA" by S&P, such ratings do not eliminate
or necessarily mitigate the risks of investing in Preferred Shares. Moody's or
S&P could downgrade its rating of the Preferred Shares or withdraw its rating at
any time, which may make the Preferred Shares less liquid at an auction or in
the secondary market. If a Fund fails to satisfy its asset coverage ratios, it
will be required to redeem a sufficient number of Preferred Shares in order to
return to compliance with the asset coverage ratios. A Fund may voluntarily
redeem Preferred Shares under certain circumstances in order to meet asset
coverage tests.
COMPARISON OF THE FUNDS
INVESTMENT OBJECTIVE AND POLICIES
The Funds pursue the same investment objective and have similar investment
policies. Each Fund's investment objective is to seek to provide common
shareholders with a high level of current income exempt from federal income tax,
consistent with preservation of capital. Each Fund intends to achieve its
objective by investing in a diversified portfolio of municipal securities which
the Adviser believes does not involve undue risk to income or principal. Under
normal market conditions, the Target Fund invests substantially all of its net
assets in municipal securities rated investment grade at the time of investment
and the Acquiring Fund invests substantially all of its total assets in
municipal securities rated investment grade at the time of investment. Under
normal market conditions, each Fund invests at least 80% of its net assets in
municipal securities. Investment grade securities are rated BBB or higher by S&P
or Baa or higher by Moody's in the case of long-term obligations, and have
equivalent ratings in the case of short-term obligations. Securities rated BBB
by S&P are regarded by S&P as having an adequate capacity to pay interest and
repay principal; whereas such securities normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely, in the opinion of S&P, to lead to a weakened capacity to pay interest
and repay principal for debt in this category than in higher rated categories.
Securities rated Baa by Moody's are considered by Moody's as medium grade
obligations; they are neither highly protected nor poorly secured; interest
payments and principal security appear to Moody's to be adequate for the present
but certain protective elements may be lacking or may be characteristically
20
unreliable over any great length of time; in the opinion of Moody's, they lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
The foregoing policies with respect to credit quality of portfolio investments
apply only at the time of purchase of a security, and the Funds are not required
to dispose of a security in the event that S&P or Moody's (or any other
nationally recognized statistical rating organization) downgrades its assessment
of the credit characteristics of a particular issuer. In determining whether a
Fund will retain or sell such a security, the Adviser may consider such factors
as the Adviser's assessment of the credit quality of the issuer of such
security, the price at which such security could be sold and the rating, if any,
assigned to such security by other nationally recognized statistical rating
organizations.
Each Fund may invest an unlimited portion of its assets in municipal
securities that pay interest that is subject to the alternative minimum tax
provisions of federal tax law. A substantial portion of the income produced by
each Fund may be taxable under the alternative minimum tax. The Funds may not be
suitable investments for investors who are already subject to the federal
alternative minimum tax or who would become subject to the federal alternative
minimum tax as a result of an investment in the Funds.
Each Fund may engage in certain hedging transactions and may purchase and sell
put and call options on municipal securities and municipal securities indices.
Such transactions are not treated as investments in municipal securities for the
purpose of each Fund's policy of investing 80% of its total assets in municipal
securities.
MUNICIPAL SECURITIES. Municipal securities are obligations issued by or on
behalf of states, certain territories and possessions of the United States and
the District of Columbia and their political subdivisions, agencies and
instrumentalities, the interest on which, in the opinion of bond counsel or
other counsel to the issuer of such securities is, at the time of issuance, not
includable in gross income for regular federal income tax purposes. Under normal
market conditions, each Fund will invest in at least 80% of its net assets in
municipal securities. The policy stated in the foregoing sentence is a
fundamental policy of each Fund and cannot be changed without shareholder
approval.
Municipal securities include long-term obligations, often called municipal
bonds, as well as short-term municipal notes, participation certificates,
municipal leases, and tax-exempt commercial paper. During ordinary market
conditions, longer-term municipal securities generally provide a higher yield
than short-term municipal securities of similar credit quality and therefore
each Fund generally expects primarily to invest and hold until maturity
longer-term municipal securities. The
21
Funds may, however, invest in short-term municipal securities in certain
circumstances.
The two principal classifications of municipal bonds are "general obligation"
bonds and "revenue" or "special obligation" bonds, which include "industrial
revenue bonds." General obligation bonds are secured by the issuer's pledge of
its faith, credit and taxing power for the payment of principal and interest,
and accordingly the capacity of the issuer of a general obligation bond as to
the timely payment of interest and the repayment of principal when due is
affected by the issuer's maintenance of its tax base. Revenue or special
obligation bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special tax or other specific revenue source such as from the user of the
facility being financed; accordingly the timely payment of interest and the
repayment of principal in accordance with the terms of the revenue or special
obligation bond is a function of the economic viability of such facility or such
revenue source. Although the ratings of Moody's or S&P of the municipal
securities in the Fund's portfolio are relative and subjective, and are not
absolute standards of quality, such ratings reflect the assessment of Moody's or
S&P, as the case may be, of the issuer's ability, or the economic viability of
the special revenue source, with respect to the timely payment of interest and
the repayment of principal in accordance with the terms of the obligation.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of municipal authorities
or entities. Although lease obligations do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged, a lease
obligation may be backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. Typically in "non-appropriation" lease obligations, the lease
terminates as of the end of the last fiscal year for which an appropriation is
made. Although "non-appropriation" lease obligations are often secured by an
assignment of the lessor's interest in the underlying property, disposition of
the property in the event of foreclosure might prove difficult. There is no
limitation on the percentage of each Fund's assets that may be invested in "non-
appropriation" lease obligations. In evaluating such lease obligations, the
Adviser will consider such factors as it deems appropriate, including (a)
whether the lease can be cancelled, (b) the ability of the lease obligee to
direct the sale of the underlying assets, (c) the general creditworthiness of
the lease obligor, (d) the likelihood that the municipality will discontinue
appropriating funding for the leased property in the event such property is no
longer considered essential by the municipality, (e) the legal recourse of the
lease obligee in the event of such a
22
failure to appropriate funding and (f) any limitations which are imposed on the
lease obligor's ability to utilize substitute property or services than those
covered by the lease obligation. The Acquiring Fund will invest in lease
obligations which contain non-appropriation clauses only if such obligations are
rated investment grade at the time of investment.
Participation certificates are participations in lease obligations of state
and local governments or authorities to finance the acquisition of equipment and
facilities. They may represent participations in a lease, an installment
purchase contract, or a conditional sales contract. Some municipal leases and
participation certificates may not be readily marketable.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantee
of such payment obligations, of the municipal securities.
Municipal securities may have fixed or variable interest rates. Each Fund may
purchase floating and variable rate demand notes, which are municipal securities
normally having a stated maturity in excess of one year, but which permit the
holder to tender the notes for purchase at the principal amount thereof. The
interest rate on a floating rate demand note is based on a known lending rate,
such as a bank's prime rate, and is adjusted each time such rate is adjusted.
The interest rate on a variable rate demand note is adjusted at specified
intervals. There generally is no secondary market for these notes, although they
may be tendered for redemption at face value. Each such note purchased by a Fund
will meet the criteria established for the purchase of municipal securities.
Each Fund may invest up to 15% of its net assets in "inverse floating rate
obligations." Floating rate obligations bear rates of interest that are adjusted
periodically to reflect changes in market rates of interest. Inverse floating
rate obligations have rates that vary inversely with changes in market rates of
interest. These securities have varying degrees of liquidity and the market
value of such securities generally will fluctuate in response to changes in
market rates of interest to a greater extent than the value of an equal
principal amount of a fixed rate security having similar credit quality,
redemption provisions and maturity. These securities tend to underperform the
market for fixed rate bonds in a rising interest rate environment, but tend to
outperform the market for fixed rate bonds when interest rates decline or remain
relatively stable.
There is no limitation as to the maturity of municipal securities in which a
Fund may invest. The Adviser may adjust the average maturity of a Fund's
portfolio from time to time, depending on its assessment of the relative yields
available on
23
securities of different maturities and its expectations of future changes in
interest rates.
Each Fund generally will not invest 25% or more of its total assets in any
industry. Governmental issuers of municipal securities are not considered part
of any "industry." However, municipal securities backed only by the assets and
revenues of nongovernmental users may for this purpose be deemed to be issued by
such nongovernmental users, and the 25% limitation would apply to such
obligations. It is nonetheless possible that a Fund may invest 25% or more of
its total assets in a broader segment of the municipal securities market, such
as revenue obligations of hospitals and other health care facilities, housing
agency revenue obligations, or airport revenue obligations if the Adviser
determines that the yields available from obligations in a particular segment of
the market justified the additional risks associated with a large investment in
such segment. Although such obligations could be supported by the credit of
governmental users, or by the credit of nongovernmental users engaged in a
number of industries, economic, business, political and other developments
generally affecting the revenues of such users (for example, proposed
legislation or pending court decisions affecting the financing of such projects
and market factors affecting the demand for their services or products) may have
a general adverse effect on all municipal securities in such a market segment.
DEFENSIVE STRATEGIES. At times the Adviser may judge that conditions in the
market for municipal securities make pursuing a Fund's basic investment strategy
inconsistent with the best interests of its Shareholders. At such times the
Adviser may use alternative strategies, primarily designed to reduce
fluctuations in the value of a Fund's assets. In implementing these "defensive"
strategies, each Fund may invest to a substantial degree in high quality,
short-term municipal securities. If these other municipal securities are not
available or, in the Adviser's judgment, do not afford sufficient protection
against adverse market conditions, each Fund may invest in taxable securities.
Such taxable securities may include: obligations of the U.S. Government, its
agencies or instrumentalities: other debt securities rated within the four
highest grades by either S&P or Moody's; commercial paper rated in the highest
grade by either rating service; certificates of deposit and bankers'
acceptances; repurchase agreements with respect to any of the foregoing
investments; or any other fixed-income securities that the Adviser considers
consistent with such strategy. To the extent that the use of certain of these
strategies produces taxable income, this taxable income will be distributed on a
pro rata basis among the Preferred Shares and the Common Shares. It is
impossible to predict whether, or for how long, a Fund will use any such
defensive strategies. Further, the yields on such securities may approach or be
less than the then current dividend rate payable to preferred shareholders. In
such event, the benefit of leverage to the common shareholders will diminish and
a Fund's leveraged capital structure may work to the disadvantage of the common
shareholders.
24
OTHER INVESTMENT PRACTICES AND POLICIES
In connection with the investment objective and policies described above, each
Fund may, but is not required to, utilize various other investment strategies as
described below to earn income, to facilitate portfolio management and to
mitigate risk. Such strategies are generally accepted by modern portfolio
managers and are regularly utilized by many investment companies and other
institutional investors. These investment practices entail risks. Although the
Adviser believes that these investment practices may further the Funds'
respective investment objectives, no assurance can be given that these
investment practices will achieve this result.
STRATEGIC TRANSACTIONS. Each Fund may engage in certain Strategic
Transactions to attempt to protect against possible changes in the market value
of securities held in or to be purchased for its portfolio resulting from
securities markets fluctuations, to protect unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of its portfolio, or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables, including market conditions.
The ability of a Fund to utilize these Strategic Transactions successfully
depends on the Adviser's ability to predict pertinent market movements, which
cannot be assured. Each Fund complies with applicable regulatory requirements
when implementing these strategies, techniques and instruments.
The Target Fund may use Strategic Transactions, other than Strategic
Transactions involving financial futures and options thereon, to enhance
potential gain, although no more than 5% of the Target Fund's assets may be
committed to Strategic Transactions for non-hedging purposes. Among other
Strategic Transactions which the Acquiring Fund may utilize, the Acquiring Fund
may invest in options on municipal securities. The Acquiring Fund may purchase
and sell (write) options on up to 20% of its assets.
Strategic Transactions have risks associated with them, including possible
default by the other party to the transaction, liquidity and, to the extent the
Adviser's view as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses greater than if they
had not been used. Use of put and call options may result in losses to a Fund,
force the sale of portfolio securities at inopportune times or for prices other
than at current market values, limit the amount of appreciation a Fund can
realize on its investments or cause a Fund to hold a security it might otherwise
sell. The use of options and futures transactions entails certain other risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of a
Fund creates the possibility that losses on the hedging instrument may
25
be greater than gains in the value of the Fund's position. In addition, futures
and options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets, a
Fund might not be able to close out a transaction without incurring substantial
losses, if at all.
Although the contemplated use of these futures contracts and options thereon
should tend to minimize the risk of loss due to a decline in the value of the
hedged position, at the same time they tend to limit any potential gain which
might result from an increase in value of such position. Finally, the daily
variation margin requirements for futures contracts and the sale of options
thereon would create, a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. Income earned or gains realized or deemed to
be earned or realized, if any, by a Fund from engaging in Strategic Transactions
generally will be taxable income of the Fund. Such income is allocated to both
the Common Shares and the Preferred Shares of a Fund on a pro rata basis.
RATING AGENCY LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. For as long as
APS are rated by Moody's, a Fund will engage in transactions in options on
securities, futures contracts based on the Municipal Index or Treasury Bonds and
options on such futures contracts only when consistent with the provisions set
forth in the "Certificate of Vote," unless it receives written confirmation from
Moody's that engaging in such transactions would not impair the ratings then
assigned to the APS by Moody's. For as long as APS are rated by S&P, a Fund will
not buy or sell futures contracts or options thereon or write put options or
call options on portfolio securities unless it receives written confirmation
from S&P that engaging in such transactions will not impair the ratings then
assigned to the APS by S&P, except that a Fund may buy and sell futures
contracts based on the Municipal Index or Treasury Bonds, may purchase put and
call options on such contracts and may write covered call options and secured
put options on portfolio securities (subject to certain limitations described in
such Fund's Certificate of Vote).
"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. Each Fund may also purchase
and sell municipal securities on a "when-issued" and "delayed delivery" basis.
No income accrues to a Fund on municipal securities in connection with such
transactions prior to the date such Fund actually takes delivery of such
securities. These transactions are subject to market fluctuation; the value of
the municipal securities at delivery may be more or less than their purchase
price, and yields generally available on municipal securities when delivery
occurs may be higher than yields on the municipal securities obtained pursuant
to such transactions. Because the Fund engaging in such transactions relies on
the buyer or seller, as the case may be, to consummate the transaction, failure
by the other party to complete the
26
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. When a Fund is the buyer in such a
transaction, however, it will maintain, in a segregated account with its
custodian, cash or liquid portfolio securities having an aggregate value equal
to the amount of such purchase commitments until payment is made. A Fund will
make commitments to purchase municipal securities on such basis only with the
intention of actually acquiring these securities, but a Fund may sell such
securities prior to the settlement date if such sale is considered to be
advisable. To the extent a Fund engages in "when-issued" and "delayed delivery"
transactions, it will do so for the purpose of acquiring securities for a Fund's
portfolio consistent with that Fund's investment objective and policies and not
for the purpose of investment leverage. No specific limitation exists as to the
percentage of a Fund's assets which may be used to acquire securities on a
"when-issued" or "delayed delivery" basis.
INVESTMENT RESTRICTIONS
Each Funds' investment objective, each Fund's policy with respect to investing
at least 80% of its net assets in municipal securities and the following
investment restrictions are fundamental and cannot be changed without the
approval of the holders of a majority of the Funds' outstanding voting
securities (defined in the 1940 Act as the lesser of (i) more than 50% of the
Funds' outstanding Common Shares and of the APS, including any outstanding APS,
voting by class, or (ii) 67% of the Funds' outstanding Common Shares and of the
APS, including any outstanding APS, voting by class, present at a meeting at
which the holders of more than 50% of the outstanding shares of each such class
are present in person or by proxy). All other investment policies or practices
are considered by the Funds not to be fundamental and accordingly may be changed
without shareholder approval. If a percentage restriction on investment or use
of assets set forth below is adhered to at the time a transaction is effected,
later changes in percentage resulting from changing market values will not be
considered a deviation from policy. With respect to the limitations on
borrowings, the percentage limitations apply at the time of purchase and on an
ongoing basis. The investment restrictions of the Acquiring Fund are set forth
below. Except as noted herein, the investment restrictions of the Target Fund
are similar. The Acquiring Fund may not:
1. With respect to 75% of its total assets, purchase any securities (other
than obligations issued or guaranteed as to principal or interest by the
United States government or by its agencies or instrumentalities), if as a
result more than 5% of the Fund's total assets would be invested in
securities of a single issuer or if as a result the Fund would hold more
than 10% of the outstanding voting securities of any single issuer.
27
2. Invest more than 25% of its total assets in a single industry; however, as
described above the Fund may from time to time invest more than 25% of its
total assets in a particular segment of the municipal securities market.
3. Issue senior securities, as defined in the 1940 Act, other than preferred
shares of beneficial interest, except to the extent such issuance might be
involved with borrowings described under subparagraph (4) below or with
respect to hedging and risk management transactions or the writing of
options.
4. Borrow money, except for temporary or emergency purposes from banks or for
repurchase of the Fund's Shares, and then only in an amount not exceeding
one-third of the Fund's total assets, including the amount borrowed. The
Fund will not mortgage, pledge or hypothecate any assets except in
connection with a borrowing. The Fund will not purchase portfolio
securities during any period that such borrowings exceed 5% of the total
asset value of the Fund. Notwithstanding this investment restriction, the
Fund may enter into "when issued" and "delayed delivery" transactions as
described above.
5. Make loans of money or property to any person, except to the extent the
securities in which the Fund may invest are considered to be loans and
except that the Fund may lend money or property in connection with
maintenance of the value of or the Fund's interest with respect to the
securities owned by the Fund.
6. Buy any securities "on margin." Neither the deposit of initial or
variation margin in connection with hedging and risk management
transactions nor short-term credits as may be necessary for the clearance
of transactions is considered the purchase of a security on margin.
7. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell financial futures or options,
except in connection with hedging or risk management transactions.
8. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.
9. Make investments for the purpose of exercising control or participation in
management, except to the extent that exercise by the Fund of its rights
under agreements related to municipal securities would be deemed to
constitute such control or participation and except that the Fund may
purchase securities of other investment companies to the extent permitted
by (i) 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the Securities and Exchange Commission under
the
28
1940 Act, as amended from time to time or, (iii) an exemption or other
relief from the provisions of the 1940 Act.
10. Invest in securities issued by other investment companies except as part
of a merger, consolidation or other acquisition and except to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the Securities and Exchange
Commission under the 1940 Act, as amended from time to time or, (iii) an
exemption or other relief from the provisions of the 1940 Act.
11. Invest in equity interests in oil, gas or other mineral exploration or
development programs, except pursuant to the exercise by the Fund of its
rights under agreements relating to municipal securities.
12. Purchase or sell real estate, commodities or commodity contracts, except
to the extent the municipal securities the Fund may invest in are
considered to be interests in real estate, commodities or commodity
contracts or to the extent the Fund exercises its rights under agreements
relating to municipal securities (in which case the Fund may liquidate
real estate acquired as a result of a default on a mortgage), and except
to the extent that financial futures and related options the Fund may
invest in are considered to be commodities or commodities contracts.
As a matter of operating policy, each Fund will not invest 25% or more of its
assets in a single industry; however, each Fund may from time to time invest 25%
or more of its assets in a particular segment of the municipal securities
market.
MANAGEMENT OF THE FUNDS
THE BOARDS. The Board of Trustees of each Fund is responsible for the overall
supervision of the operations of its respective Fund and performs the various
duties imposed on trustees of investment companies by the 1940 Act and under
applicable state law.
THE ADVISER. The investment adviser for each Fund is Van Kampen Asset
Management. The Adviser is a wholly owned subsidiary of Van Kampen Investments
Inc. ("Van Kampen Investments"). Van Kampen Investments is a diversified asset
management company that administers more than three million retail investor
accounts, has extensive capabilities for managing institutional portfolios and
has more than $98 billion under management or supervision as of April 30, 2005.
Van Kampen Investments is an indirect wholly owned subsidiary of Morgan Stanley,
a preeminent global financial services firm that maintains leading market
positions in each of its three primary businesses: securities, asset management
and credit services. Morgan Stanley is a full service securities firm engaged in
securities trading and brokerage activities, investment banking, research and
analysis, financing and financial advisory services. The principal business
address of the Adviser
29
and Van Kampen Investments is 1221 Avenue of the Americas, New York, New York
10020.
Pursuant to separate investment advisory agreements between each Fund and the
Adviser, each Fund pays the Adviser a monthly fee at the annual rate of 0.55% of
such Fund's average daily managed assets, including assets attributable to
Preferred Shares. Effective November 1, 2004, the investment advisory fee paid
by each Fund was reduced from 0.60% to 0.55%. Subsequent to the Reorganization,
the Adviser will continue to receive compensation at the rate of 0.55% of the
average daily managed assets, including assets attributable to Preferred Shares,
of the combined fund. Because the fees paid to the Adviser are calculated on
managed assets, including assets attributable to Preferred Shares, the fees
earned by the Adviser will be higher when Preferred Shares are outstanding.
Under a separate accounting services and legal services agreement, the Adviser
(or its affiliates) provides accounting and legal services to each Fund. The
Adviser (or its affiliates) allocates the cost of such services to each Fund.
PORTFOLIO MANAGEMENT. Each Fund's portfolio is managed by the Adviser's
Municipal Fixed Income team. The team is made up of established investment
professionals. Current members of the team include Dennis Pietrzak, Executive
Director, Robert Wimmel, Vice President, and John Reynoldson, Executive
Director.
Dennis Pietrzak has worked for the Adviser since [ ] and began managing
the Funds in [ ]. Robert Wimmel has worked for the Adviser since 1996 and
began managing the Funds in [ ]. John Reynoldson has worked for the
Adviser since 1987 and began managing the Funds in [ ].
Dennis Pietrzak is the lead portfolio manager of each Fund. Robert Wimmel and
John Reynoldson are co-portfolio managers of each Fund. All team members are
responsible for the day-to-day management of each Fund and for the overall
strategy of each Fund.
The Reorganization Statement of Additional Information provides additional
information about the portfolio managers' compensation, other accounts managed
by the portfolio managers and the portfolio managers' ownership of securities in
each Fund.
PORTFOLIO TRANSACTIONS WITH AFFILIATES. The Adviser may place portfolio
transactions, to the extent permitted by law, with brokerage firms affiliated
with the Funds and the Adviser if it reasonably believes that the quality of
execution and the commission are comparable to that available from other
qualified firms.
LEGAL PROCEEDINGS INVOLVING THE ADVISER. The Adviser, certain affiliates of
the Adviser, and certain investment companies advised by the Adviser or its
affiliates were named as defendants in a number of similar class action
complaints which
30
were consolidated. The amended complaint also names as defendants certain
individual trustees and directors of certain investment companies advised by
affiliates of the Adviser; the complaint does not, however, name the individual
trustees of any Van Kampen funds. The complaint generally alleges that
defendants violated their statutory disclosure obligations and fiduciary duties
by failing properly to disclose (i) that the Adviser and certain affiliates of
the Adviser allegedly offered economic incentives to brokers and others to steer
investors to the funds advised by the Adviser or its affiliates rather than
funds managed by other companies, and (ii) that the funds advised by the Adviser
or its affiliates allegedly paid excessive commissions to brokers in return for
their alleged efforts to steer investors to these funds. The complaint seeks,
among other things, unspecified compensatory damages, rescissionary damages,
fees and costs. The defendants' motion to dismiss this action is pending. After
defendants moved to dismiss, the plaintiffs filed a motion for leave to amend
the complaint, which is also pending. The proposed amendment drops all claims
against the named investment companies, which are listed only as nominal
defendants. The proposed amendment raises similar claims against the Adviser and
its affiliates with respect to the investment companies advised by the Adviser
or its affiliates, and, in addition, alleges that affiliates of the Adviser
received undisclosed compensation for steering investors into thirteen
non-affiliated fund families. The defendants intend to continue to defend this
action vigorously. While the defendants believe that they have meritorious
defenses, the ultimate outcome of this matter is not presently determinable at
this early stage of litigation.
The Adviser and certain affiliates of the Adviser are also named as defendants
in a derivative suit which additionally names as defendants individual trustees
of certain Van Kampen funds; the named investment companies are listed as
nominal defendants. The complaint alleges that defendants caused the Van Kampen
funds to pay economic incentives to a proprietary sales force to promote the
sale of Van Kampen funds. The complaint also alleges that the Van Kampen funds
paid excessive commissions to Morgan Stanley and its affiliates in connection
with the sales of the funds. The complaint seeks, among other things, the
removal of the current trustees of the funds, rescission of the management
contracts for the funds, disgorgement of profits by Morgan Stanley and its
affiliates and monetary damages. This complaint has been coordinated with the
action described in the preceding paragraph. The defendants have moved to
dismiss this action and otherwise intend to defend it vigorously. This action is
currently stayed until the later of (i) a ruling on the motion to dismiss the
action described in the preceding paragraph or (ii) a ruling on a motion to
dismiss the action described in the next paragraph. While the defendants believe
that they have meritorious defenses, the ultimate outcome of this matter is not
presently determinable at this early stage of litigation.
The plaintiff in the action described in the preceding paragraph filed a
separate derivative action against the Adviser, certain affiliates of the
Adviser, the individual trustees of certain Van Kampen funds, and certain
unaffiliated entities. The named
31
investment companies are listed as nominal defendants. The complaint alleges
that certain unaffiliated entities engaged in or facilitated market timing and
late trading in the Van Kampen funds, and that the Adviser, certain affiliates
of the Adviser, and the trustees failed to prevent and/or detect such market
timing and late trading. The complaint seeks, among other things, the removal of
the current trustees of the funds, rescission of the management contracts and
distribution plans for the funds, disgorgement of fees and profits from the
Adviser and its affiliates, and monetary damages. The defendants' motion to
dismiss this action is pending. While the defendants believe that they have
meritorious defenses, the ultimate outcome of this matter is not presently
determinable at this early stage of litigation.
The Adviser and the individual trustees of certain Van Kampen funds are named
as defendants in a recently filed class action complaint that alleges the
defendants breached various fiduciary and statutory duties to investors by
failing to ensure that the funds participated in securities class action
settlements involving securities held in the funds' portfolios. The complaint
seeks, among other things, compensatory and punitive damages. None of the funds
are named as defendants, and no claims are asserted against them. Each of the
defendants have moved or will move to dismiss the complaint and believe that
they have meritorious defenses.
The Adviser, one of the investment companies advised by the Adviser, and
certain officers and directors of the investment company are defendants in a
class action filed in 2001 alleging that the defendants issued a series of
prospectuses and registration statements that were materially false and
misleading. Among other things, the complaint alleges that the prospectuses and
registration statements contained misleading descriptions of the method
defendants used to value senior loan interests in the fund's portfolio, and that
defendants materially overstated the net asset value of the fund. The parties
recently reached an agreement to settle the case. The court preliminarily
approved the settlement agreement in June, 2005, subject to a later hearing on
the fairness of the settlement agreement.
OTHER SERVICE PROVIDERS
CUSTODIAN, TRANSFER AGENT, AUCTION AGENT AND DIVIDEND PAYING AGENT. State
Street Bank and Trust Company is the custodian for each Fund. Its principal
business address is 225 West Franklin Street, Boston, Massachusetts 02110.
EquiServe Trust Company, N.A., 250 Royall Street, Canton, Massachusetts, 02021,
is the transfer agent, dividend paying agent and registrar for the Common Shares
of each Fund. Deutsche Bank Trust Company Americas ("Deutsche Bank"), 280 Park
Avenue, New York, New York 10017, is the auction agent and dividend paying agent
for the APS of each Fund.
CAPITALIZATION
The Board of Trustees of each Fund may authorize separate classes of shares
together with such designation of preferences, rights, voting powers,
restrictions,
32
limitations, qualifications or terms as may be determined from time to time by
the trustees. The table below sets forth the capitalization of the Target Fund
and the Acquiring Fund as of January 31, 2005, and the pro forma capitalization
of the combined fund as if the Reorganization had occurred on that date.
CAPITALIZATION AS OF JANUARY 31, 2005 (UNAUDITED)
ACTUAL PRO FORMA
------------------------ -----------
VAN KAMPEN
ADVANTAGE VAN KAMPEN VAN KAMPEN
MUNICIPAL MUNICIPAL MUNICIPAL
INCOME OPPORTUNITY OPPORTUNITY
TRUST TRUST TRUST
---------- ----------- -----------
NET ASSETS CONSIST OF (AMOUNTS IN
THOUSANDS):
Common Shares ($.01 par value)*..... $ 191 $ 153 $ 344
Paid in surplus..................... 282,026 226,764 508,346
Net unrealized appreciation......... 39,932 33,535 73,467
Accumulated undistributed net
investment income................. 2,842 1,062 3,904
Accumulated net realized gain
(loss)............................ 763 949 1,712
NET ASSETS APPLICABLE TO
COMMON SHARES..................... 325,754 262,463 587,773**
PREFERRED SHARES ($.01 par value,
with liquidation preference of
$25,000)*......................... 190,000 150,000 340,000
NET ASSETS INCLUDING PREFERRED
SHARES............................ 515,754 412,463 927,773
NET ASSET VALUE PER COMMON SHARE:..... 17.05 17.09 17.08
---------------
* Based on the number of outstanding shares listed in "Outstanding Securities
of the Funds" table below.
** Reflects a non-recurring cost associated with these Reorganization of
approximately $444,000, with $220,000 to be borne by the Acquiring Fund and
$220,000 to be borne by the Target Fund, assuming the Reorganization is
approved and completed. See "Information about the Reorganization--Expenses
of the Reorganization" for additional information.
33
OUTSTANDING SECURITIES OF THE FUNDS AS OF JANUARY 31, 2005
AMOUNT OUTSTANDING
AMOUNT HELD EXCLUSIVE OF AMOUNT
AMOUNT BY FUND FOR ITS SHOWN IN
TITLE OF CLASS AUTHORIZED OWN ACCOUNT PREVIOUS COLUMN
-------------- ---------- --------------- -------------------
Van Kampen Advantage
Municipal Income Trust
Common Shares............. Unlimited 0 19,106,785
Preferred Shares.......... 100,000,000 0 7,600
Van Kampen Municipal
Opportunity Trust
Common Shares............. Unlimited 0 15,357,684
Preferred Shares.......... 100,000,000 0 6,000
ADDITIONAL INFORMATION ABOUT COMMON SHARES OF THE FUNDS
GENERAL. Common shareholders of a Fund are entitled to share equally in
dividends declared by such Fund's Board of Trustees payable to holders of the
Common Shares and in the net assets of such Fund available for distribution to
holders of the Common Shares after payment of the preferential amounts payable
to preferred shareholders. Common shareholders do not have preemptive or
conversion rights and a Fund's Common Shares are not redeemable. The outstanding
Common Shares of each Fund are fully paid and nonassessable (except as described
under "Governing Law" below). So long as any Preferred Shares of a Fund are
outstanding, holders of the Fund's Common Shares will not be entitled to receive
any dividends or other distributions from the Fund unless all accrued dividends
on the Fund's outstanding Preferred Shares have been paid, and unless asset
coverage (as defined in the 1940 Act) with respect to such Preferred Shares
would be at least 200% after giving effect to such distributions.
PURCHASE AND SALE. Purchase and sale procedures for the Common Shares of each
of the Funds are identical. Investors typically purchase and sell Common Shares
of the Funds through a registered broker-dealer on the NYSE or CHX, thereby
incurring a brokerage commission set by the broker-dealer. Alternatively,
investors may purchase or sell Common Shares of the Funds through privately
negotiated transactions with existing shareholders.
34
COMMON SHARE PRICE DATA. The following table sets forth the high and low sales
prices for Common Shares of each Fund on the NYSE for each full quarterly period
within each Fund's two most recent fiscal years and for the first fiscal quarter
of the current fiscal year of each Fund, along with the net asset value and
discount or premium to net asset value for each quotation.
VAN KAMPEN ADVANTAGE
MUNICIPAL INCOME TRUST
-----------------------
NET ASSET PREMIUM NET ASSET PREMIUM
QUARTERLY PERIOD ENDING HIGH PRICE VALUE (DISCOUNT) LOW PRICE VALUE (DISCOUNT)
----------------------- ---------- --------- ---------- --------- --------- ----------
April 30, 2005........ $15.30 $17.21 (10.25)% $14.13 $16.49 (14.31)%
January 31, 2005...... $15.21 $16.84 (9.68)% $14.43 $16.51 (12.60)%
October 31, 2004...... $15.32 $16.91 (9.40)% $14.82 $16.55 (10.45)%
July 31, 2004......... $14.54 $16.24 (10.47)% $13.86 $15.99 (13.32)%
April 30, 2004........ $17.15 $17.21 (0.35)% $14.51 $16.27 (10.82)%
January 31, 2004...... $16.95 $17.21 (1.51)% $16.06 $16.79 (4.35)%
October 31, 2003...... $16.35 $16.72 (2.21)% $15.30 $16.20 (5.56)%
July 31, 2003......... $17.31 $17.74 (2.42)% $15.27 $16.19 (5.68)%
April 30, 2003........ $16.30 $17.06 (4.45)% $15.51 $16.81 (7.73)%
January 31, 2003...... $15.84 $17.00 (6.82)% $15.01 $16.63 (9.74)%
VAN KAMPEN MUNICIPAL
OPPORTUNITY TRUST
-----------------------
NET ASSET PREMIUM NET ASSET PREMIUM
QUARTERLY PERIOD ENDING HIGH PRICE VALUE (DISCOUNT) LOW PRICE VALUE (DISCOUNT)
----------------------- ---------- --------- ---------- --------- --------- ----------
April 30, 2005........ $15.50 $17.27 (10.25)% $14.22 $16.50 (13.82)%
January 31, 2005...... $15.19 $16.87 (9.96)% $14.51 $16.71 (13.17)%
October 31, 2004...... $15.31 $16.77 (8.71)% $14.74 $16.43 (10.47)%
July 31, 2004......... $14.74 $16.27 (9.40)% $14.06 $16.04 (12.34)%
April 30, 2004........ $17.60 $17.50 0.57% $14.70 $16.30 (9.82)%
January 31, 2004...... $17.14 $17.20 (0.35)% $16.53 $17.07 (3.16)%
October 31, 2003...... $16.66 $17.01 (2.06)% $15.79 $16.49 (4.24)%
July 31, 2003......... $17.86 $18.03 (0.94)% $15.98 $16.48 (3.03)%
April 30, 2003........ $16.94 $17.31 (2.14)% $15.85 $16.98 (6.65)%
January 31, 2003...... $16.33 $17.72 (7.84)% $15.55 $16.88 (7.88)%
As of , 2005, (i) the net asset value per share for Target Fund Common
Shares was $[ ] and the market price per share was $[ ],
representing a [discount/premium] to net asset value of [ ]%, and (ii) the
net asset value per share for Acquiring Fund Common Shares was $[ ] and
the market price per share was $[ ], representing a [discount/premium]
to net asset value of [ ]%.
Common Shares of each Fund have traded at a discount to net asset value for
extended periods since each Fund's inception. In order to reduce or eliminate a
market value discount from net asset value, the Board of Trustees of each Fund
may, subject to the terms and conditions of its Preferred Shares, authorize that
35
Fund from time to time to repurchase the Common Shares in the open market or to
tender for the Common Shares at net asset value. The Board of Trustees of each
Fund, in consultation with the Adviser, will review on a quarterly basis the
possibility of open market repurchases and/or tender offers for the Common
Shares. Subject to its borrowing restrictions, each Fund may incur debt to
finance such repurchases, which entails risks. The ability of a Fund to enter
into tender offers and the Common Share repurchases may be limited by the 1940
Act asset coverage requirements and any additional asset coverage requirements
which may be imposed by a rating agency in connection with any rating of the
Preferred Shares. No assurance can be given that the Board of Trustees of either
Fund will, in fact, authorize a Fund to undertake such repurchases and/or tender
offers or that, if undertaken, such actions would result in the Common Shares
trading at a price which is equal or close to net asset value.
DIVIDENDS AND DISTRIBUTIONS. The Funds' current policies with respect to
dividends and distributions relating to their respective Common Shares are
similar. It is each Fund's present policy, which may be changed by its Board of
Trustees, to make monthly distributions to holders of its Common Shares of
substantially all of such Fund's net investment income remaining after the
payment of dividends on any outstanding Preferred Shares. Net income of each
Fund consists of all interest income accrued on portfolio assets less all
expenses of such Fund. Each Fund is required to allocate net capital gains and
other taxable income, if any, received by the Fund between its Fund's Common
Shares and the APS on a pro rata basis in the year for which such capital gains
and other income is realized.
Expenses of each Fund are accrued each day. Net realized capital gains, if
any, are expected to be distributed to shareholders at least once a year. While
there are any Preferred Shares of a Fund outstanding, such Fund may not declare
any cash dividend or other distribution on its Common Shares, unless at the time
of such declaration, (1) all accrued Preferred Shares dividends have been paid
and (2) the value of the Fund's total assets (determined after deducting the
amount of such dividend or other distribution), less all liabilities and
indebtedness of such Fund, is at least 200% (as required by the 1940 Act) of the
liquidation value of the outstanding Preferred Shares (expected to equal the
aggregate original purchase price of the outstanding Preferred Shares plus any
accrued and unpaid dividends thereon, whether or not earned or declared on a
cumulative basis). In addition to the requirements of the 1940 Act, each Fund
may be required to comply with other asset coverage requirements as a condition
of a Fund obtaining a rating of its Preferred Shares from a nationally
recognized rating service. These requirements may include an asset coverage test
more stringent than under the 1940 Act. This limitation on a Fund's ability to
make distributions on its Common Shares could in certain circumstances impair
the ability of a Fund to maintain its qualification for taxation as a regulated
investment company. Each Fund intends, however, to the
36
extent possible, to purchase or redeem Preferred Shares from time to time to
maintain compliance with such asset coverage requirements and may pay special
dividends to the holders of the Preferred Shares in certain circumstances in
connection with any such impairment of a Fund's status as a regulated investment
company.
For information concerning the manner in which dividends and distributions to
holders of a Fund's Common Shares may be reinvested automatically in such Fund's
Common Shares, see "-- Dividend Reinvestment Plan" below.
DIVIDEND REINVESTMENT PLAN. Each Fund offers a Dividend Reinvestment Plan
(each a "Plan," and collectively the "Plans") pursuant to which holders of
Common Shares may elect to have all distributions of dividends and all capital
gains automatically reinvested in Common Shares pursuant to such Plan. The Plans
for the Target Fund and the Acquiring Fund are similar. Unless common
shareholders elect to participate in a Plan, common shareholders will receive
distributions of dividends and capital gains in cash. EquiServe Trust Company,
N.A., as plan agent (the "Plan Agent"), serves as agent for the holders of
Common Shares of each Fund in administering the Plans.
After the Reorganization, a holder of shares of a Fund who currently receives
dividends in cash will continue to receive dividends in cash; all holders who
elect to participate in the Plan of a Fund will have their dividends
automatically reinvested in shares of the combined fund. All correspondence
concerning the Plan should be directed to the Plan Agent at P.O. Box 43011,
Providence, Rhode Island 02940-3011. Telephone calls concerning the Plan may be
directed to the Plan Agent between the hours of 7:30 a.m. and 5:00 p.m. Central
Standard Time at (800) 341-2929.
ADDITIONAL INFORMATION ABOUT PREFERRED SHARES OF THE FUNDS
GENERAL. Target Fund APS and Acquiring Fund APS are preferred shares of
beneficial interest which entitle their holders to receive dividends when, as
and if declared by the Board of Trustees of such Fund out of funds legally
available therefor, at a rate per annum that may vary for successive dividend
periods. The APS of each Fund have a liquidation preference of $25,000 per
share. The net asset value per share of each Fund's Preferred Shares equals its
liquidation preference plus accumulated but unpaid dividends per share. Neither
Target Fund APS nor Acquiring Fund APS are traded on a stock exchange or
over-the-counter. Holders of each Fund's APS do not have preemptive rights to
purchase any shares of APS, or any other preferred shares that might be issued.
SERIES. Under the 1940 Act, each Fund is permitted to have outstanding more
than one series of preferred shares so long as no single series has priority
over another to the distribution of assets of the Fund or the payment of
dividends. Both
37
Funds currently have one series of APS outstanding. If the Reorganization is
approved and completed, the combined fund will have two series of APS. The
existing series of Acquiring Fund APS will comprise Series A. The Acquiring Fund
will issue Series B APS in exchange for Target Fund APS. The aggregate
liquidation preference of each series will equal the aggregate liquidation
preference of the existing shares that the respective series replaces. The
number of days in the regular dividend period for each series, the number of
shares in each series and the liquidation preference per share will be similar
to the existing preferred shares.
PURCHASE AND SALE. APS of the Acquiring Fund and APS of the Target Fund are
purchased or sold using similar procedures. The APS of the Funds generally are
purchased and sold through auctions conducted on a regular basis by Deutsche
Bank, as the auction agent for each Fund's APS (the "Auction Agent") unless the
applicable Fund elects to declare a special dividend period. Unless otherwise
permitted by the Funds, existing and potential holders of each Fund's APS only
may participate in auctions through their broker-dealers. Broker-dealers submit
the orders of their respective customers who are existing and potential holders
of APS to the Auction Agent. On or prior to each auction date for the APS (the
business day next preceding the first day of each dividend period), each holder
may submit orders to buy, sell or hold APS to its broker-dealer. Outside of
these auctions, shares of APS may be purchased or sold through broker-dealers
for the APS in a secondary trading market maintained by the broker-dealers.
However, there can be no assurance that a secondary market will develop or if it
does develop, that it will provide holders with a liquid trading market for the
APS of either Fund.
Auctions are generally held every seven days for Target Fund APS and every 28
days for Acquiring Fund APS. As a result of the Reorganization, the last
dividend period for the Target Fund APS prior to the Closing Date and the
initial dividend period for the Acquiring Fund APS issued in connection with the
Reorganization after the Closing Date may be shorter than the ordinary dividend
period for such shares.
DIVIDENDS AND DISTRIBUTIONS. The holders of the APS are entitled to receive,
when, as and if declared by the Board of Trustees of the Fund, out of funds
legally available therefore, cumulative cash dividends on their shares.
Dividends on a Fund's APS so declared and payable shall be paid in preference to
and in priority over any dividends so declared and payable on the Fund's Common
Shares.
The Acquiring Fund generally pays dividends on Acquiring Fund APS monthly at
the rate specified in the preceding auction. The Target Fund generally pays
dividends on Target Fund APS once every 28 days at the rate specified in the
preceding auction.
Each Fund is required to allocate net capital gains and other taxable income,
if any, proportionately between its Common Shares and APS. The amount of taxable
38
income allocated to the APS depends upon the amount of such income realized by
each Fund, but is generally not expected to be significant.
In normal circumstances, whenever a Fund intends to include any net capital
gains or other taxable income in any dividend on APS, such Fund will notify the
Auction Agent of the amount to be so included prior to the Auction establishing
the applicable rate for such dividend. The Auction Agent will in turn notify
each broker-dealer who will notify existing and potential holders of each Fund's
APS. As a result, auction participants may, in response to such information,
place bids which take account of the inclusion of net capital gains or other
taxable income in the dividend. If a Fund retroactively allocates any net
capital gains or other taxable income to the APS without having given notice to
the Auction Agent such Fund will pay an additional dividend to offset
substantially the tax effect thereof.
While the Funds normally utilize the auction procedures described above, each
Fund may utilize special dividend periods in certain circumstances to set the
dividend rate.
DIVIDEND RATES. The following table provides information about the dividend
rates for each Fund's APS as of a recent auction date.
AUCTION
DIVIDEND DATE FUND RATE
------------- ---- ----
[ ], 2005 Target Fund APS [ ]%
[ ], 2005 Acquiring Fund APS [ ]%
The dividend rates in effect at the closing of the Reorganization will be the
rates determined in the auction most recently preceding such closing.
RATINGS. The Target Fund APS and Acquiring Fund APS have each been assigned a
rating of "AAA" from S&P and "Aaa" from Moody's. Each Fund intends that, so long
as its APS are outstanding, the composition of its portfolio will reflect
guidelines established by S&P and Moody's in connection with each Fund's receipt
of a rating for such shares of at least "AAA" from S&P and "Aaa" from Moody's.
S&P and Moody's, which are nationally recognized statistical rating
organizations, issue ratings for various securities reflecting the perceived
creditworthiness of such securities. The guidelines for rating such preferred
shares have been developed by S&P and Moody's in connection with issuances of
asset-backed and similar securities, including debt obligations and variable
rate preferred stock, generally on a case-by-case basis through discussions with
the issuers of these securities. The guidelines are designed to ensure that
assets underlying outstanding debt or preferred stock will be varied
sufficiently and will be of sufficient quality and amount to justify investment
grade ratings. The guidelines do not have the force of law but have been adopted
by each Fund in order to satisfy current requirements necessary for S&P and
Moody's to issue the above-described ratings for APS,
39
which ratings generally are relied upon by institutional investors in purchasing
such securities. The guidelines provide a set of tests for portfolio composition
and asset coverage that supplement (and in some cases are more restrictive than)
the applicable requirements under the 1940 Act.
Each Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by S&P or Moody's. Failure to adopt
any such modifications, however, may result in a change in the ratings described
above or a withdrawal of the ratings altogether. In addition, any rating agency
providing a rating for a Fund's APS, at any time, may change or withdraw any
such rating. As set forth in the Certificate of Vote of Trustees Establishing
APS of each Fund (each a "Certificate of Vote"), the Board of Trustees of each
Fund, without shareholder approval, may modify certain definitions or
restrictions that have been adopted by the Fund pursuant to the rating agency
guidelines, provided the Board of Trustees has obtained written confirmation
from S&P and Moody's that any such change would not impair the ratings then
assigned by S&P and Moody's to the APS. For so long as any shares of a Fund's
APS are rated by S&P or Moody's, as the case may be, a Fund's use of options and
financial futures contracts and options thereon will be subject to certain
limitations mandated by the rating agencies.
REDEMPTIONS. The redemption provisions pertaining to the APS of each Fund are
similar. APS of each Fund are generally redeemable at the option of the Fund at
$25,000 per share plus accumulated but unpaid dividends (whether or not earned
or declared) to the date of redemption plus, in certain circumstances, a
redemption premium. APS of each Fund are also subject to mandatory redemption at
a price equal to their liquidation preference plus accumulated but unpaid
dividends (whether or not earned or declared) to the date of redemption upon the
occurrence of certain specified events, such as the failure of the Fund to
maintain asset coverage requirements for the APS specified by Moody's and S&P in
connection with their issuance of ratings on the APS. The liquidation preference
per share of each Fund's APS is $25,000.
LIQUIDATION RIGHTS. Upon any liquidation, dissolution or winding up of a Fund,
whether voluntary or involuntary, the holders of such Fund's APS will be
entitled to receive, out of the assets of the Fund in question available for
distribution to shareholders, before any distribution or payment is made upon
any of such Fund's Common Shares or any other capital shares of the Fund ranking
junior in right of payment upon liquidation to APS of $25,000 per share together
with the amount of any dividends accumulated but unpaid (whether or not earned
or declared) thereon to the date of distribution, and after such payment the
holders of APS will be entitled to no other payments except for any additional
dividends (as described above). If such assets of the Fund are insufficient to
make the full liquidation payment on the APS and liquidation payments on any
other outstanding class or series of preferred shares of the Fund ranking on a
parity with the APS as to
40
payment upon liquidation, then such assets will be distributed among the holders
of APS and the holders of shares of such other class or series ratably in
proportion to the respective preferential amounts to which they are entitled.
After payment of the full amount of liquidation distribution to which they are
entitled, the holders of a Fund's APS will not be entitled to any further
participation in any distribution of assets by such Fund except for any
additional dividends (which are more fully described below). A consolidation,
merger or share exchange of a Fund with or into any other entity or entities or
a sale, whether for cash, shares of stock, securities or properties, of all or
substantially all or any part of the assets of a Fund shall not be deemed or
construed to be a liquidation, dissolution or winding up of such Fund for this
purpose.
ADDITIONAL INFORMATION. For additional information regarding APS of the
Acquiring Fund, Target Fund shareholders should consult the Certificate of Vote
of the Acquiring Fund attached as Appendix B to the Reorganization Statement of
Additional Information. Acquiring Fund APS issued in connection with the
Reorganization will be governed by the Certificate of Vote of the Acquiring
Fund, which, upon completion of the Reorganization, will be amended to reflect
the creation of new series and the issuance of additional Acquiring Fund APS.
GOVERNING LAW
Each Fund is organized as a business trust under the laws of The Commonwealth
of Massachusetts. The Target Fund was organized on July 8, 1992 and commenced
operations on September 18, 1992; the Acquiring Fund was organized on February
21, 1992 and commenced operations on April 16, 1992.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust of each Fund contains an express disclaimer of
shareholder liability in connection with Fund property or for acts, obligations
or affairs of the Fund and provides for indemnification and reimbursement of
expenses out of the Fund's property for any shareholder held personally liable
for the obligations of that Fund. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Fund itself would be unable to meet its obligations. Given the
nature of each Fund's assets and operations, the possibility of a Fund being
unable to meet its obligations is remote and, in the opinion of counsel to the
Funds, the risk to the Funds' respective shareholders is remote.
Each Fund is also subject to federal securities laws, including the 1940 Act
and the rules and regulations promulgated by the SEC thereunder, and applicable
state securities laws. Each Fund is registered as a non-diversified, closed-end
management investment company under the 1940 Act.
41
CERTAIN PROVISIONS OF THE DECLARATIONS OF TRUST
Each Fund's Declaration of Trust includes provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Trustees, and could
have the effect of depriving common shareholders of an opportunity to sell their
Common Shares at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of such Fund. The Board of Trustees of each
Fund is divided into three classes, with the term of one class expiring at the
annual meeting of shareholders. At each annual meeting, each class whose term is
expiring will be elected to a three-year term. This provision could delay for up
to two years the replacement of a majority of the Board of Trustees. A trustee
may be removed from office only for cause by a written instrument signed by at
least two-thirds of the remaining trustees or by a vote of the holders of at
least two-thirds of the class of shares of the Fund that elected such trustee
and entitled to vote on the matter.
In addition, each Fund's Declaration of Trust requires the favorable vote of
the holders of at least 75% of the outstanding shares of each class of the Fund
in question voting as a class, then entitled to vote to approve, adopt or
authorize certain transactions with 5%-or-greater holders of a class of shares
and their associates, unless the Board of Trustees shall by resolution have
approved a memorandum of understanding with such holders, in which case normal
voting requirements would be in effect. For purposes of these provisions, a
5%-or-greater holder of a class of shares (a "Principal Shareholder") refers to
any person who, whether directly or indirectly and whether alone or together
with its affiliates and associates, beneficially owns 5% or more of the
outstanding shares of any class of beneficial interest of such Fund. The
transactions subject to these special approval requirements are: (i) the merger
or consolidation of a Fund or any subsidiary of a Fund with or into any
Principal Shareholder; (ii) the issuance of any securities of a Fund to any
Principal Shareholder for cash (except pursuant to the Dividend Reinvestment
Plan); (iii) the sale, lease or exchange of all or any substantial part of the
assets of a Fund to any Principal Shareholder (except assets having an aggregate
fair market value of less than $1,000,000, aggregating for the purpose of such
computation all assets sold, leased or exchanged in any series of similar
transactions within a twelve-month period); or (iv) the sale, lease or exchange
to a Fund or any subsidiary thereof, in exchange for securities of a Fund, of
any assets of any Principal Shareholder (except assets having an aggregate fair
market value of less than $1,000,000, aggregating for purposes of such
computation all assets sold, leased or exchanged in any series of similar
transactions within a twelve-month period).
The Board of Trustees of each Fund has determined that the 75% voting
requirements described above, which are greater than the minimum requirements
under Massachusetts law or the 1940 Act, are in the best interest of
shareholders of
42
each respective Fund generally. Reference should be made to the Declaration of
Trust of each Fund on file with the SEC for the full text of these provisions.
The Declaration of Trust of each Fund further provides that no trustee,
officer, employee or agent of a Fund is liable to such Fund or to any
shareholder, nor is any trustee, officer, employee or agent liable to any third
persons in connection with the affairs of such Fund, except as such liability
may arise from his or her own bad faith, willful misfeasance, gross negligence,
or reckless disregard of their duties. It also provides that all third persons
shall look solely to Fund property for satisfaction of claims arising in
connection with the affairs of a Fund. With the exceptions stated, the
Declaration of Trust provides that a trustee or officer is entitled to be
indemnified against all liability in connection with the affairs of a Fund.
CONVERSION TO OPEN-END FUND
Each Fund may be converted to an open-end investment company at any time by an
amendment to its Declaration of Trust. Each Fund's Declaration of Trust provides
that such an amendment would require the approval of (a) a majority of the
trustees, including the approval by a majority of the disinterested trustees of
such Fund, and (b) the lesser of (i) more than 50% of such Fund's outstanding
common and preferred shares, each voting as a class or (ii) 67% of the common
and preferred shares, each voting as a class, present at a meeting at which
holders of more than 50% of the outstanding shares of each such class are
present in person or by proxy. If approved in the foregoing manner, conversion
of a Fund could not occur until 90 days after the shareholders' meeting at which
such conversion was approved and would also require at least 30 days prior
notice to all shareholders. Conversion of a Fund to an open-end investment
company would require the redemption of all outstanding Preferred Shares, which
would eliminate the leveraged capital structure of such Fund. In the event of
conversion, the Common Shares would cease to be listed on the NYSE, AMEX, CHX,
NASDAQ National Market System or other national securities exchange or national
market system. Shareholders of an open-end investment company may require the
company to redeem their shares at any time (except in certain circumstances as
authorized by or under the 1940 Act) at their net asset value, less such
redemption charge, if any, as might be in effect at the time of a redemption. If
a Fund were converted to an open-end fund, it is likely that new Common Shares
would be sold at net asset value plus a sales load. Following any such
conversion, it is also possible that certain of the Fund's investment policies
and strategies would have to be modified to assure sufficient portfolio
liquidity. In particular the Fund would be required to maintain its portfolio
such that not more than 15% of its assets would be invested in illiquid
securities. Such requirement could cause the Fund to dispose of portfolio
securities or other assets at a time when it is not advantageous to do so, and
could adversely affect the ability of the Fund to meet its investment objective.
43
VOTING RIGHTS
Voting rights are identical for the holders of each Fund's Common Shares.
Holders of each Fund's Common Shares are entitled to one vote for each share
held. Except as set forth herein, or except as expressly required by applicable
law or expressly set forth in the designation of rights and preferences with
respect to a Fund's Preferred Shares, holders of Preferred Shares have no voting
rights. When holders of a Fund's Preferred Shares are entitled to vote, they are
also entitled to cast one vote per share held.
Preferred shareholders of a Fund, voting as a class, are entitled to elect two
of the Fund's trustees. Under the 1940 Act, if at any time dividends on a Fund's
preferred shares are unpaid in an amount equal to two full years dividends
thereon, the holders of all outstanding preferred shares, voting as a class, are
entitled to elect a majority of the Fund's trustees until all dividends have
been paid or declared and set apart for payment.
The Certificate of Vote establishing the Preferred Shares of each Fund
provides that such Fund shall not take certain actions relating to the
preferences, rights or powers of holders of such Fund's Preferred Shares without
the affirmative vote of the holders of a majority of the outstanding Preferred
Shares. Additionally, if a Fund has more than one series of Preferred Shares
outstanding, an affirmative vote of a majority of the outstanding shares of each
series of Preferred Shares, each voting separately as a class, is required with
respect to any matter that materially affects the series in a manner different
from that of other series of such Fund's Preferred Shares. The specific
provisions of each Fund's Certificate of Vote with respect to the voting rights
of holders of Preferred Shares may differ and Target Fund shareholders should
consult the Certificate of Vote governing the Acquiring Fund APS, included as
Appendix B to the Reorganization Statement of Additional Information.
44
FINANCIAL HIGHLIGHTS
TARGET FUND. The following schedule presents financial highlights for one
Target Fund Common Share outstanding throughout the periods indicated.
YEAR ENDED OCTOBER 31,
--------------------------------------------------
2004 2003 2002(A) 2001 2000
---- ---- ------- ---- ----
NET ASSET VALUE, BEGINNING OF THE
PERIOD............................ $ 16.72 $ 16.77 $ 16.80 $ 15.52 $ 14.87
------- ------- ------- ------- --------
Net Investment Income............. 1.13 1.17 1.21 1.23 1.24
Net Realized and Unrealized
Gain/Loss....................... .26 (.01) (.05) 1.18 .68
Common Share Equivalent of
Distributions Paid to Preferred
Shareholders:
Net Investment Income........... (.11) (.10) (.14) (.34) (.40)
Net Realized Gain............... (.01) -0- -0- -0- -0-
------- ------- ------- ------- --------
Total from Investment Operations... 1.27 1.06 1.02 2.07 1.52
Distributions Paid to Common
Shareholders:
Net Investment Income........... (1.05) (1.11) (1.05) (.79) (.87)
Net Realized Gain............... (.07) -0- -0- -0- -0-
------- ------- ------- ------- --------
NET ASSET VALUE, END OF THE
PERIOD............................ $ 16.87 $ 16.72 $ 16.77 $ 16.80 $ 15.52
======= ======= ======= ======= ========
Common Share Market Price at End of
the Period........................ $ 15.20 $ 16.20 $ 15.46 $ 14.35 $12.9375
Total Return(b).................... 0.81% 12.30% 15.28% 17.27% 6.86%
Net Assets Applicable to Common
Shares at End of the Period (In
millions)......................... $ 322.3 $ 319.5 $ 320.4 $ 320.9 $ 296.5
Ratio of Expenses to Average Net
Assets Applicable to Common
Shares(c)......................... 1.31% 1.32% 1.46% 1.61% 1.75%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(c).................. 6.75% 6.99% 7.26% 7.56% 8.34%
Portfolio Turnover................. 28% 27% 40% 32% 26%
SUPPLEMENTAL RATIOS:
Ratio of Expenses to Average Net
Assets Including Preferred
Shares(c)......................... .82% .83% .91% 1.00% 1.05%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(d).................. 6.11% 6.37% 6.40% 5.44% 5.61%
SENIOR SECURITIES:
Total Preferred Shares
Outstanding....................... 7,600 7,600 7,600 7,600 7,600
Asset Coverage Per Preferred
Share(e).......................... $67,420 $67,049 $67,170 $67,225 $ 64,014
Involuntary Liquidating Preference
Per Preferred Share............... $25,000 $25,000 $25,000 $25,000 $ 25,000
Average Market Value Per Preferred
Share............................. $25,000 $25,000 $25,000 $25,000 $ 25,000
YEAR ENDED OCTOBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
NET ASSET VALUE, BEGINNING OF THE
PERIOD............................ $ 16.93 $ 16.35 $ 15.68 $ 15.61 $ 13.99
-------- -------- -------- -------- --------
Net Investment Income............. 1.22 1.25 1.26 1.29 1.33
Net Realized and Unrealized
Gain/Loss....................... (2.06) .59 .72 .16 1.70
Common Share Equivalent of
Distributions Paid to Preferred
Shareholders:
Net Investment Income........... (.32) (.35) (.35) (.36) (.39)
Net Realized Gain............... -0- -0- -0- -0- -0-
-------- -------- -------- -------- --------
Total from Investment Operations... (1.16) 1.49 1.63 1.09 2.64
Distributions Paid to Common
Shareholders:
Net Investment Income........... (.90) (.91) (.96) (1.02) (1.02)
Net Realized Gain............... -0- -0- -0- -0- -0-
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF THE
PERIOD............................ $ 14.87 $ 16.93 $ 16.35 $ 15.68 $ 15.61
======== ======== ======== ======== ========
Common Share Market Price at End of
the Period........................ $12.9375 $15.8125 $15.0625 $ 14.75 $ 14.375
Total Return(b).................... -13.16% 11.33% 8.96% 9.88% 21.06%
Net Assets Applicable to Common
Shares at End of the Period (In
millions)......................... $ 284.1 $ 323.4 $ 312.5 $ 299.7 $ 298.3
Ratio of Expenses to Average Net
Assets Applicable to Common
Shares(c)......................... 1.66% 1.64% 1.66% 1.72% 1.72%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(c).................. 7.55% 7.48% 7.99% 8.31% 8.94%
Portfolio Turnover................. 33% 30% 49% 37% 79%
SUPPLEMENTAL RATIOS:
Ratio of Expenses to Average Net
Assets Including Preferred
Shares(c)......................... 1.03% 1.03% 1.02% 1.05% 1.03%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(d).................. 5.56% 5.35% 5.76% 5.99% 6.31%
SENIOR SECURITIES:
Total Preferred Shares
Outstanding....................... 7,600 3,800 3,800 3,800 3,800
Asset Coverage Per Preferred
Share(e).......................... $ 62,388 $135,105 $132,234 $128,865 $128,498
Involuntary Liquidating Preference
Per Preferred Share............... $ 25,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
Average Market Value Per Preferred
Share............................. $ 25,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
---------------
(a) As required, effective November 1, 2001, the Trust has adopted the
provisions of the AICPA Audit and Accounting Guide for Investment Companies
and began accreting market discount on fixed income securities. The effect
of this change for the year ended October 31, 2002 was to increase net
investment income per share by $.02, decrease net realized and unrealized
gains and losses by $.02 and increase the ratio of net investment income to
average net assets applicable to common shares by .11%. Per share, ratios,
and supplemental data for periods prior to October 31, 2002 have not been
restated to reflect this change in presentation.
(b) Total return assumes an investment at the common share market price at the
beginning of the period indicated, reinvestment of all distributions for the
period in accordance with the Trust's dividend reinvestment plan, and sale
of all shares at the closing common share market price at the end of the
period indicated.
(c) Ratios do not reflect the effect of dividend payments to preferred
shareholders.
(d) Ratios reflect the effect of dividend payments to preferred shareholders.
(e) Calculated by subtracting the Trust's total liabilities (not including the
preferred shares) from the Trust's total assets and dividing this by the
number of preferred shares outstanding.
45
ACQUIRING FUND. The following schedule presents financial highlights for one
Acquiring Fund Common Share outstanding throughout the periods indicated.
YEAR ENDED OCTOBER 31,
--------------------------------------------------
2004 2003 2002(A) 2001 2000
---- ---- ------- ---- ----
NET ASSET VALUE, BEGINNING OF THE
PERIOD............................ $ 17.02 $ 17.48 $ 17.59 $ 16.29 $ 15.67
------- ------- ------- ------- --------
Net Investment Income............. 1.13 1.19 1.23 1.26 1.27
Net Realized and Unrealized
Gain/Loss....................... .23 .09 .15 1.29 .65
Common Share Equivalent of
Distributions Paid to
Preferred Shareholders:
Net Investment Income........... (.10) (.08) (.09) (.32) (.40)
Net Realized Gain............... (.02) (.04) (.08) (.01) -0-
------- ------- ------- ------- --------
Total from Investment Operations... 1.24 1.16 1.21 2.22 1.52
Distributions Paid to Common
Shareholders:
Net Investment Income........... (1.08) (1.16) (1.08) (.92) (.90)
Net Realized Gain............... (.29) (.46) (.24) -0- -0-
------- ------- ------- ------- --------
NET ASSET VALUE, END OF THE
PERIOD............................ $ 16.89 $ 17.02 $ 17.48 $ 17.59 $ 16.29
======= ======= ======= ======= ========
Common Share Market Price at End of
the Period........................ $ 15.20 $ 16.65 $ 16.04 $ 15.65 $13.6875
Total Return(b).................... -0.60% 14.53% 11.36% 21.42% 8.28%
Net Assets Applicable to Common
Shares at End of the Period (In
millions)......................... $ 259.4 $ 261.3 $ 268.3 $ 270.0 $ 250.1
Ratio of Expenses to Average Net
Assets Applicable to Common
Shares(c)......................... 1.30% 1.28% 1.42% 1.58% 1.68%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(c).................. 6.74% 6.90% 7.17% 7.40% 8.04%
Portfolio Turnover................. 28% 36% 43% 34% 29%
SUPPLEMENTAL RATIOS:
Ratio of Expenses to Average Net
Assets Including Preferred
Shares(c)......................... .82% .81% .91% 1.00% 1.03%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(d).................. 6.15% 6.43% 6.61% 5.54% 5.49%
SENIOR SECURITIES:
Total Preferred Shares
Outstanding....................... 6,000 6,000 6,000 6,000 6,000
Asset Coverage Per Preferred
Share(e).......................... $68,253 $68,560 $69,736 $70,006 $ 66,683
Involuntary Liquidating Preference
Per Preferred Share............... $25,000 $25,000 $25,000 $25,000 $ 25,000
Average Market Value Per Preferred
Share............................. $25,000 $25,000 $25,000 $25,000 $ 25,000
YEAR ENDED OCTOBER 31,
---------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
NET ASSET VALUE, BEGINNING OF THE
PERIOD............................ $ 17.61 $ 16.96 $ 16.12 $ 15.85 $ 14.39
------- -------- -------- -------- --------
Net Investment Income............. 1.25 1.26 1.26 1.27 1.28
Net Realized and Unrealized
Gain/Loss....................... (1.97) .64 .83 .27 1.58
Common Share Equivalent of
Distributions Paid to
Preferred Shareholders:
Net Investment Income........... (.32) (.35) (.35) (.36) (.39)
Net Realized Gain............... -0- -0- -0- -0- -0-
------- -------- -------- -------- --------
Total from Investment Operations... (1.04) 1.55 1.74 1.18 2.47
Distributions Paid to Common
Shareholders:
Net Investment Income........... (.90) (.90) (.90) (.91) (1.01)
Net Realized Gain............... -0- -0- -0- -0- -0-
------- -------- -------- -------- --------
NET ASSET VALUE, END OF THE
PERIOD............................ $ 15.67 $ 17.61 $ 16.96 $ 16.12 $ 15.85
======= ======== ======== ======== ========
Common Share Market Price at End of
the Period........................ $ 13.50 $ 16.50 $15.0625 $ 13.75 $ 13.625
Total Return(b).................... -13.29% 15.91% 16.54% 7.72% 12.70%
Net Assets Applicable to Common
Shares at End of the Period (In
millions)......................... $ 240.5 $ 270.3 $ 260.3 $ 247.5 $ 243.3
Ratio of Expenses to Average Net
Assets Applicable to Common
Shares(c)......................... 1.62% 1.61% 1.64% 1.66% 1.75%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(c).................. 7.35% 7.25% 7.64% 7.96% 8.45%
Portfolio Turnover................. 30% 29% 49% 85% 70%
SUPPLEMENTAL RATIOS:
Ratio of Expenses to Average Net
Assets Including Preferred
Shares(c)......................... 1.03% 1.03% 1.03% 1.03% 1.06%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(d).................. 5.48% 5.24% 5.51% 5.73% 5.87%
SENIOR SECURITIES:
Total Preferred Shares
Outstanding....................... 6,000 3,000 3,000 3,000 3,000
Asset Coverage Per Preferred
Share(e).......................... $65,086 $140,098 $136,771 $132,502 $131,094
Involuntary Liquidating Preference
Per Preferred Share............... $25,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
Average Market Value Per Preferred
Share............................. $25,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
---------------
(a) As required, effective November 1, 2001, the Trust has adopted the
provisions of the AICPA Audit and Accounting Guide for Investment Companies
and began accreting market discount on fixed income securities. The effect
of this change for the year ended October 31, 2002 was to increase net
investment income by $.01, decrease net realized and unrealized gains and
losses per share by $.01 and increase the ratio of net investment income to
average net assets applicable to common shares by .03%. Per share, ratios
and supplemental data for periods prior to October 31, 2002 have not been
restated to reflect this change in presentation.
(b) Total return assumes an investment at the common share market price at the
beginning of the period indicated, reinvestment of all distributions for the
period in accordance with the Trust's dividend reinvestment plan, and sale
of all shares at the closing common share market price at the end of the
period indicated.
(c) Ratios do not reflect the effect of dividend payments to preferred
shareholders.
(d) Ratios reflect the effect of dividend payments to preferred shareholders.
(e) Calculated by subtracting the Trust's total liabilities (not including the
preferred shares) from the Trust's total assets and dividing this by the
number of preferred shares outstanding.
46
INFORMATION ABOUT THE REORGANIZATION
GENERAL
Under the Reorganization Agreement (a form of which is attached as Appendix A
to the Reorganization Statement of Additional Information), the Acquiring Fund
will acquire substantially all of the assets, and will assume substantially all
of the liabilities, of the Target Fund, in exchange for Acquiring Fund Common
Shares and Acquiring Fund APS to be issued by the Acquiring Fund. The Acquiring
Fund will issue and cause to be listed on the NYSE and the CHX additional
Acquiring Fund Common Shares. The Acquiring Fund Common Shares issued to the
Target Fund will have an aggregate net asset value equal to the aggregate net
asset value of the Target Fund Common Shares less the costs of the
Reorganization (though cash may be paid in lieu of any fractional shares). The
Acquiring Fund APS issued to the Target Fund will have an aggregate liquidation
preference equal to the aggregate liquidation preference of the Target Fund APS.
Upon receipt by the Target Fund of such shares, the Target Fund will (i)
distribute the Acquiring Fund Common Shares to the holders of Target Fund Common
Shares and (ii) distribute the Acquiring Fund APS to the holders of Target Fund
APS. As soon as practicable after the Closing Date for the Reorganization, the
Target Fund will deregister as an investment company under the 1940 Act and
dissolve under applicable state law.
The Target Fund will distribute the Acquiring Fund Common Shares and the
Acquiring Fund APS received by it pro rata to its holders of record of Target
Fund Common Shares and Target Fund APS, as applicable, in exchange for such
shareholders' shares in the Target Fund. Such distribution will be accomplished
by opening new accounts on the books of the Acquiring Fund in the names of the
common and preferred shareholders of the Target Fund and transferring to those
shareholder accounts the Acquiring Fund Common Shares and the Acquiring Fund APS
previously credited on those books to the accounts of the Target Fund. Each
newly-opened account on the books of the Acquiring Fund for the former common
shareholders of the Target Fund will represent the respective pro rata number of
Acquiring Fund Common Shares (rounded down, in the case of fractional shares
held in an account other than a Dividend Reinvestment Plan account, to the next
largest number of whole shares) due such shareholder. No fractional Acquiring
Fund Common Shares will be issued (except for shares held in a Dividend
Reinvestment Plan account). In the event of fractional shares held in an account
other than a Dividend Reinvestment Plan account, the Acquiring Fund's transfer
agent will aggregate all fractional Acquiring Fund Common Shares and sell the
resulting whole shares on the NYSE for the account of all holders of fractional
interests, and each such holder will be entitled to the pro rata share of the
proceeds from such sale upon surrender of the Target Fund Common Share
certificates. Similarly, each newly-opened account on the books of the Acquiring
Fund for the
47
former preferred shareholders of Target Fund APS would represent the respective
pro rata number of Acquiring Fund APS due such shareholder. See "Terms of the
Reorganization Agreement--Surrender and Exchange of Share Certificates" below
for a description of the procedures to be followed by Target Fund shareholders
to obtain their Acquiring Fund Common Shares or Acquiring Fund APS (and cash in
lieu of fractional shares, if any).
As a result of the Reorganization, every holder of Target Fund Common Shares
would own Acquiring Fund Common Shares that (except for cash payments received
in lieu of fractional shares) will have an aggregate net asset value immediately
after the Closing Date equal to the aggregate net asset value of that
shareholder's Target Fund Common Shares immediately prior to the Closing Date
less the costs of the Reorganization. Since the Acquiring Fund Common Shares
will be issued at net asset value in exchange for the net assets of the Target
Fund having a value equal to the aggregate net asset value of those Acquiring
Fund Common Shares, the net asset value per share of Acquiring Fund Common
Shares should remain virtually unchanged by the Reorganization except for its
share of the reorganization costs. Similarly, the aggregate liquidation
preference of the Acquiring Fund APS to be issued to the Target Fund will equal
the aggregate liquidation preference of the Target Fund APS. Each holder of
Target Fund APS would receive Acquiring Fund APS that would have an aggregate
liquidation preference immediately after the Closing Date equal to the aggregate
liquidation preference of that shareholder's Target Fund APS immediately prior
to the Closing Date. The liquidation preference per share of the Acquiring Fund
APS will remain unchanged by the Reorganization. Thus, the Reorganization will
result in no dilution of net asset value of the Target Fund Common Shares or
Acquiring Fund Common Shares, other than to reflect the costs of the
Reorganization, and will result in no dilution of the value per share of
Acquiring Fund APS or Target Fund APS. However, as a result of the
Reorganization, a shareholder of either Fund will hold a reduced percentage of
ownership in the larger combined entity than he or she did in either of the
separate Funds.
No sales charge or fee of any kind will be charged to shareholders of the
Target Fund in connection with their receipt of Acquiring Fund Common Shares or
Acquiring Fund APS in the Reorganization. Holders of Target Fund APS will find
that the auction dates and dividend payment dates for the Acquiring Fund APS
received in the Reorganization are ordinarily (i.e., except in the case of a
special dividend period) on a seven day schedule, similar to the schedule of
dividend payment dates for Target Fund APS. The auction procedures for the
Acquiring Fund APS and the Target Fund APS are similar. As a result of the
Reorganization, the last dividend period for the Target Fund APS prior to the
Closing Date and the initial dividend period for the Acquiring Fund APS issued
in connection with the Reorganization after the Closing Date may be shorter than
the ordinary dividend period for such shares.
48
TERMS OF THE REORGANIZATION AGREEMENT
The following is a summary of the significant terms of the Reorganization
Agreement. This summary is qualified in its entirety by reference to the form of
Reorganization Agreement, attached as Appendix A to the Reorganization Statement
of Additional Information.
VALUATION OF ASSETS AND LIABILITIES. The respective assets of each of the
Funds will be valued after the close of business on the NYSE (generally, 4:00
p.m., Eastern time) on the Closing Date. For the purpose of determining the net
asset value of a Common Share of each Fund, the value of the securities held by
the Fund plus any cash or other assets (including interest accrued but not yet
received) minus all liabilities (including accrued expenses) and the aggregate
liquidation value of the outstanding Preferred Shares of the Fund is divided by
the total number of Common Shares of the Fund outstanding at such time. Daily
expenses, including the fees payable to the Adviser, will accrue on the Closing
Date.
AMENDMENTS AND CONDITIONS. The Reorganization Agreement may be amended at any
time prior to the Closing Date with respect to any of the terms therein. The
obligations of each Fund pursuant to the Reorganization Agreement are subject to
various conditions, including a registration statement on Form N-14 being
declared effective by the SEC, approval by the shareholders of the Target Fund,
approval of the issuance of additional Acquiring Fund Common Shares by common
shareholders of the Acquiring Fund, receipt of an opinion of counsel as to tax
matters, receipt of an opinion of counsel as to corporate and securities matters
and the continuing accuracy of various representations and warranties of the
Funds being confirmed by the respective parties.
POSTPONEMENT; TERMINATION. Under the Reorganization Agreement, the Board of
Trustees of either Fund may cause the Reorganization to be postponed or
abandoned in certain circumstances should such Board determine that it is in the
best interests of the shareholders of its respective Fund to do so.
The Reorganization Agreement may be terminated, and the Reorganization
abandoned at any time (whether before or after adoption thereof by the
shareholders of either of the Funds) prior to the Closing Date, or the Closing
Date may be postponed: (i) by mutual consent of the Boards of Trustees of the
Funds and (ii) by the Board of Trustees of either Fund if any condition to that
Fund's obligations set forth in the Reorganization Agreement has not been
fulfilled or waived by such Board.
SURRENDER AND EXCHANGE OF SHARE CERTIFICATES. After the Closing Date, each
holder of an outstanding certificate or certificates formerly representing
Target Fund Common Shares will be entitled to receive, upon surrender of his or
her certificate or certificates, a certificate or certificates representing the
number of Acquiring Fund Common Shares distributable with respect to such
holder's Target
49
Fund Common Shares, together with cash in lieu of any fractional Acquiring Fund
Common Shares held in an account other than a Dividend Reinvestment Plan
account. Promptly after the Closing Date, the transfer agent for the Acquiring
Fund Common Shares will mail to each holder of certificates formerly
representing Target Fund Common Shares a letter of transmittal for use in
surrendering his or her certificates for certificates representing Acquiring
Fund Common Shares and cash in lieu of any fractional shares held in an account
other than a Dividend Reinvestment Plan account.
Please do not send in any share certificates at this time. Upon consummation
of the Reorganization, holders of Target Fund Common Shares will be furnished
with instructions for exchanging their share certificates for Acquiring Fund
share certificates and, if applicable, cash in lieu of fractional shares.
From and after the Closing Date, certificates formerly representing Target
Fund Common Shares will be deemed for all purposes to evidence ownership of the
number of full Acquiring Fund Common Shares distributable with respect to the
Target Fund Common Shares held before the Reorganization as described above and
as shown in the table above, provided that, until such share certificates have
been so surrendered, no dividends payable to the holders of record of Target
Fund Common Shares as of any date subsequent to the Closing Date will be
reinvested pursuant to the Acquiring Fund's Dividend Reinvestment Plan, but will
instead be paid in cash. Once such Target Fund share certificates have been
surrendered, participants in the Target Fund's Dividend Reinvestment Plan will
automatically be enrolled in the Dividend Reinvestment Plan of the Acquiring
Fund.
From and after the Closing Date, there will be no transfers on the share
transfer books of the Target Fund. If, after the Closing Date, certificates
representing Target Fund Common Shares are presented to the Acquiring Fund, they
will be cancelled and exchanged for certificates representing Acquiring Fund
Common Shares, and cash in lieu of fractional shares, if applicable,
distributable with respect to such Target Fund Common Shares in the
Reorganization.
Preferred Shares are held in "street name" by the Depository Trust Company and
all transfers will be accomplished by book entry.
EXPENSES OF THE REORGANIZATION. In the event the Reorganization is approved
and completed, the expenses of the Reorganization will be shared by the Target
Fund and the Acquiring Fund in proportion to their respective projected annual
expense savings as a result of the Reorganization. In the event the
Reorganization is not completed, the Adviser will bear the costs associated with
the Reorganization.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
The following is a general summary of the material anticipated U.S. federal
income tax consequences of the Reorganization. The discussion is based upon the
50
Internal Revenue Code, Treasury regulations, court decisions, published
positions of the Internal Revenue Service ("IRS") and other applicable
authorities, all as in effect on the date hereof and all of which are subject to
change or differing interpretations (possibly with retroactive effect). The
discussion is limited to U.S. persons who hold shares of the Target Fund as
capital assets for U.S. federal income tax purposes (generally, assets held for
investment). This summary does not address all of the U.S. federal income tax
consequences that may be relevant to a particular shareholder or to shareholders
who may be subject to special treatment under U.S. federal income tax laws. No
ruling has been or will be obtained from the IRS regarding any matter relating
to the Reorganization. No assurance can be given that the IRS would not assert,
or that a court would not sustain, a position contrary to any of the tax aspects
described below. Prospective investors must consult their own tax advisers as to
the U.S. federal income tax consequences of the Reorganization, as well as the
effects of state, local and non-U.S. tax laws.
It is a condition to closing the Reorganization that each of the Target Fund
and the Acquiring Fund receives an opinion from Skadden, Arps, Slate, Meagher &
Flom LLP ("Skadden Arps"), dated as of the Closing Date, regarding the
characterization of the Reorganization as a "reorganization" within the meaning
of Section 368(a) of the Internal Revenue Code. As such a reorganization, the
U.S. federal income tax consequences of the Reorganization can be summarized as
follows:
- No gain or loss will be recognized by the Target Fund or the Acquiring
Fund upon the transfer to the Acquiring Fund of substantially all of the
assets of the Target Fund in exchange for Acquiring Fund Common Shares and
Acquiring Fund APS and the assumption by the Acquiring Fund of
substantially all of the liabilities of the Target Fund and the subsequent
liquidation of the Target Fund.
- No gain or loss will be recognized by a shareholder of the Target Fund who
exchanges, as the case may be, all of his, her or its Target Fund Common
Shares for Acquiring Fund Common Shares pursuant to the Reorganization
(except with respect to cash received in lieu of a fractional share of the
Acquiring Fund, as discussed below) or all of his, her or its Target Fund
APS for Acquiring Fund APS pursuant to the Reorganization.
- The aggregate tax basis of the Acquiring Fund Common Shares or Acquiring
Fund APS, as the case may be, received by a shareholder of the Target Fund
pursuant to the Reorganization will be the same as the aggregate tax basis
of the shares of the Target Fund surrendered in exchange therefor (reduced
by any amount of tax basis allocable to a fractional share for which cash
is received).
51
- The holding period of the Acquiring Fund Common Shares or Acquiring Fund
APS, as the case may be, received by a shareholder of the Target Fund
pursuant to the Reorganization will include the holding period of the
shares of the Target Fund surrendered in exchange therefor.
- A shareholder of the Target Fund that receives cash in lieu of a
fractional Acquiring Fund Common Share pursuant to the Reorganization will
recognize capital gain or loss with respect to the fractional share in an
amount equal to the difference between the amount of cash received for the
fractional share and the portion of such shareholder's tax basis in its
Target Fund Common Shares that is allocable to the fractional share. The
capital gain or loss will be long-term if the holding period for such
Target Fund Common Shares is more than one year as of the date of the
exchange.
- The Acquiring Fund's tax basis in the Target Fund's assets received by the
Acquiring Fund pursuant to the Reorganization will equal the tax basis of
such assets in the hands of the Target Fund immediately prior to the
Reorganization, and the Acquiring Fund's holding period of such assets
will include the period during which the assets were held by the Target
Fund.
The Acquiring Fund intends to continue to be taxed under the rules applicable
to regulated investment companies as defined in Section 851 of the Internal
Revenue Code, which are the same rules currently applicable to the Target Fund
and its shareholders.
The opinion of Skadden Arps will be based on U.S. federal income tax law in
effect on the Closing Date. In rendering its opinion, Skadden Arps will also
rely upon certain representations of the management of the Acquiring Fund and
the Target Fund and assume, among other things, that the Reorganization will be
consummated in accordance with the Reorganization Agreement and as described
herein. An opinion of counsel is not binding on the IRS or any court.
SHAREHOLDER APPROVAL
Under the Declaration of Trust of the Target Fund (as amended to date and
including the Certificate of Vote of the Target Fund), relevant Massachusetts
law and the rules of the NYSE and CHX, shareholder approval of the
Reorganization Agreement requires the affirmative vote of shareholders of the
Target Fund representing more than 50% of the outstanding Target Fund Common
Shares and Target Fund APS entitled to vote, each voting separately as a class.
52
------------------------------------------------------------------------------
PROPOSAL 2: ISSUANCE OF ADDITIONAL ACQUIRING FUND COMMON SHARES
------------------------------------------------------------------------------
Pursuant to the Reorganization Agreement, which is described more fully under
"Proposal 1: Reorganization of the Target Fund" herein, the Acquiring Fund will
acquire substantially all of the assets and assume substantially all of the
liabilities of the Target Fund in exchange for Acquiring Fund Common Shares and
Acquiring Fund APS. The Target Fund will distribute Acquiring Fund Common Shares
to holders of Target Fund Common Shares and Acquiring Fund APS to holders of
Target Fund APS, and will then terminate its registration under the 1940 Act and
dissolve under applicable state law. The Acquiring Fund Board, based upon its
evaluation of all relevant information, anticipates that the Reorganization will
benefit holders of Acquiring Fund Common Shares.
The aggregate net asset value of Acquiring Fund Common Shares received in the
Reorganization will equal the aggregate net asset value of the Target Fund
Common Shares held immediately prior to the Reorganization, less the costs of
the Reorganization (though holders of Target Fund Common Shares may receive cash
for their fractional shares). The aggregate liquidation preference of Acquiring
Fund APS received in the Reorganization will equal the aggregate liquidation
preference of Target Fund APS held immediately prior to the Reorganization. The
Reorganization will result in no dilution of net asset value of the Acquiring
Fund Common Shares, other than to reflect the costs of the Reorganization. No
gain or loss will be recognized by the Acquiring Fund or its shareholders in
connection with the Reorganization. The Acquiring Fund will continue to operate
as a registered closed-end investment company with the investment objective and
policies described in this Joint Proxy Statement/Prospectus.
In connection with the Reorganization and as contemplated by the
Reorganization Agreement, the Acquiring Fund will issue additional Acquiring
Fund Common Shares and list such shares on the NYSE and the CHX. While
applicable state and federal law does not require the shareholders of the
Acquiring Fund to approve the Reorganization, applicable NYSE and CHX rules
require the common shareholders of the Acquiring Fund to approve the issuance of
additional Acquiring Fund Common Shares to be issued in connection with the
Reorganization.
SHAREHOLDER APPROVAL
Shareholder approval of the issuance of additional Acquiring Fund Common
Shares requires the affirmative vote of a majority of the votes cast on the
proposal, provided that the total votes cast on the proposal represents more
than 50% in interest of all securities entitled to vote on the proposal. For
more information regarding voting requirements, see the section entitled "Other
Information--Voting Information and Requirements" below.
53
------------------------------------------------------------------------------
OTHER INFORMATION
------------------------------------------------------------------------------
VOTING INFORMATION AND REQUIREMENTS
GENERAL. A list of shareholders of each Fund entitled to be present and vote
at the Special Meeting will be available at the offices of the Funds, 1 Parkview
Plaza, Oakbrook Terrace, Illinois 60181-5555, for inspection by any shareholder
during regular business hours for ten days prior to the date of the Special
Meeting.
RECORD DATE. The Board of Trustees of each Fund has fixed the close of
business on July 29, 2005 as the record date (the "Record Date") for the
determination of shareholders entitled to notice of, and to vote at, the Special
Meeting or any adjournment thereof. Shareholders on the Record Date will be
entitled to one vote for each share held, with no shares having cumulative
voting rights. At the Record Date, the Target Fund had outstanding [ ] Target
Fund Common Shares and [ ] Target Fund APS and the Acquiring Fund had
outstanding [ ] Acquiring Fund Common Shares and [ ] Acquiring Fund APS.
PROXIES. Shareholders may vote by appearing in person at the Special Meeting,
by returning the enclosed proxy card or by casting their vote via telephone or
the internet using the instructions provided on the enclosed proxy card and more
fully described below. Shareholders of each Fund have the opportunity to submit
their voting instructions via the internet by utilizing a program provided by a
third-party vendor hired by the Funds, or by "touch-tone" telephone voting. The
giving of such a proxy will not affect your right to vote in person should you
decide to attend the Special Meeting. To use the internet, please access the
internet address found on your proxy card. To record your voting instructions by
automated telephone, please call the toll-free number listed on your proxy card.
The internet and automated telephone voting instructions are designed to
authenticate shareholder identities, to allow shareholders to give their voting
instructions, and to confirm that shareholders' instructions have been recorded
properly. Shareholders submitting their voting instructions via the internet
should understand that there may be costs associated with internet access, such
as usage charges from internet access providers and telephone companies, that
must be borne by the shareholders. Any person giving a proxy may revoke it at
any time prior to its exercise by giving written notice of the revocation to the
Secretary of the applicable Fund at the address indicated above, by delivering a
duly executed proxy bearing a later date, by recording later-dated voting
instructions via the internet or automated telephone or by attending the Special
Meeting and voting in person. The giving of a proxy will not affect your right
to vote in person if you attend the Special Meeting and wish to do so.
All properly executed proxies received prior to the Special Meeting will be
voted in accordance with the instructions marked thereon or otherwise as
provided therein. Unless instructions to the contrary are marked, proxies will
be voted
54
"FOR" the approval of each proposal. Abstentions and broker non-votes (i.e.,
where a nominee such as a broker, holding shares for beneficial owners, votes on
certain matters pursuant to discretionary authority or instructions from
beneficial owners, but with respect to one or more proposals does not receive
instructions from beneficial owners or does not exercise discretionary
authority) are not treated as votes "FOR" a proposal.
With respect to Proposal 1, abstentions and broker non-votes have the same
effect as votes "AGAINST" the proposals since their approvals are based on the
affirmative vote of a majority of the total Target Fund Common Shares
outstanding and a majority of the total Target Fund APS outstanding. With
respect to Proposal 2, abstentions will not be treated as votes "FOR" the
proposal but will be counted as votes cast on the proposal and will therefore
have the same effect as votes "AGAINST" the proposal. Broker non-votes will not
be treated as votes "FOR" the proposal and will not be counted as votes cast on
the proposal and will therefore have the effect of reducing the aggregate number
of shares voting on the proposal and reducing the number of votes "FOR" required
to approve the proposal.
With respect to each proposal, a majority of the outstanding shares of each
class entitled to vote on the proposal must be present in person or by proxy to
have a quorum to conduct business at the Special Meeting. Abstentions and broker
non-votes will be deemed present for quorum purposes.
CERTAIN VOTING INFORMATION REGARDING TARGET FUND APS. Pursuant to the rules of
the NYSE, Target Fund APS held in "street name" may be voted under certain
conditions by broker-dealer firms and counted for purposes of establishing a
quorum of that Fund if no instructions are received one business day before the
Special Meeting or, if adjourned, one business day before the day to which the
Special Meeting is adjourned. These conditions include, among others, that (i)
at least 30% of the Target Fund's Preferred Shares outstanding have voted on the
Reorganization and (ii) less than 10% of the Target Fund's Preferred Shares
outstanding have voted against the Reorganization. In such instance, the
broker-dealer firm will vote such uninstructed Target Fund APS on the
Reorganization in the same proportion as the votes cast by all holders of Target
Fund APS who voted on the Reorganization. The Target Fund will include shares
held of record by broker-dealers as to which such authority has been granted in
its tabulation of the total number of shares present for purposes of determining
whether the necessary quorum of shareholders of the Target Fund exists.
55
SHAREHOLDER INFORMATION
[As of , 2005 to the knowledge of the Funds, no shareholder owned
beneficially more than 5% of a Fund's outstanding Common Shares.]
[ ]
[To the knowledge of the Funds, no trustee or executive officer owned,
directly or beneficially, Common Shares of the Funds as of , 2005 and no
trustees or executive officers owned Preferred Shares of the Funds as of that
date.]
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 30(f) of the 1940 Act and Section 16(a) of the Securities Exchange Act
of 1934, as amended, require the Funds' trustees, officers, investment adviser,
affiliated persons of the investment adviser and persons who own more than 10%
of a registered class of a Fund's equity securities to file forms with the SEC
and the NYSE, as applicable, reporting their affiliation with such Fund and
reports of ownership and changes in ownership of Fund shares. These persons and
entities are required by SEC regulation to furnish the Fund with copies of all
such forms they file. Based on a review of these forms furnished to each Fund,
each Fund believes that during its last fiscal year, its trustees, officers,
investment adviser and affiliated persons of the investment adviser complied
with the applicable filing requirements.
SHAREHOLDER PROPOSALS
To be considered for presentation at a shareholders' meeting, rules
promulgated by the SEC generally require that, among other things, a
shareholder's proposal must be received at the offices of the relevant Fund a
reasonable time before a solicitation is made. Timely submission of a proposal
does not necessarily mean that such proposal will be included. Any shareholder
who wishes to submit a proposal for consideration at a meeting of such
shareholder's Fund should send such proposal to the respective Fund at the
principal executive offices of the Fund at 1221 Avenue of the Americas, New
York, New York 10020.
Information regarding the deadline for timely submission of proposals intended
to be presented at the year 2006 Annual Meeting of the Funds will be provided in
the proxy statement relating to the 2005 Annual Meeting of the Funds, which is
expected to take place later this year. If the Reorganization of the Target Fund
is approved and completed prior to its 2005 Annual Meeting, the Target Fund will
cease to exist and will not hold its 2005 Annual Meeting.
SOLICITATION OF PROXIES
Solicitation of proxies on behalf of the Funds is being made primarily by the
mailing of this Notice and Joint Proxy Statement/Prospectus with its enclosures
on
56
or about [ ], 2005. Shareholders whose shares are held by nominees such as
brokers can vote their proxies by contacting their respective nominee. In
addition to the solicitation of proxies by mail, employees of the Adviser and
its affiliates as well as dealers or their representatives may, without
additional compensation, solicit proxies in person or by mail, telephone,
telegraph, facsimile or oral communication. The Funds have retained
Computershare Fund Services ("Computershare") to make telephone calls to
shareholders to remind them to vote. Computershare will be paid a project
management fee as well as fees charged on a per call basis and certain other
expenses. Management estimates that any such solicitation would cost
approximately $ for the Target Fund and $ for the Acquiring
Fund. Proxy solicitation expenses are an expense of the Reorganization which
will be borne by the Target Fund and the Acquiring Fund in proportion to their
projected annual expense savings as a result of the Reorganization.
LEGAL MATTERS
Certain legal matters concerning the federal income tax consequences of the
Reorganization and the issuance of Acquiring Fund Common Shares and Acquiring
Fund APS will be passed upon by Skadden Arps, which serves as counsel to the
Target Fund and the Acquiring Fund. Wayne W. Whalen, a partner of Skadden Arps,
is a trustee of both the Target Fund and the Acquiring Fund.
OTHER MATTERS TO COME BEFORE THE MEETING
The Board of Trustees of each Fund knows of no business other than that
described in this Joint Proxy Statement/Prospectus which will be presented for
consideration at the Special Meeting. If any other matters are properly
presented, it is the intention of the persons named on the enclosed proxy card
to vote proxies in accordance with their best judgment.
In the event that a quorum is present at the Special Meeting but sufficient
votes to approve any of the proposals are not received, proxies (including
abstentions and broker non-votes) will be voted in favor of one or more
adjournments of the Special Meeting to permit further solicitation of proxies on
such proposals, provided that the Board of Trustees of each Fund determines that
such an adjournment and additional solicitation is reasonable and in the
interest of shareholders based on a consideration of all relevant factors,
including the percentage of votes then cast, the percentage of negative votes
cast, the nature of the proposed solicitation activities and the nature of the
reasons for such further solicitation. Any such adjournment will require the
affirmative vote of the holders of a majority of the outstanding shares voted at
the session of the Special Meeting to be adjourned.
57
If you cannot be present in person at the Special Meeting, please fill in,
sign and return the enclosed proxy card promptly or please record your voting
instructions by telephone or via the internet. No postage is necessary if the
enclosed proxy card is mailed in the United States.
Lou Anne McInnis
Assistant Secretary
Van Kampen Advantage
Municipal Income Trust
Van Kampen Municipal
Opportunity Trust
, 2005
58
EXHIBIT I
DESCRIPTION OF SECURITIES RATINGS
STANDARD & POOR'S -- A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P) follows:
A S&P issue credit rating is a current opinion of the creditworthiness of an
obligor with respect to a specific financial obligation, a specific class of
financial obligations, or a specific financial program (including ratings on
medium-term note programs and commercial paper programs). It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation and takes into account the currency in
which the obligation is denominated. The issue credit rating is not a
recommendation to purchase, sell, or hold a financial obligation, inasmuch as it
does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the obligors
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any credit rating and may, on occasion, rely
on unaudited financial information. Credit ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances. Issue credit ratings can be either long-term or
short-term. Short-term ratings are generally assigned to those obligations
considered short term in the relevant market. In the U.S., for example, that
means obligations with an original maturity of no more than 365 days, including
commercial paper. Short-term ratings are also used to indicate the
creditworthiness of an obligor with respect to put features on long-term
obligations. The result is a dual rating, in which the short-term ratings
address the put feature, in addition to the usual long-term rating. Medium-term
notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based, in varying degrees, on the following
considerations:
- Likelihood of payment -- capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the terms
of the obligation;
- Nature of and provisions of the obligation;
- Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower
I-1
than senior obligations, to reflect the lower priority in bankruptcy, as noted
above. (Such differentiation applies when an entity has both senior and
subordinated obligations, secured and unsecured obligations, or operating
company and holding company obligations.) Accordingly, in the case of junior
debt, the rating may not conform exactly with the category definition.
AAA: An obligation rated "AAA" has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated "AA" differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
SPECULATIVE GRADE
BB, B, CCC, CC, C: Obligations rated "BB", "B", "CCC", "CC" and "C" are
regarded as having significant speculative characteristics. "BB" indicates the
least degree of speculation and "C" the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC: An obligation rated "CCC" is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse
I-2
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC: An obligation rated "CC" is currently highly vulnerable to nonpayment.
C: A subordinated debt or preferred stock obligation rated "C" is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The "C" rating may be used to cover a situation
where a bankruptcy petition has been filed or similar action taken, but payments
on this obligation are being continued. A "C" also will be assigned to a
preferred stock issue in arrears on dividends or sinking fund payments, but that
is currently paying.
D: An obligation rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating.
N.R.: This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular obligation as a matter of policy.
SHORT-TERM ISSUE CREDIT RATINGS
A-1: A short-term obligation rated "A-1" is rated in the highest category by
S&P. The obligor's capacity to meet its financial commitment on the obligation
is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
A-2: A short-term obligation rated "A-2" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more
I-3
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B: A short-term obligation rated "B" is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C: A short-term obligation rated "C" is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
MOODY'S INVESTORS SERVICE INC. -- A brief description of the applicable
Moody's Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
Aaa: Obligations rated Aaa are judged to be of the highest quality with
minimal credit risk.
Aa: Obligations rated Aa are judged to be of high quality and are subject to
very low credit risk.
A: Obligations rated A are considered upper-medium grade and are subject to
low credit risk.
Baa: Obligations rated Baa are subject to moderate credit risk. They are
considered medium-grade and as such may possess certain speculative
characteristics.
Ba: Obligations rated Ba are judged to have speculative elements and are
subject to substantial credit risk.
B: Obligations rated B are considered speculative and are subject to high
credit risk.
Caa: Obligations rated Caa are judged to be of poor standing and are subject
to very high credit risk.
Ca: Obligations rated Ca are highly speculative and are likely in, or very
near, default, with some prospect of recovery of principal and interest.
I-4
C: Obligations rated C are the lowest rated class of bonds, and are typically
in default, with little prospect for recovery of principal or interest.
Note: Moody's appends numerical modifiers 1, 2, and 3 to each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
Moody's assigns long-term ratings to individual debt securities issued from
medium-term note (MTN) programs, in addition to indicating ratings to MTN
programs themselves. Notes issued under MTN programs with such indicated ratings
are rated at issuance at the rating applicable to all pari passu notes issued
under the same program, at the program's relevant indicated rating, provided
such notes do not exhibit any of the characteristics listed below:
-- Notes containing features that link interest or principal to the
credit performance of any third party or parties.
-- Notes allowing for negative coupons, or negative principal.
-- Notes containing any provision that could obligate the investor to
make any additional payments.
-- Notes containing provisions that subordinate the claim.
For notes with any of these characteristics, the rating of the individual note
may differ from the indicated rating of the program.
Market participants must determine whether any particular note is rated, and
if so, at what rating level. Moody's encourages market participants to contact
Moody's Ratings Desks directly or visit www.moodys.com directly if they have
questions regarding ratings for specific notes issued under a medium-term note
program. Unrated notes issued under an MTN program may be assigned an NR symbol.
I-5
SHORT-TERM RATINGS
Moody's short-term ratings are opinions of the ability of issuers to honor
short-term financial obligations. Ratings may be assigned to issuers, short-term
programs or to individual short-term debt instruments. Such obligations
generally have an original maturity not exceeding thirteen months, unless
explicitly noted. Moody's employs the following designations to indicate the
relative repayment ability of rated issuers:
P-1
Issuers (or supporting institutions) rated Prime-1 have a superior ability to
repay short-term debt obligations.
P-2
Issuers (or supporting institutions) rated Prime-2 have a strong ability to
repay short-term debt obligations.
P-3
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability
to repay short-term obligations.
NP
Issuers (or supporting institutions) rated Not Prime do not fall within any of
the Prime rating categories.
NOTE: Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced
by the senior-most long-term rating of the issuer, its guarantor or
support-provider.
I-6
[VAN KAMPEN INVESTMENTS LOGO]
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JUNE 30, 2005
STATEMENT OF ADDITIONAL INFORMATION
RELATING TO THE ACQUISITION OF THE ASSETS AND LIABILITIES OF
VAN KAMPEN ADVANTAGE MUNICIPAL INCOME TRUST
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN MUNICIPAL OPPORTUNITY TRUST
DATED , 2005
This Statement of Additional Information is available to the shareholders
of Van Kampen Advantage Municipal Income Trust (the "Target Fund") in connection
with a proposed transaction (the "Reorganization") whereby Van Kampen Municipal
Opportunity Trust (the "Acquiring Fund") will acquire substantially all of the
assets and assume substantially all of the liabilities of the Target Fund in
exchange for an equal aggregate net asset value of newly-issued common shares of
beneficial interest, par value $0.01 per share ("Acquiring Fund Common Shares"),
and newly-issued auction preferred shares with a par value of $0.01 per share
and a liquidation preference of $25,000 per share ("Acquiring Fund APS"). The
Target Fund will distribute Acquiring Fund Common Shares to holders of common
shares of the Target Fund ("Target Fund Common Shares") and Acquiring Fund APS
to holders of auction preferred shares of the Target Fund ("Target Fund APS"),
and will then terminate its registration under the Investment Company Act of
1940, as amended (the "1940 Act"), and dissolve under applicable state law. A
copy of a form of the Agreement and Plan of Reorganization between the Target
Fund and the Acquiring Fund is attached hereto as Appendix A. Unless otherwise
defined herein, capitalized terms have the meanings given to them in the Proxy
Statement/Prospectus.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Proxy Statement/Prospectus dated , 2005 relating
to the proposed Reorganization of the Target Fund into the Acquiring Fund. A
copy of the Proxy Statement/Prospectus may be obtained, without charge, by
writing to the Van Kampen Client Relations Department at 1 Parkview Plaza, P.O.
Box 5555, Oakbrook Terrace, Illinois 60181-5555 or by calling (800) 341-2929
(TDD users may call (800) 421-2833).
The Acquiring Fund will provide, without charge, upon the written or oral
request of any person to whom this Statement of Additional Information is
delivered, a copy of any and all documents that have been incorporated by
reference in the registration statement of which this Statement of Additional
Information is a part.
TABLE OF CONTENTS
Page
----
Trustees and Officers....................................... S-1
Investment Advisory Agreement............................... S-12
Other Agreements............................................ S-13
Fund Management............................................. S-15
Code of Ethics.............................................. S-17
Portfolio Transactions and Brokerage Allocation............. S-17
Other Information........................................... S-20
Financial Statements........................................ S-20
Pro Forma Financial Statements.............................. S-20
Appendix A--Form of Agreement and Plan of Reorganization.... A-1
Appendix B--Certificate of Vote of Trustees................. B-1
Appendix C--Annual Report of the Acquiring Fund............. C-1
Appendix D--Annual Report of the Target Fund................ D-1
Appendix E--Semiannual Report of the Acquiring Fund......... E-1
Appendix F--Semiannual Report of the Target Fund............ F-1
Appendix G--Proxy Voting Procedures......................... G-1
Appendix H--Pro Forma Financial Statements.................. H-1
TRUSTEES AND OFFICERS
GENERAL
The business and affairs of each Fund are managed under the direction of
each Fund's Board of Trustees and each Fund's officers appointed by the Board of
Trustees. The Acquiring Fund and the Target Fund share the same Board of
Trustees and executive officers. The tables below list the trustees and
executive officers of each Fund and their principal occupations during the last
five years, other directorships held by trustees and their affiliations, if any,
with Van Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Asset
Management (the "Adviser"), Van Kampen Funds Inc., Van Kampen Advisors Inc., Van
Kampen Exchange Corp. and Van Kampen Investor Services Inc. ("Investor
Services"). The term "Fund Complex" includes each of the investment companies
advised by the Adviser as of the date of this Statement of Additional
Information. Trustees of the Funds generally serve three-year terms or until
their successors are duly elected and qualified. Officers are annually elected
by the trustees.
INDEPENDENT TRUSTEES
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUNDS SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
David C. Arch (59) Trustee Trustee of the Chairman and Chief 82 Trustee/Director/
Blistex Inc. Funds since Executive Officer of Managing General
1800 Swift Drive 1992 Blistex Inc., a consumer Partner of funds in
Oak Brook, IL 60523 health care products the Fund Complex.
manufacturer. Director of
the Heartland Alliance, a
nonprofit organization
serving human needs based
in Chicago. Director of
St. Vincent de Paul
Center, a Chicago based
day care facility serving
the children of low income
families. Board member of
the Illinois
Manufacturers'
Association.
Jerry D. Choate (66) Trustee Trustee of the Prior to January 1999, 80 Trustee/Director/
33971 Selva Road Funds since Chairman and Chief Managing General
Suite 130 2003 Executive Officer of the Partner of funds in
Dana Point, CA 92629 Allstate Corporation the Fund Complex.
("Allstate") and Allstate Director of Amgen
Insurance Company. Prior Inc., a
to January 1995, President biotechnological
and Chief Executive company, and Director
Officer of Allstate. Prior of Valero Energy
to August 1994, various Corporation, an
management positions at independent refining
Allstate. company.
S-1
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUNDS SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Rod Dammeyer+ (64) Trustee Trustee of the President of CAC, L.L.C., 82 Trustee/Director/
CAC, L.L.C. Funds since a private company offering Managing General
4350 LaJolla Village Drive 1992 capital investment and Partner of funds in
Suite 980 management advisory the Fund Complex.
San Diego, CA 92122-6223 services. Prior to Director of
February 2001, Vice Stericycle, Inc.,
Chairman and Director of Ventana Medical
Anixter International, Systems, Inc., and
Inc., a global distributor GATX Corporation, and
of wire, cable and Trustee of The
communications Scripps Research
connectivity products. Institute and the
Prior to July 2000, University of Chicago
Managing Partner of Equity Hospitals and Health
Group Corporate Investment Systems. Prior to
(EGI), a company that April 2004, Director
makes private investments of TheraSense, Inc.
in other companies. Prior to January
2004, Director of
TeleTech Holdings
Inc. and Arris Group,
Inc. Prior to May
2002, Director of
Peregrine Systems
Inc. Prior to
February 2001,
Director of IMC
Global Inc. Prior to
July 2000, Director
of Allied Riser
Communications Corp.,
Matria Healthcare
Inc., Transmedia
Networks, Inc., CNA
Surety, Corp. and
Grupo Azcarero Mexico
(GAM).
Linda Hutton Heagy (56) Trustee Trustee of the Managing Partner of 80 Trustee/Director/
Heidrick & Struggles Funds since Heidrick & Struggles, an Managing General
233 South Wacker Drive 2003 executive search firm. Partner of funds in
Suite 7000 Trustee on the University the Fund Complex.
Chicago, IL 60606 of Chicago Hospitals
Board, Vice Chair of the
Board of the YMCA of
Metropolitan Chicago and a
member of the Women's
Board of the University of
Chicago. Prior to 1997,
Partner of Ray &
Berndtson, Inc., an
executive recruiting firm.
Prior to 1996, Trustee of
The International House
Board, a fellowship and
housing organization for
international graduate
students. Prior to 1995,
Executive Vice President
of ABN AMRO, N.A., a bank
holding company. Prior to
1990, Executive Vice
President of The Exchange
National Bank.
S-2
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUNDS SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
R. Craig Kennedy (53) Trustee Trustee of the Director and President of 80 Trustee/Director/
1744 R Street, NW Funds since the German Marshall Fund Managing General
Washington, DC 20009 2003 of the United States, an Partner of funds in
independent U.S. the Fund Complex.
foundation created to
deepen understanding,
promote collaboration and
stimulate exchanges of
practical experience
between Americans and
Europeans. Formerly,
advisor to the Dennis
Trading Group Inc., a
managed futures and option
company that invests money
for individuals and
institutions. Prior to
1992, President and Chief
Executive Officer,
Director and member of the
Investment Committee of
the Joyce Foundation, a
private foundation.
Howard J Kerr (69) Trustee Trustee of the Prior to 1998, President 82 Trustee/Director/
736 North Western Avenue Funds since and Chief Executive Managing General
P.O. Box 317 1992 Officer of Pocklington Partner of funds in
Lake Forest, IL 60045 Corporation, Inc., an the Fund Complex.
investment holding Director of the Lake
company. Director of the Forest Bank & Trust.
Marrow Foundation.
Jack E. Nelson (69) Trustee Trustee of the President of Nelson 80 Trustee/Director/
423 Country Club Drive Funds since Investment Planning Managing General
Winter Park, FL 32789 2003 Services, Inc., a Partner of funds in
financial planning company the Fund Complex.
and registered investment
adviser in the State of
Florida. President of
Nelson Ivest Brokerage
Services Inc., a member of
the NASD, Securities
Investors Protection Corp.
and the Municipal
Securities Rulemaking
Board. President of Nelson
Sales and Services
Corporation, a marketing
and services company to
support affiliated
companies.
S-3
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUNDS SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Hugo F. Sonnenschein+ (64) Trustee Trustee of the President Emeritus and 82 Trustee/Director/
1126 E. 59th Street Funds since Honorary Trustee of the Managing General
Chicago, IL 60637 1994 University of Chicago and Partner of funds in
the Adam Smith the Fund Complex.
Distinguished Service Director of Winston
Professor in the Laboratories, Inc.
Department of Economics at
the University of Chicago.
Prior to July 2000,
President of the
University of Chicago.
Trustee of the University
of Rochester and a member
of its investment
committee. Member of the
National Academy of
Sciences, the American
Philosophical Society and
a fellow of the American
Academy of Arts and
Sciences.
Suzanne H. Woolsey, Ph.D. (63) Trustee Trustee of the Chief Communications 80 Trustee/Director/
815 Cumberstone Road Funds since Officer of the National Managing General
Harwood, MD 20776 2003 Academy of Sciences/ Partner of funds in
National Research Council, the Fund Complex.
an independent, federally Director of Fluor
chartered policy Corp., an
institution, from 2001 to engineering,
November 2003 and Chief procurement and
Operating Officer from construction
1993 to 2001. Director of organization, since
the Institute for Defense January 2004 and
Analyses, a federally Director of Neurogen
funded research and Corporation, a
development center, pharmaceutical
Director of the German company, since
Marshall Fund of the January 1998.
United States, Director of
the Rocky Mountain
Institute and Trustee of
Colorado College. Prior to
1993, Executive Director
of the Commission on
Behavioral and Social
Sciences and Education at
the National Academy of
Sciences/National Research
Council. From 1980 through
1989, Partner of Coopers &
Lybrand.
S-4
INTERESTED TRUSTEES*
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUNDS SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Mitchell M. Merin* (51) Trustee and Trustee of President of funds in the Fund 80 Trustee/Director/
1221 Avenue of the Americas President the Funds Complex. Chairman, President, Managing General
New York, NY 10020 since Chief Executive Officer and Partner of funds in
2003; Director of the Adviser and Van the Fund Complex.
President Kampen Advisors Inc. since
of the December 2002. Chairman,
Funds President and Chief Executive
since 2002 Officer of Van Kampen Investments
since December 2002. Director of
Van Kampen Investments since
December 1999. Chairman and
Director of Van Kampen Funds Inc.
since December 2002. President,
Director and Chief Operating
Officer of Morgan Stanley
Investment Management since
December 1998. President and
Director since April 1997 and
Chief Executive Officer since
June 1998 of Morgan Stanley
Investment Advisors Inc. and
Morgan Stanley Services Company
Inc. Chairman, Chief Executive
Officer and Director of Morgan
Stanley Distributors Inc. since
June 1998. Chairman since June
1998, and Director since January
1998 of Morgan Stanley Trust.
Director of various Morgan
Stanley subsidiaries. President
of the Morgan Stanley Funds since
May 1999. Previously Chief
Executive Officer of Van Kampen
Funds Inc. from December 2002 to
July 2003, Chief Strategic
Officer of Morgan Stanley
Investment Advisors Inc. and
Morgan Stanley Services Company
Inc. and Executive Vice President
of Morgan Stanley Distributors
Inc. from April 1997 to June
1998. Chief Executive Officer
from September 2002 to April 2003
and Vice President from May 1997
to April 1999 of the Morgan
Stanley Funds.
Richard F. Powers, III* (59) Trustee Trustee of Advisory Director of Morgan 82 Trustee/Director/
1221 Avenue of the Americas the Funds Stanley. Prior to December 2002, Managing General
New York, NY 10020 since 1999 Chairman, Director, President, Partner of funds in
Chief Executive Officer and the Fund Complex.
Managing Director of Van Kampen
Investments and its investment
advisory, distribution and other
subsidiaries. Prior to December
2002, President and Chief
Executive Officer of funds in the
Fund Complex. Prior to May 1998,
Executive Vice President and
Director of Marketing at Morgan
Stanley and Director of Dean
Witter, Discover & Co. and Dean
Witter Realty. Prior to 1996,
Director of Dean Witter Reynolds
Inc.
S-5
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUNDS SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Wayne W. Whalen* (65) Trustee Trustee of Partner in the law firm of 83 Trustee/Director/
333 West Wacker Drive the Funds Skadden, Arps, Slate, Meagher & Managing General
Chicago, IL 60606 since 1992 Flom LLP, legal counsel to funds Partner of funds in
in the Fund Complex. the Fund Complex.
Director of the
Abraham Lincoln
Presidential Library
Foundation.
------------------------------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Messrs. Merin and Powers are interested persons of funds in
the Fund Complex and the Adviser by reason of their current or former
positions with Morgan Stanley or its affiliates. Mr. Whalen is an interested
person of certain funds in the Fund Complex by reason of he and his firm
currently providing legal services as legal counsel to such funds in the Fund
Complex.
+ Designated as Preferred Shares Trustee.
S-6
OFFICERS
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUNDS SERVED DURING PAST 5 YEARS
Ronald E. Robison (66) Executive Vice Officer of Executive Vice President and Principal Executive Officer of
1221 Avenue of the Americas President and the Funds Funds in the Fund Complex since May 2003. Chief Executive
New York, NY 10020 Principal since 2003 Officer and Chairman of Investor Services. Managing Director
Executive of Morgan Stanley. Chief Administrative Officer, Managing
Officer Director and Director of Morgan Stanley Investment Advisors
Inc., Morgan Stanley Services Company Inc. and Managing
Director and Director of Morgan Stanley Distributors Inc.
Chief Executive Officer and Director of Morgan Stanley
Trust. Executive Vice President and Principal Executive
Officer of the Institutional and Retail Morgan Stanley
Funds; Director of Morgan Stanley SICAV; previously Chief
Global Operations Officer and Managing Director of Morgan
Stanley Investment Management Inc.
Joseph J. McAlinden (62) Executive Vice Officer of Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas President and the Funds Stanley Investment Advisors Inc., Morgan Stanley Investment
New York, NY 10020 Chief Investment since 2002 Management Inc. and Morgan Stanley Investments LP and
Officer Director of Morgan Stanley Trust for over 5 years. Executive
Vice President and Chief Investment Officer of funds in the
Fund Complex. Managing Director and Chief Investment Officer
of Van Kampen Investments, the Adviser and Van Kampen
Advisors Inc. since December 2002.
Amy R. Doberman (42) Vice President Officer of Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas the Funds Management; Managing Director of Morgan Stanley Investment
New York, NY 10020 since 2004 Management, Inc., Morgan Stanley Investment Advisers Inc.
and the Adviser. Vice President of the Morgan Stanley
Institutional and Retail Funds since July 2004 and Vice
President of funds in the Fund Complex as of August 2004.
Previously, Managing Director and General Counsel of
Americas, UBS Global Asset Management from July 2000 to July
2004 and General Counsel of Aeltus Investment Management,
Inc from January 1997 to July 2000.
Stefanie V. Chang Yu (38) Vice President Officer of Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas and Secretary the Funds Vice President and Secretary of funds in the Fund Complex.
New York, NY 10020 since 2003
John L. Sullivan (49) Chief Compliance Officer of Chief Compliance Officer of funds in the Fund Complex since
1 Parkview Plaza Officer the Funds August 2004. Prior August 2004, Director and Managing
Oakbrook Terrace, IL 60181 since 1992 Director of Van Kampen Investments, the Adviser, Van Kampen
Advisors Inc. and certain other subsidiaries of Van Kampen
Investments, Vice President, Chief Financial Officer and
Treasurer of funds in the Fund Complex and head of Fund
Accounting for Morgan Stanley Investment Management. Prior
to December 2002, Executive Director of Van Kampen
Investments, the Adviser and Van Kampen Advisors Inc.
James W. Garrett (36) Chief Financial Officer of Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas Officer and the Funds Chief Financial Officer and Treasurer of Morgan Stanley
New York, NY 10020 Treasurer since 2005 Institutional Funds since 2002 and of funds in the Fund
Complex since 2005.
---------------
COMPENSATION
Each trustee/director/managing general partner (hereinafter referred to in
this section as "trustee") who is not an affiliated person (as defined in the
1940 Act) of Van Kampen Investments, the Adviser or Van Kampen Funds Inc. (each
a "Non-Affiliated Trustee") is compensated by an annual retainer and meeting
fees for services to funds in the Fund Complex. Each fund in the Fund Complex
(except Van Kampen Exchange Fund) provides a deferred compensation plan to its
Non-Affiliated Trustees that allows trustees to defer receipt of their
compensation until retirement and earn a return on such deferred amounts.
Amounts deferred are retained by the Funds and earn a rate of return
S-7
determined by reference to the return on the common shares of the Funds or other
funds in the Fund Complex as selected by the respective Non-Affiliated Trustee.
To the extent permitted by the 1940 Act, the Funds may invest in securities of
those funds selected by the Non-Affiliated Trustees in order to match the
deferred compensation obligation. The deferred compensation plan is not funded
and obligations thereunder represent general unsecured claims against the
general assets of the Funds. Deferring compensation has the same economic effect
as if the Non-Affiliated Trustee reinvested his or her compensation into the
funds. Each fund in the Fund Complex (except Van Kampen Exchange Fund) provides
a retirement plan to its Non-Affiliated Trustees that provides Non-Affiliated
Trustees with compensation after retirement, provided that certain eligibility
requirements are met. Under the retirement plan, a Non-Affiliated Trustee who is
receiving compensation from the Funds prior to such Non-Affiliated Trustee's
retirement, has at least 10 years of service (including years of service prior
to adoption of the retirement plan) and retires at or after attaining the age of
60, is eligible to receive a retirement benefit per year for each of the 10
years following such retirement from the Funds. Non-Affiliated Trustees retiring
prior to the age of 60 or with fewer than 10 years but more than 5 years of
service may receive reduced retirement benefits from the Funds.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
Fund Complex
--------------------------------------------------------------
Aggregate Aggregate Pension Aggregate Estimated
Aggregate Compensation or Retirement Maximum Annual
Compensation from the Benefits Accrued Benefits from the Total Compensation
from the Target Acquiring as Part of Fund Complex before Deferral from
Name(1) Fund(2) Fund(3) Expenses(4) Upon Retirement(5) Fund Complex(6)
------- --------------- ------------ ----------------- ------------------- --------------------
INDEPENDENT TRUSTEES
David C. Arch $4,359 $3,736 $ 35,277 $147,500 $192,530
Jerry D. Choate 6,007 5,092 82,527 126,000 200,002
Rod Dammeyer 4,365 3,742 63,782 147,500 208,000
Linda Hutton Heagy 5,806 4,891 24,465 142,500 184,784
R. Craig Kennedy 6,007 5,092 16,911 142,500 200,002
Howard J Kerr 4,565 3,942 140,743 146,250 208,000
Jack E. Nelson 6,007 5,092 97,294 109,500 200,002
Hugo F. Sonnenschein 4,565 3,942 64,476 147,500 208,000
Suzanne H. Woolsey 6,007 5,092 58,450 142,500 200,002
INTERESTED TRUSTEE
Wayne W. Whalen(1) 3,942 4,565 72,001 147,500 208,000
------------------------------------
(1) Trustees not eligible for compensation are not included in the Compensation
Table. Mr. Whalen is an "interested person" (within the meaning of Section
2(a)(19) of the 1940 Act) of the Funds and certain other funds in the Fund
Complex. Theodore A. Myers retired from the Board of Trustees of the Funds
and other funds in the Fund Complex as of December 31, 2003. J. Miles
Branagan retired as a member of the Board of Trustees of the Funds and other
funds in the Fund Complex on December 31, 2004.
(2) The amounts shown in this column represent the aggregate compensation before
deferral with respect to the Target Fund's fiscal year ended October 31,
2004. The following Trustees deferred compensation from the Target Fund
during the fiscal year
S-8
ended October 31, 2004: Mr. Choate, $6,007; Mr. Dammeyer, $4,365; Ms. Heagy,
$5,806; Mr. Nelson, $6,007; Mr. Sonnenschein, $4,565; and Mr. Whalen,
$4,565. The cumulative deferred compensation (including interest) accrued
with respect to each trustee, including former trustees, from the Fund as of
October 31, 2004 is as follows: Mr. Choate, $7,880; Mr. Dammeyer, $61,304;
Ms. Heagy, $7,780; Mr. Kerr, $29,593; Mr. Nelson, $7,811; Mr. Sonnenschein,
$53,372; and Mr. Whalen, $54,157. The deferred compensation plan is
described above the Compensation Table.
(3) The amounts shown in this column represent the aggregate compensation before
deferral with respect to the Acquiring Fund's fiscal year ended October 31,
2004. The following Trustees deferred compensation from the Acquiring Fund
during the fiscal year ended October 31, 2004: Mr. Choate, $5,092; Mr.
Dammeyer, $3,742; Ms. Heagy, $4,891; Mr. Nelson, $5,092; Mr. Sonnenschein,
$3,942; and Mr. Whalen, $3,942. The cumulative deferred compensation
(included interest) accrued with respect to each trustee, including former
trustees, from the Fund as of October 31, 2004 is as follows: Mr. Choate,
$6,697; Mr. Dammeyer, $56,270; Ms. Heagy, $6,583; Mr. Kerr, $29,169; Mr.
Nelson, $6,638; Mr. Sonnenschein, $49,045; and Mr. Whalen, $49,442. The
deferred compensation plan is described above the Compensation Table.
(4) The amounts shown in this column represent the sum of the retirement
benefits accrued by the operating funds in the Fund Complex for each of the
trustees for the funds' respective fiscal years ended in 2004. The
retirement plan is described above the Compensation Table.
(5) For each trustee, this is the sum of the estimated maximum annual benefits
payable by the funds in the Fund Complex for each year of the 10-year period
commencing in the year of such person's anticipated retirement. The
retirement plan is described above the Compensation Table.
(6) The amounts shown in this column represent the aggregate compensation paid
by all of the funds in the Fund Complex as of December 31, 2004 before
deferral by the trustees under the deferred compensation plan. Because the
funds in the Fund Complex have different fiscal year ends, the amounts shown
in this column are presented on a calendar year basis.
BOARD COMMITTEES
The Board of Trustees of each Fund has the same three standing committees
(an audit committee, a brokerage and services committee and a governance
committee). Each committee is comprised solely of "Independent Trustees", which
is defined for purposes herein as trustees who: (1) are not "interested persons"
of the Funds as defined by the 1940 Act and (2) are "independent" of the Funds
as defined by the New York Stock Exchange, American Stock Exchange and Chicago
Stock Exchange listing standards.
The Board's audit committee consists of Jerry D. Choate, Rod Dammeyer and
R. Craig Kennedy. In addition to being Independent Trustees as defined above,
each of these trustees also meets the additional independence requirements for
audit committee members as defined by the New York Stock Exchange, American
Stock Exchange and Chicago Stock Exchange listing standards. The audit committee
makes recommendations to the Board of Trustees concerning the selection of the
Funds' independent registered public accounting firm, reviews
S-9
with such independent registered public accounting firm the scope and results of
the Funds' annual audit and considers any comments which the independent
registered public accounting firm may have regarding the Funds' financial
statements, books of account or internal controls. The Board of Trustees has
adopted a formal written charter for the audit committee which sets forth the
audit committee's responsibilities. The audit committee has reviewed and
discussed the financial statements of the Funds with management as well as with
the independent registered public accounting firm of the Funds, and discussed
with the independent registered public accounting firm the matters required to
be discussed under the Statement of Auditing Standards No. 61. The audit
committee has received the written disclosures and the letter from the
independent registered public accounting firm required under Independence
Standards Board Standard No. 1 and has discussed with the independent registered
public accounting firm its independence. Based on this review, the audit
committee recommended to the Board of Trustees of the Funds that the Funds'
audited financial statements be included in the Funds' annual reports to
shareholders for the most recent fiscal year for filing with the SEC.
The Board's brokerage and services committee consists of Linda Hutton
Heagy, Hugo F. Sonnenschein and Suzanne H. Woolsey. The brokerage and services
committee reviews the Fund's allocation of brokerage transactions and
soft-dollar practices.
The Board's governance committee consists of David C. Arch, Howard J Kerr
and Jack E. Nelson. In addition to being Independent Trustees as defined above,
each of these trustees also meets the additional independence requirements for
nominating committee members as defined by the New York Stock Exchange, American
Stock Exchange and Chicago Stock Exchange listing standards. The governance
committee identifies individuals qualified to serve as Independent Trustees on
the Board and on committees of the Board, advises the Board with respect to
Board composition, procedures and committees, develops and recommends to the
Board a set of corporate governance principles applicable to the Funds, monitors
corporate governance matters and makes recommendations to the Board, and acts as
the administrative committee with respect to Board policies and procedures,
committee policies and procedures and codes of ethics. The Independent Trustees
of the Funds select and nominate any other nominee Independent Trustees for the
Funds. While the Independent Trustees of the Funds expect to be able to continue
to identify from their own resources an ample number of qualified candidates for
the Board of Trustees as they deem appropriate, they will consider nominations
from shareholders to the Board. Nominations from shareholders should be in
writing and sent to the respective Fund's offices at 1221 Avenue of the
Americas, New York, New York 10020 or directly to the Independent Trustees at
the address specified above for each Trustee.
During the Funds' last fiscal year, the Board of Trustees held 16 meetings.
During the Funds' last fiscal year, the audit committee of the Board held 5
meetings, the brokerage and services committee of the Board held 4 meetings and
the governance committee of the Board held 5 meetings.
SHARE OWNERSHIP
Excluding any deferred compensation balances as described in the
Compensation Table, as of December 31, 2004, the most recently completed
calendar year prior to the date of this Statement of Additional Information,
each trustee of the Funds beneficially
S-10
owned equity securities of the Funds and of all of the funds in the Fund Complex
overseen by the trustee in the dollar range amounts specified below.
2004 TRUSTEE BENEFICIAL OWNERSHIP OF SECURITIES
INDEPENDENT TRUSTEES
TRUSTEE
-----------------------------------------------------------------------------------------
ARCH CHOATE DAMMEYER HEAGY KENNEDY KERR NELSON SONNENSCHEIN WOOLSEY
-------- ------- -------- -------- -------- ------- ------- ------------ --------
Dollar range of equity securities
in the Target Fund................
Dollar range of equity securities
in the Acquiring Fund.............
Aggregate dollar range of equity
securities in all registered
investment companies overseen by
trustee in the Fund Complex....... $50,001- $1- over $50,001- over $1- $1- $10,001- $10,001-
$100,000 $10,000 $100,000 $100,000 $100,000 $10,000 $10,000 $50,000 $50,000
INTERESTED TRUSTEES
TRUSTEE
----------------------------
MERIN POWERS WHALEN
-------- -------- --------
Dollar range of equity securities in the Target Fund........
Dollar range of equity securities in the Acquiring Fund.....
Aggregate dollar range of equity securities in all
registered investment companies overseen by trustee in the
Fund Complex............................................... over over over
$100,000 $100,000 $100,000
Including deferred compensation balances (which are amounts deferred and
thus retained by the Funds as described in the Compensation Table), as of
December 31, 2004, the most recently completed calendar year prior to the date
of this Statement of Additional Information, each trustee of the Funds had in
the aggregate, combining beneficially owned equity securities and deferred
compensation of the Funds and of all of the funds in the Fund Complex overseen
by the trustee, the dollar range of amounts specified below.
2004 TRUSTEE BENEFICIAL OWNERSHIP AND DEFERRED COMPENSATION
INDEPENDENT TRUSTEES
TRUSTEE
--------------------------------------------------------------------------------------------
ARCH CHOATE DAMMEYER HEAGY KENNEDY KERR NELSON SONNENSCHEIN WOOLSEY
-------- -------- -------- -------- -------- -------- -------- ------------ --------
Dollar range of equity
securities and deferred
compensation in the Target
Fund...........................
Dollar range of equity
securities and deferred
compensation in the Acquiring
Fund...........................
Aggregate dollar range of equity
securities and deferred
compensation in all registered
investment companies overseen
by trustee in Fund Complex..... $50,001- over over $50,001- over over over over $10,000-
$100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $50,001
S-11
INTERESTED TRUSTEES
TRUSTEE
------------------------------
MERIN POWERS WHALEN
-------- -------- --------
Dollar range of equity
securities and deferred
compensation in the Target
Fund...........................
Dollar range of equity
securities and deferred
compensation in the Acquiring
Fund...........................
Aggregate dollar range of equity
securities and deferred
compensation in all registered
investment companies overseen
by trustee in the Fund
Complex........................ over over over
$100,000 $100,000 $100,000
As of , 2005, the trustees and officers of each Fund as a group
owned less than 1% of the shares of each Fund.
INVESTMENT ADVISORY AGREEMENT
Each Fund and the Adviser are parties to an investment advisory agreement
(each an "Advisory Agreement"). Under an Advisory Agreement, each Fund retains
the Adviser to manage the investment of such Fund's assets, including the
placing of orders for the purchase and sale of portfolio securities. The Adviser
obtains and evaluates economic, statistical and financial information to
formulate strategy and implement such Fund's investment objective. The Adviser
also furnishes offices, necessary facilities and equipment, provides
administrative services to such Fund, renders periodic reports to the Fund's
Board of Trustees and permits its officers and employees to serve without
compensation as trustees or officers of such Fund if elected to such positions.
Each Fund, however, bears the costs of its day-to-day operations, including
auction agent fees, fees for broker-dealers participating in auctions of such
Fund's Preferred Shares, custodian fees, legal and independent registered public
accounting firm fees, the costs of reports and proxies to shareholders,
compensation of trustees of such Fund (other than those who are affiliated
persons of Van Kampen Investments, the Adviser or Van Kampen Funds Inc.) and all
other ordinary business expenses not specifically assumed by the Adviser. The
Advisory Agreement also provides that the Adviser shall not be liable to a Fund
for any actions or omissions in the absence of willful misfeasance, bad faith,
negligence or reckless disregard of its obligations and duties under the
Advisory Agreement.
Each Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by a Fund's Board of Trustees or (ii) by a
vote of a majority of a Fund's outstanding voting securities and (b) by a vote
of a majority of the trustees who are not parties to the agreement or interested
persons of any such party by votes cast in person at a meeting called for such
purpose. Each Advisory Agreement provides that it shall terminate automatically
if assigned and that it may be terminated without penalty by either party on 60
days' written notice.
In approving each Advisory Agreement, the Board of Trustees, including the
non-interested trustees, considered the nature, quality and scope of the
services provided by the Adviser, the performance, fees and expenses of a Fund
compared to other similar investment companies, the Adviser's expenses in
providing the services and the profitability of the Adviser and its affiliated
companies. The Board of Trustees also reviewed the benefit to the Adviser of
receiving research paid for by Fund assets and the propriety of such an
arrangement and evaluated other benefits the Adviser derives from its
relationship with a Fund. The Board of Trustees considered the extent to which
any economies of scale experienced by the Adviser are shared with a Fund's
shareholders, and the propriety of alternative breakpoints in a Fund's advisory
fee schedule. The Board of Trustees
S-12
considered comparative advisory fees of a Fund and other investment companies at
different asset levels, and considered the trends in the industry versus
historical and projected sales and redemptions of a Fund. The Board of Trustees
reviewed reports from third parties about the foregoing factors and considered
changes, if any, in such items since its previous approval. The Board of
Trustees discussed the financial strength of the Adviser and its affiliated
companies and the capability of the personnel of the Adviser. The Board of
Trustees reviewed the statutory and regulatory requirements for approval of
advisory agreements. The Board of Trustees, including the non-interested
trustees, evaluated all of the foregoing and determined, in the exercise of its
business judgment, that approval of each Advisory Agreement was in the best
interests of the respective Fund and its shareholders.
Prior to the date of this Statement of Additional Information, Van Kampen
Advisors Inc., an affiliate of the Adviser, acted as sub-adviser to the Fund.
Van Kampen Advisors Inc. was located at 40 Broad Street, Suite 915, Boston,
Massachusetts 02109. The Adviser paid to Van Kampen Advisors Inc. on a monthly
basis a portion of the net advisory fees that the Adviser received from the
Fund.
ADVISORY FEES
The Adviser received the approximate advisory fees from each Fund as
follows:
FISCAL YEAR ENDED OCTOBER 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------
Acquiring Fund............................. $2,443,896 $2,481,620 $2,478,266
Target Fund................................ $3,053,266 $3,072,652 $3,039,099
OTHER AGREEMENTS
THE ADMINISTRATIVE SERVICES AGREEMENT
Each Fund was a party to an administrative services agreement. The
administrative services provided by Van Kampen Funds Inc. (the "Administrator")
included record keeping and reporting responsibilities with respect to each
Fund's portfolio and Preferred Shares and providing certain services to
shareholders. Prior to May 14, 2002, each Fund paid the Administrator a monthly
administrative services fee at the annual rate of 0.20% of the average net
assets of each Fund. Prior to June 1, 2004, each Fund paid the Administrator a
monthly administrative services fee at the annual rate of 0.05% of the average
daily net assets of each Fund. Effective June 1, 2004, the administrative fee
was reduced from 0.05% to 0.00%. The administrative services agreement for each
Fund was terminated effective May 26, 2005.
ADMINISTRATIVE SERVICES FEES
The Administrator received the approximate administrative services fees
from each Fund as follows:
FISCAL YEAR ENDED OCTOBER 31,
--------------------------------
2004 2003 2002
-------- -------- --------
Acquiring Fund............................... $119,262 $206,802 $534,761
Target Fund.................................. $148,842 $256,053 $655,615
S-13
ACCOUNTING SERVICES AGREEMENT
Each Fund has entered into an accounting services agreement pursuant to
which the Adviser provides accounting services to each Fund supplementary to
those provided by the custodian. Such services are expected to enable the Funds
to more closely monitor and maintain its accounts and records. Each Fund pays
all costs and expenses related to such services, including all salary and
related benefits of accounting personnel, as well as the overhead and expenses
of office space and the equipment necessary to render such services. Each Fund
shares together with the other Van Kampen funds in the cost of providing such
services with 25% of such costs shared proportionately based on the respective
number of classes of securities issued per fund and the remaining 75% of such
costs based proportionately on the respective net assets per fund.
ACCOUNTING SERVICES FEES
The Adviser received the approximate accounting services fees from each
Fund as follows:
FISCAL YEAR ENDED
OCTOBER 31,
---------------------------
2004 2003 2002
------- ------- -------
Acquiring Fund..................................... $23,898 $26,731 $28,000
Target Fund........................................ $27,439 $31,230 $32,576
LEGAL SERVICES AGREEMENT
Each Fund and certain other Van Kampen funds have entered into legal
services agreements pursuant to which Van Kampen Investments provides legal
services, including without limitation, accurate maintenance of each fund's
minute books and records, preparation and oversight of each fund's regulatory
reports and other information provided to shareholders, as well as responding to
day-to-day legal issues on behalf of the funds. Payment by the funds for such
services is made on a cost basis for the salary and salary-related benefits,
including but not limited to bonuses, group insurance and other regular wages
for the employment of personnel. Of the total costs for legal services provided
to the funds, one half of such costs are allocated equally to each fund and the
remaining one half of such costs are allocated to specific funds based on
monthly time records.
LEGAL SERVICES FEES
Van Kampen Investments received the approximate legal services fees from
each Fund as follows:
FISCAL YEAR ENDED OCTOBER 31,
-------------------------------
2004 2003 2002
------- ------- -------
Acquiring Fund................................. $16,879 $17,464 $14,617
Target Fund.................................... $20,165 $18,870 $14,318
S-14
FUND MANAGEMENT
OTHER ACCOUNTS MANAGED BY THE PORTFOLIO MANAGERS
As of December 31, 2004, Dennis Piectrzak managed [ ] registered
investment companies with a total of $[ ] billion in assets;
[ ] pooled investment vehicles other than registered investment
companies with a total of $[ ] million in assets; and [ ]
other accounts with a total of $[ ] billion in assets.
As of December 31, 2004, Robert Wimmel managed 36 registered investment
companies with a total of $11.0 billion in assets; 0 pooled investment vehicles
other than registered investment companies; and 0 other accounts.
As of December 31, 2004, John Reynoldson managed 33 registered investment
companies with a total of $7.8 billion in assets; 0 pooled investment vehicles
other than registered investment companies; and 0 other accounts.
Because the portfolio managers manage assets for other investment
companies, pooled investment vehicles and/or other accounts (including
institutional clients, pension plans and certain high net worth individuals),
there may be an incentive to favor one client over another resulting in
conflicts of interest. For instance, the Adviser may receive fees from certain
accounts that are higher than the fee it receives from the Funds, or it may
receive a performance-based fee on certain accounts. In those instances, the
portfolio managers may have an incentive to favor the higher and/or
performance-based fee accounts over the Funds. The portfolio managers of the
Funds do not currently manage assets for other investment companies, pooled
investment vehicles or other accounts that charge a performance fee. The Adviser
has adopted trade allocation and other policies and procedures that it believes
are reasonably designed to address these and other conflicts of interest.
PORTFOLIO MANAGER COMPENSATION
STRUCTURE. Portfolio managers receive a combination of base compensation
and discretionary compensation, comprised of a cash bonus and several deferred
compensation programs described below. The methodology used to determine
portfolio manager compensation is applied across all accounts managed by the
portfolio manager.
BASE SALARY COMPENSATION. Generally, portfolio managers receive base
compensation based on the level of their position with the Adviser.
DISCRETIONARY COMPENSATION. In addition to base compensation, portfolio
managers may receive discretionary compensation. Discretionary compensation can
include:
- Cash Bonus;
- Morgan Stanley's Equity Incentive Compensation Program (EICP) awards--a
mandatory program that defers a portion of discretionary year-end
compensation into restricted stock units or other awards based on Morgan
Stanley common stock that are subject to vesting and other conditions;
S-15
- Investment Management Deferred Compensation Plan (IMDCP) awards--a
mandatory program that defers a portion of discretionary year-end
compensation and notionally invests it in designated funds advised by the
Adviser or its affiliates. The award is subject to vesting and other
conditions. Portfolio managers must notionally invest a minimum of 25% to
a maximum of 50% of the IMDCP deferral into a combination of the
designated funds they manage that are included in the IMDCP fund menu.
- Select Employees' Capital Accumulation Program (SECAP) awards--a
voluntary program that permits employees to elect to defer a portion of
their discretionary compensation and notionally invest the deferred
amount across a range of designated investment funds, including funds
advised by the Adviser or its affiliates; and
- Voluntary Equity Incentive Compensation Program (VEICP) awards--a
voluntary program that permits employees to elect to defer a portion of
their discretionary compensation to invest in Morgan Stanley stock units.
Several factors determine discretionary compensation, which can vary by
portfolio management team and circumstances. In order of relative importance,
these factors include
- Investment performance. A portfolio manager's compensation is linked to
the pre-tax investment performance of the accounts managed by the
portfolio manager. Investment performance is calculated for one-, three
and five-year periods measured against a fund's primary benchmark (as set
forth in a fund's prospectus), indices and/or peer groups. Generally, the
greatest weight is placed on the three- and five-year periods.
- Revenues generated by the investment companies, pooled investment
vehicles and other accounts managed by the portfolio manager.
- Contribution to the business objectives of the Adviser.
- The dollar amount of assets managed by the portfolio manager.
- Market compensation survey research by independent third parties.
- Other qualitative factors, such as contributions to client objectives.
- Performance of Morgan Stanley and Morgan Stanley Investment Management,
and the overall performance of the Global Investor Group, a department
within Morgan Stanley Investment Management that includes all investment
professionals.
Occasionally, to attract new hires or to retain key employees, the total
amount of compensation will be guaranteed in advance of the fiscal year end
based on current market levels. In limited circumstances, the guarantee may
continue for more than one year. The guaranteed compensation is based on the
same factors as those comprising overall compensation described above.
S-16
SECURITIES OWNERSHIP OF PORTFOLIO MANAGERS
As of the end of each Fund's most recently completed fiscal year, the
dollar range of securities beneficially owned by each portfolio manager in each
Fund is shown below:
-------- -------- ----------
(1) (1) (1)
------------------------------------
(1) This amount includes amounts held directly or notionally in the Fund through
certain defined contribution and/or deferred compensation programs.
CODE OF ETHICS
The Funds and the Adviser have adopted a Code of Ethics (the "Code of
Ethics") that sets forth general and specific standards relating to the
securities trading activities of their employees. The Code of Ethics does not
prohibit employees from acquiring securities that may be purchased or held by
the Funds, but is intended to ensure that all employees conduct their personal
transactions in a manner that does not interfere with the portfolio transactions
of the Funds or other Van Kampen funds, or that such employees take unfair
advantage of their relationship with the Funds. Among other things, the Code of
Ethics prohibits certain types of transactions absent prior approval, imposes
various trading restrictions (such as time periods during which personal
transactions may or may not be made) and requires quarterly reporting of
securities transactions and other reporting matters. All reportable securities
transactions and other required reports are to be reviewed by appropriate
personnel for compliance with the Code of Ethics. Additional restrictions apply
to portfolio managers, traders, research analysts and others who may have access
to nonpublic information about the trading activities of the Funds or other Van
Kampen funds or who otherwise are involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for the
Funds, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions on such transactions. While
the Adviser will be primarily responsible for the placement of each Fund's
portfolio business, the policies and practices in this regard are subject to
review by each Fund's Board of Trustees.
As most transactions made by a Fund are principal transactions at net
prices, a Fund generally incurs little or no brokerage costs. The portfolio
securities in which a Fund invests are normally purchased directly from the
issuer or in the over-the-counter market from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers include a spread or markup to the dealer
between the bid and asked price. Sales to dealers are effected at bid prices. A
Fund may also purchase certain money market instruments directly from an issuer,
in which case no commissions or discounts are paid, or may purchase and sell
listed
S-17
securities on an exchange, which are effected through brokers who charge a
commission for their services.
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to each Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker-dealers and in negotiating prices and any brokerage commissions
on such transactions, the Adviser considers the firm's reliability, integrity
and financial condition and the firm's execution capability, the size and
breadth of the market for the security, the size of and difficulty in executing
the order, and the best net price. There are many instances when, in the
judgment of the Adviser, more than one firm can offer comparable execution
services. In selecting among such firms, consideration may be given to those
firms which supply research and other services in addition to execution
services. The Adviser is authorized to pay higher commissions to brokerage firms
that provide it with investment and research information than to firms which do
not provide such services if the Adviser determines that such commissions are
reasonable in relation to the overall services provided. No specific value can
be assigned to such research services which are furnished without cost to the
Adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser to the Fund and still must be analyzed
and reviewed by its staff, the receipt of research information is not expected
to reduce its expenses materially. The investment advisory fee is not reduced as
a result of the Adviser's receipt of such research services. Services provided
may include (a) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which a Fund effects its securities
transactions may be used by the Adviser in servicing all of its advisory
accounts; not all of such services may be used by the Adviser in connection with
a Fund.
The Adviser also may place portfolio transactions, to the extent permitted
by law, with brokerage firms affiliated with a Fund and the Adviser if it
reasonably believes that the quality of execution and the commission are
comparable to that available from other qualified firms.
The Adviser may place portfolio transactions at or about the same time for
other advisory accounts, including other investment companies. The Adviser seeks
to allocate portfolio transactions equitably whenever concurrent decisions are
made to purchase or sell securities for a Fund and another advisory account. In
some cases, this procedure could have an adverse effect on the price or the
amount of securities available to a Fund. In making such allocations among a
Fund and other advisory accounts, the main factors considered by the Adviser are
the respective sizes of such Fund and other advisory accounts, the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and opinions of the persons responsible
for recommending the investment.
Certain broker-dealers, through which a Fund may effect securities
transactions, are affiliated persons (as defined in the 1940 Act) of a Fund or
affiliated persons of such
S-18
affiliates, including Morgan Stanley or its subsidiaries. Each Fund's Board of
Trustees has adopted certain policies incorporating the standards of Rule 17e-1
issued by the SEC under the 1940 Act which require that the commissions paid to
affiliates of the Fund must be reasonable and fair compared to the commissions,
fees or other remuneration received or to be received by other brokers in
connection with comparable transactions involving similar securities during a
comparable period of time. The rule and procedures also contain review
requirements and require the Adviser to furnish reports to the trustees and to
maintain records in connection with such reviews. After consideration of all
factors deemed relevant, the trustees will consider from time to time whether
the advisory fee for each Fund will be reduced by all or a portion of the
brokerage commission paid to affiliated brokers.
Unless otherwise disclosed below, a Fund paid no commissions to affiliated
brokers during the last three fiscal years. Each Fund paid the following
commissions to brokers during the fiscal years shown:
AFFILIATED BROKERS
ALL BROKERS MORGAN STANLEY DW INC.
----------- ----------------------
COMMISSIONS PAID:
Fiscal year ended October 31, 2004:
Target Fund......................... $16,642
Acquiring Fund...................... $21,086
Fiscal year ended October 31, 2004:
Target Fund......................... $19,848
Acquiring Fund...................... $13,997
Fiscal year ended October 31, 2004:
Target Fund......................... $ 2,155
Acquiring Fund...................... $ 1,237
FISCAL YEAR 2004 PERCENTAGES
Commissions with affiliate to total
commissions:
Target Fund......................................
Acquiring Fund...................................
Value of brokerage transactions with
affiliate to total transactions:
Target Fund......................................
Acquiring Fund...................................
During the fiscal year ended October 31, 2004, no Fund paid brokerage
commissions to brokers selected primarily on the basis of research services
provided to the Adviser.
S-19
OTHER INFORMATION
CUSTODY OF ASSETS
All securities owned by the Funds and all cash, including proceeds from the
sale of securities in each Fund's investment portfolio, are held by State Street
Bank and Trust Company, 225 West Franklin Street, Boston, Massachusetts 02110,
as custodian. The custodian also provides accounting services to the Funds.
PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD
The Funds' Proxy Voting Policy and Procedures are included as Appendix E to
this Statement of Additional Information. Information on how each Fund voted
proxies relating to portfolio securities during the most recent twelve-month
period ended June 30 is available without charge, upon request, by calling (800)
341-2929 or by visiting our web site at www.vankampen.com. This information is
also available on the SEC's web site at http://www.sec.gov.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
An independent registered public accounting firm for the Funds performs an
annual audit of each Fund's financial statements. Each Fund's Board of Trustees
has engaged , located at , to be each Fund's
independent registered public accounting firm.
FINANCIAL STATEMENTS
Incorporated herein by reference and included in their respective
entireties are (i) the audited financial statements of the Acquiring Fund for
the fiscal year ended October 31, 2004, as included in Appendix C hereto, (ii)
the audited financial statements of the Target Fund for fiscal year ended
October 31, 2004, as included in Appendix D hereto, (iii) the unaudited
semi-annual financial statements of the Acquiring Fund for the period ended
April 30, 2005, as included in Appendix E hereto, and (iv) the unaudited
semi-annual financial statements of the Target Fund for the period ended April
30, 2005, as included in Appendix F hereto.
PRO FORMA FINANCIAL STATEMENTS
Set forth in Appendix H hereto are unaudited pro forma financial statements
of the Acquiring Fund giving effect to the Reorganization which include: (i) Pro
Forma Condensed Statements of Assets and Liabilities at January 31, 2005, (ii)
Pro Forma Condensed Statement of Operations for the one year period ended
January 31, 2005 and (iii) Pro Forma Portfolio of Investments at January 31,
2005.
S-20
APPENDIX A
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION
In order to consummate the Reorganization and in consideration of the
promises and the covenants and agreements hereinafter set forth, and intending
to be legally bound, Van Kampen XXXXXX, a registered closed-end investment
company, File No. 811-XXXX (the "Target Fund") and Van Kampen XXXXXX (the
"Acquiring Fund"), a registered closed-end investment company, File No.
811-XXXX, each hereby agree as follows:
1. Representations and Warranties of the Acquiring Fund.
The Acquiring Fund represents and warrants to, and agrees with, the
Target Fund that:
(a) The Acquiring Fund is a trust, with transferable shares, duly
organized, validly existing and in good standing in conformity
with the laws of its jurisdiction of organization, and has the
power to own all of its assets and to carry out this
Agreement. The Acquiring Fund has all necessary federal, state
and local authorizations to carry on its business as it is now
being conducted and to carry out this Agreement.
(b) The Acquiring Fund is duly registered under the Investment
Company Act of 1940, as amended (the "1940 Act") as a
[non-]diversified, closed-end management investment company
and such registration has not been revoked or rescinded and is
in full force and effect. The Acquiring Fund has elected and
qualified for the special tax treatment afforded regulated
investment companies ("RICs") under Section 851 of the
Internal Revenue Code (the "Code") at all times since its
inception and intends to continue to so qualify until
consummation of the reorganization contemplated hereby (the
"Reorganization") and thereafter.
(c) The Target Fund has been furnished with the Acquiring Fund's
Annual Report to Shareholders for the fiscal year ended XXXX,
2004, and the audited financial statements appearing therein,
having been audited by independent registered public
accounting firm, fairly present the financial position of the
Acquiring Fund as of the respective dates indicated, in
conformity with accounting principles generally accepted in
the United States applied on a consistent basis.
(d) An unaudited statement of assets, liabilities and capital of
the Acquiring Fund and an unaudited schedule of investments of
the Acquiring Fund, each as of the Valuation Time (as defined
in Section 5(d) of this Agreement), will be furnished to the
Target Fund, at or prior to the Closing Date (as defined in
Section 7(a) herein), for the purpose of determining the
number of Acquiring Fund Common Shares and Acquiring Fund APS
to be issued pursuant to Section 6 of this Agreement; each
will fairly present the financial position of the Acquiring
Fund as of the Valuation Time in conformity with generally
accepted accounting principles applied on a consistent basis.
(e) The Acquiring Fund has full power and authority to enter into
and perform its obligations under this Agreement. The
execution, delivery and performance of this Agreement has been
duly authorized by all necessary action of its Board of
Trustees, and this Agreement constitutes a valid and binding
contract enforceable in accordance with its terms, subject to
the effects of bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar
A-1
laws relating to or affecting creditors' rights generally and
court decisions with respect thereto.
(f) There are no material legal, administrative or other
proceedings pending or, to the knowledge of the Acquiring
Fund, threatened against it which assert liability on the part
of the Acquiring Fund or which materially affect its financial
condition or its ability to consummate the Reorganization. The
Acquiring Fund is not charged with or, to the best of its
knowledge, threatened with any violation or investigation of
any possible violation of any provisions of any federal, state
or local law or regulation or administrative ruling relating
to any aspect of its business.
(g) The Acquiring Fund is not obligated under any provision of its
Declaration of Trust, as amended, or its by-laws, as amended,
and is not a party to any contract or other commitment or
obligation, and is not subject to any order or decree which
would be violated by its execution of or performance under
this Agreement, except insofar as the Funds have mutually
agreed to amend such contract or other commitment or
obligation to cure any potential violation as a condition
precedent to the Reorganization.
(h) There are no material contracts outstanding to which the
Acquiring Fund is a party that have not been disclosed in the
N-14 Registration Statement (as defined in subsection (k)
below) or that will not otherwise be disclosed to the Target
Fund prior to the Valuation Time.
(i) The Acquiring Fund has no known liabilities of a material
amount, contingent or otherwise, other than those shown on its
statements of assets, liabilities and capital referred to in
subsection (c) above, those incurred in the ordinary course of
its business as an investment company, and those incurred in
connection with the Reorganization. As of the Valuation Time,
the Acquiring Fund will advise the Target Fund in writing of
all known liabilities, contingent or otherwise, whether or not
incurred in the ordinary course of business, existing or
accrued as of such time, except to the extent disclosed in the
financial statements referred to in subsection (c) above.
(j) No consent, approval, authorization or order of any court or
government authority is required for the consummation by the
Acquiring Fund of the Reorganization, except such as may be
required under the Securities Act of 1933, as amended (the
"1933 Act"), the Securities Exchange Act of 1934, as amended
(the "1934 Act") and the 1940 Act or state securities laws
(which term as used herein shall include the laws of the
District of Columbia and Puerto Rico).
(k) The registration statement filed by the Acquiring Fund on Form
N-14, which includes the proxy statement of the Target Fund
and the Acquiring Fund with respect to the transactions
contemplated herein (the "Joint Proxy Statement/Prospectus"),
and any supplement or amendment thereto or to the documents
therein (as amended or supplemented, the "N-14 Registration
Statement"), on its effective date, at the time of the
shareholders' meetings referred to in Section 8(a) of this
Agreement and at the Closing Date, insofar as it relates to
the Acquiring Fund, (i) complied or will comply in all
material respects with the provisions of the 1933 Act, the
1934 Act and the 1940 Act and the rules and regulations
thereunder and (ii) did not or will not contain any
A-2
untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading; and the Joint
Proxy Statement/Prospectus included therein did not or will
not contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements
therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that the
representations and warranties in this subsection only shall
apply to statements in or omissions from the N-14 Registration
Statement made in reliance upon and in conformity with
information furnished by the Acquiring Fund for use in the
N-14 Registration Statement.
(l) The Acquiring Fund is authorized to issue an unlimited number
of common shares of beneficial interest, par value $.01 per
share (the "Acquiring Fund Common Shares"), and XXXX preferred
shares of beneficial interest, par value $.01 per share. The
Board of Trustees of the Acquiring Fund has designated XXXX
preferred shares as Auction Preferred Shares ("Acquiring Fund
APS"). Each outstanding Acquiring Fund Common Share and each
Acquiring Fund APS of the Acquiring Fund is fully paid and,
except as provided in Section 5.1 of the Acquiring Fund's
Declaration of Trust, nonassessable, and has full voting
rights.
(m) The Acquiring Fund Common Shares and the Acquiring Fund APS to
be issued to the Target Fund pursuant to this Agreement will
have been duly authorized and, when issued and delivered
pursuant to this Agreement, will be legally and validly issued
and will be fully paid and, except as provided in Section 5.1
of the Acquiring Fund's Declaration of Trust, nonassessable
and will have full voting rights, and no shareholder of the
Acquiring Fund will have any preemptive right of subscription
or purchase in respect thereof.
(n) At or prior to the Closing Date, the Acquiring Fund Common
Shares to be transferred to the Target Fund for distribution
to the shareholders of the Target Fund on the Closing Date
will be duly qualified for offering to the public in all
states of the United States in which the sale of shares of the
Funds presently are qualified, and there will be a sufficient
number of such shares registered under the 1933 Act and, as
may be necessary, with each pertinent state securities
commission to permit the transfers contemplated by this
Agreement to be consummated.
(o) At or prior to the Closing Date, the Acquiring Fund APS to be
transferred to the Target Fund on the Closing Date will be
duly qualified for offering to the public in all states of the
United States in which the sale of APS of the Target Fund
presently are qualified, and there are a sufficient number of
Acquiring Fund APS registered under the 1933 Act and with each
pertinent state securities commission to permit the transfers
contemplated by this Agreement to be consummated.
(p) At or prior to the Closing Date, the Acquiring Fund will have
obtained any and all regulatory, trustee and shareholder
approvals necessary to issue the Acquiring Fund Common Shares
and the Acquiring Fund APS to the Target Fund.
(q) The Acquiring Fund has filed, or intends to file, or has
obtained extensions to file, all federal, state and local tax
returns which are required to be filed by it, and has paid or
has obtained extensions to pay, all federal, state and local
taxes shown on said returns to be due and owing and all
assessments received by it, up to and including the taxable
year in which the Closing Date occurs. All tax liabilities of
the Acquiring Fund have been adequately provided for on its
books, and no tax deficiency or liability of the Acquiring
Fund has been asserted and no question with respect thereto
has been raised by the Internal Revenue Service or by any
state or local tax authority for taxes in excess of those
already paid, up to and including the taxable year in which
the Closing Date occurs.
(r) The Acquiring Fund has elected to qualify and has qualified as
a RIC as of and since its inception; has been a RIC under the
Code at all times since the end of its first taxable year when
it so qualified; qualifies and will continue to qualify as a
RIC under the Code; and has satisfied the distribution
requirements imposed by the Code for each of its taxable
years.
2. Representations and Warranties of the Target Fund.
The Target Fund represents and warrants to, and agrees with, the
Acquiring Fund that:
(a) The Target Fund is a trust, with transferable shares, duly
organized, validly existing and in good standing in conformity
with the laws of the jurisdiction of its organization, and has
the power to own all of its assets and to carry out this
Agreement. The Target Fund has all necessary federal, state
and local authorizations to carry on its business as it is now
being conducted and to carry out this Agreement.
A-3
(b) The Target Fund is duly registered under the 1940 Act as a
[non-]diversified, closed-end management investment company,
and such registration has not been revoked or rescinded and is
in full force and effect. The Target Fund has elected and
qualified for the special tax treatment afforded RICs under
Section 851 of the Code at all times since its inception, and
intends to continue to so qualify through its taxable year
ending upon liquidation.
(c) As used in this Agreement, the term "Target Fund Investments"
shall mean (i) the investments of the Target Fund shown on the
schedule of its investments as of the Valuation Time furnished
to the Acquiring Fund; and (ii) all other assets owned by the
Target Fund or liabilities incurred as of the Valuation Time.
(d) The Target Fund has full power and authority to enter into and
perform its obligations under this Agreement. The execution,
delivery and performance of this Agreement has been duly
authorized by all necessary action of its Board of Trustees
and this Agreement constitutes a valid and binding contract
enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar laws relating to or affecting
creditors' rights generally and court decisions with respect
thereto.
(e) The Acquiring Fund has been furnished with the Target Fund's
Annual Report to Shareholders for the fiscal year ended XXXX,
2004, and the audited financial statements appearing therein,
having been audited by independent registered public
accounting firm, fairly present the financial position of the
Target Fund as of the respective dates indicated, in
conformity with accounting principles generally accepted in
the United States applied on a consistent basis.
(f) An unaudited statement of assets, liabilities and capital of
the Target Fund and an unaudited schedule of investments of
the Target Fund, each as of the Valuation Time, will be
furnished to the Acquiring Fund at or prior to the Closing
Date for the purpose of determining the number of shares of
Acquiring Fund Common Shares and Acquiring Fund APS to be
issued to the Target Fund pursuant to Section 3 of this
Agreement; each will fairly present the financial position of
the Target Fund as of the Valuation Time in conformity with
generally accepted accounting principles applied on a
consistent basis.
(g) There are no material legal, administrative or other
proceedings pending or, to the knowledge of the Target Fund,
threatened against it which assert liability on the part of
the Target Fund or which materially affect its financial
condition or its ability to consummate the Reorganization. The
Target Fund is not charged with or, to the best of its
knowledge, threatened with any violation or investigation of
any possible violation of any provisions of any federal, state
or local law or regulation or administrative ruling relating
to any aspect of its business.
(h) There are no material contracts outstanding to which the
Target Fund is a party that have not been disclosed in the
N-14 Registration Statement or will not otherwise be disclosed
to the Acquiring Fund prior to the Valuation Time.
(i) The Target Fund is not obligated under any provision of its
Declaration of Trust, as amended, or its by-laws, as amended,
or a party to any contract or other commitment or obligation,
and is not subject to any order or decree which would be
violated by its execution of or performance under this
Agreement, except insofar as the Funds have
A-4
mutually agreed to amend such contract or other commitment or
obligation to cure any potential violation as a condition
precedent to the Reorganization.
(j) The Target Fund has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its
statements of assets, liabilities and capital referred to
above, those incurred in the ordinary course of its business
as an investment company and those incurred in connection with
the Reorganization. As of the Valuation Time, the Target Fund
will advise the Acquiring Fund in writing of all known
liabilities, contingent or otherwise, whether or not incurred
in the ordinary course of business, existing or accrued as of
such time.
(k) The Target Fund has filed, or intends to file, or has obtained
extensions to file, all federal, state and local tax returns
which are required to be filed by it, and has paid or has
obtained extensions to pay, all federal, state and local taxes
shown on said returns to be due and owing and all assessments
received by it, up to and including the taxable year in which
the Closing Date occurs. All tax liabilities of the Target
Fund have been adequately provided for on its books, and no
tax deficiency or liability of the Target Fund has been
asserted and no question with respect thereto has been raised
by the Internal Revenue Service or by any state or local tax
authority for taxes in excess of those already paid, up to and
including the taxable year in which the Closing Date occurs.
(l) At both the Valuation Time and the Closing Date, the Target
Fund will have full right, power and authority to sell,
assign, transfer and deliver the Target Fund Investments. At
the Closing Date, subject only to the obligation to deliver
the Target Fund Investments as contemplated by this Agreement,
the Target Fund will have good and marketable title to all of
the Target Fund Investments, and the Acquiring Fund will
acquire all of the Target Fund Investments free and clear of
any encumbrances, liens or security interests and without any
restrictions upon the transfer thereof (except those imposed
by the federal or state securities laws and those
imperfections of title or encumbrances as do not materially
detract from the value or use of the Target Fund Investments
or materially affect title thereto).
(m) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the
Target Fund of the Reorganization, except such as may be
required under the 1933 Act, the 1934 Act, the 1940 Act or
state securities laws.
(n) The N-14 Registration Statement, on its effective date, at the
time of the shareholders' meetings called to vote on this
Agreement and on the Closing Date, insofar as it relates to
the Target Fund (i) complied or will comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and
the 1940 Act and the rules and regulations thereunder, and
(ii) did not or will not contain any untrue statement of a
material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein
not misleading; and the Joint Proxy Statement/Prospectus
included therein did not or will not contain any untrue
statement of a material fact or omit to state any material
fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in
this subsection shall apply only to statements in or omissions
from the N-14 Registration Statement made in reliance upon and
in conformity with information furnished by the Target Fund
for use in the N-14 Registration Statement.
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(o) The Target Fund is authorized to issue an unlimited number of
common shares of beneficial interest, par value $.01 per share
(the "Target Fund Common Shares"), and XXXX preferred shares
of beneficial interest, par value $.01 per share. The Board of
Trustees of the Acquiring Fund has designated XXXX preferred
shares as Target Fund Preferred Shares (the "Target Fund
Preferred Shares"). Each outstanding Target Fund Common Share
and each of the outstanding Target Fund Preferred Shares is
fully paid and, except as provided in Section 5.1 of the
Target Fund's Declaration of Trust, nonassessable, and has
full voting rights.
(p) All of the issued and outstanding Target Fund Common Shares
and Target Fund Preferred Shares were offered for sale and
sold in conformity with all applicable federal and state
securities laws.
(q) The books and records of the Target Fund made available to the
Acquiring Fund and/or its counsel are substantially true and
correct and contain no material misstatements or omissions
with respect to the operations of the Target Fund.
(r) The Target Fund will not sell or otherwise dispose of any of
the Acquiring Fund Common Shares or Acquiring Fund APS to be
received in the Reorganization, except in distribution to the
shareholders of the Target Fund, as provided in Section 3 of
this Agreement.
(s) The Target Fund has elected to qualify and has qualified as a
"RIC" under the Code as of and since its inception; has been a
RIC under the Code at all times since the end of its first
taxable year when it so qualified; qualifies and will continue
to qualify as a RIC under the Code for its taxable year ending
upon its liquidation; and has satisfied the distribution
requirements imposed by the Code for each of its taxable
years.
3. The Reorganization.
(a) Subject to receiving the requisite approvals of the
shareholders of the Target Fund, and to the other terms and
conditions contained herein, (i) the Target Fund agrees to
convey, transfer and deliver to the Acquiring Fund and the
Acquiring Fund agrees to acquire from the Target Fund, on the
Closing Date, all of the Target Fund Investments (including
interest accrued as of the Valuation Time on debt
instruments), and assume substantially all of the liabilities
of the Target Fund, in exchange for that number of Target Fund
Common Shares and Target Fund Preferred Shares provided in
Section 4 of this Agreement. Pursuant to this Agreement, as
soon as practicable after the Closing Date, the Target Fund
will distribute all Acquiring Fund Common Shares and Acquiring
Fund APS received by it to its shareholders in exchange for
their Target Fund Common Shares and Target Fund Preferred
Shares. Such distributions shall be accomplished by the
opening of shareholder accounts on the share ledger records of
the Acquiring Fund in the amounts due the shareholders of the
Target Fund based on their respective holdings in the Target
Fund as of the Valuation Time.
(b) If it is determined that the portfolios of the Target Fund and
the Acquiring Fund, when aggregated, would contain investments
exceeding certain percentage limitations imposed upon the
Acquiring Fund with respect to such investments, the Target
Fund, if requested by the Acquiring Fund, will dispose of a
sufficient amount of such investments as may be necessary to
avoid violating such limitations as of the Closing Date.
Notwithstanding the foregoing, (a) nothing herein will require
the Target Fund to dispose of any portfolios, securities or
other investments, if, in the reasonable judgment of the
Target Fund's trustees or investment adviser, such disposition
would adversely affect the tax-free nature of the
Reorganization for federal income tax purposes or would
otherwise not be in the best interests of the Target Fund, and
(b) nothing will permit the Target Fund to dispose of any
portfolio securities or other investments if, in the
reasonable judgment of the Acquiring Fund's trustees or
investment adviser, such disposition would adversely affect
the tax-free nature of the Reorganization for federal income
tax purposes or would otherwise not be in the best interests
of the Acquiring Fund.
(c) Prior to the Closing Date, the Target Fund shall declare a
dividend or dividends which, together with all such previous
dividends, shall have the effect of distributing to their
respective shareholders all of their respective net investment
company taxable income to and including the Closing Date, if
any (computed without regard to any deduction for dividends
paid), and all of its net capital gain, if any, realized to
and including the Closing Date. In this regard and in
connection with the Reorganization, the last dividend period
for the Target Fund Preferred Shares prior to the Closing Date
may be shorter than the dividend period for such Target Fund
Preferred Shares determined as set forth in the applicable
Certificate of Vote pertaining to such Target Fund Preferred
Shares.
(d) The Target Fund will pay or cause to be paid to the Acquiring
Fund any interest the Target Fund receives on or after the
Closing Date with respect to any of the Target Fund
Investments transferred to the Acquiring Fund hereunder.
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(e) The Valuation Time shall be 4:00 p.m., Eastern time, on XXXX,
2005, or such earlier or later day and time as may be mutually
agreed upon in writing (the "Valuation Time").
(f) Recourse for liabilities assumed from the Target Fund by the
Acquiring Fund in the Reorganization will be limited to the
net assets acquired by the Acquiring Fund. The known
liabilities of the Target Fund, as of the Valuation Time,
shall be confirmed to the Acquiring Fund pursuant to Section
2(j) of this Agreement.
(g) The Target Fund will be terminated following the Closing Date
by terminating its registration under the 1940 Act and its
organization under Massachusetts law and will withdraw its
authority to do business in any state where it is required to
do so.
(h) The Acquiring Fund will file with the Secretary of State of
The Commonwealth of Massachusetts, as required, any amendment
to its Certificate of Vote establishing the powers, rights and
preferences of the Acquiring Fund APS prior to the closing of
the Reorganization.
4. Issuance and Valuation of Acquiring Fund Common Shares and Acquiring
Fund APS in the Reorganization.
Acquiring Fund Common Shares and Acquiring Fund APS of an aggregate net asset
value or aggregate liquidation preference, as the case may be, equal to the
value of the assets of the Target Fund acquired in the Reorganization determined
as hereinafter provided, reduced by the amount of liabilities of the Target Fund
assumed by the Acquiring Fund in the Reorganization, shall be issued by the
Acquiring Fund to the Target Fund in exchange for such assets of the Target
Fund. The Acquiring Fund will issue to the Target Fund (i) a number of Acquiring
Fund Common Shares, the aggregate net asset value of which will equal the
aggregate net asset value of the Target Fund Common Shares, determined as set
forth below, and (ii) a number of Acquiring Fund APS, the aggregate liquidation
preference and value of which will equal the aggregate liquidation preference
and value of the Target Fund Preferred Shares, determined as set forth below.
The net asset value of each of the Funds and the liquidation preference and
value of each of the Target Fund Preferred Shares and the Acquiring Fund APS
shall be determined as of the Valuation Time in accordance with the regular
procedures of the investment adviser, and no formula will be used to adjust the
net asset value so determined of any Fund to take into account differences in
realized and unrealized gains and losses. Values in all cases shall be
determined as of the Valuation Time. The value of the Target Fund Investments to
be transferred to the Acquiring Fund shall be determined pursuant to the regular
procedures of the investment adviser.
Such valuation and determination shall be made by the Acquiring Fund in
cooperation with the Target Fund and shall be confirmed in writing by the
Acquiring Fund to the Target Fund. The net asset value per share of the
Acquiring Fund Common Shares and the liquidation preference and value per share
of the Acquiring Fund APS shall be determined in accordance with such procedures
and the Acquiring Fund shall certify the computations involved. For purposes of
determining the net asset value of each of a Target Fund Common Share and an
Acquiring Fund Common Share, the value of the securities held by the applicable
Fund plus any cash or other assets (including interest accrued but not yet
received) minus all liabilities (including accrued expenses) and the aggregate
liquidation value of the outstanding shares of Target Fund Preferred Shares or
Acquiring Fund APS, as the case may be, is divided by the total number of Target
Fund Common Shares or Acquiring Fund Common Shares, as the case may be,
outstanding at such time.
A-7
The Acquiring Fund shall issue to the Target Fund separate certificates or
share deposit receipts for the Acquiring Fund Common Shares and the Acquiring
Fund APS, each registered in the name of the Target Fund. The Target Fund shall
then distribute the Acquiring Fund Common Shares and the Acquiring Fund APS to
the holders of Target Fund Common Shares and Target Fund Preferred Shares by
redelivering the certificates or share deposit receipts evidencing ownership of
(i) the Acquiring Fund Common Shares to EquiServe Trust Company, N.A., as the
transfer agent and registrar for the Acquiring Fund Common Shares, for
distribution to the holders of Target Fund Common Shares on the basis of such
holder's proportionate interest in the aggregate net asset value of the Target
Fund Common Shares and (ii) the Acquiring Fund APS to Deutsche Bank Trust
Company Americas, as the transfer agent and registrar for the Acquiring Fund
APS, for distribution to the holders of Target Fund Preferred Shares on the
basis of such holder's proportionate interest in the aggregate liquidation
preference and value of the Target Fund Preferred Shares. With respect to any
Target Fund shareholder holding certificates evidencing ownership of Target Fund
Common Shares as of the Closing Date, and subject to the Acquiring Fund being
informed thereof in writing by the Target Fund, the Acquiring Fund will not
permit such shareholder to receive new certificates evidencing ownership of the
Acquiring Fund Common Shares or Acquiring Fund APS, exchange Acquiring Fund
Common Shares or Acquiring Fund APS credited to such shareholder's account for
shares of other investment companies managed by the Adviser or any of its
affiliates, or pledge or redeem such Acquiring Fund Common Shares or Acquiring
Fund APS, in any case, until notified by the Target Fund or its agent that such
shareholder has surrendered his or her outstanding certificates evidencing
ownership of Target Fund Common Shares or Target Fund Preferred Shares or, in
the event of lost certificates, posted adequate bond. The Target Fund, at its
own expense, will request its shareholders to surrender their outstanding
certificates evidencing ownership of Target Fund Common Shares or Target Fund
Preferred Shares, as the case may be, or post adequate bond therefor.
No fractional shares of Acquiring Fund Common Shares will be issued to
holders of Target Fund Common Shares unless such shares are held in a Dividend
Reinvestment Plan account. In lieu thereof, the Acquiring Fund's transfer agent,
EquiServe Trust Company, N.A., will aggregate all fractional Acquiring Fund
Common Shares to be issued in connection with the Reorganization (other than
those issued to a Dividend Reinvestment Plan account) and sell the resulting
full shares on the New York Stock Exchange at the current market price for
Acquiring Fund Common Shares for the account of all holders of such fractional
interests, and each such holder will receive such holder's pro rata share of the
proceeds of such sale upon surrender of such holder's certificates representing
Acquiring Fund Common Shares.
5. Payment of Expenses.
(a) With respect to expenses incurred in connection with the
Reorganization, the Target Fund and the Acquiring Fund will
share, in proportion to their respective projected annual
expense savings, all expenses incurred in connection with the
Reorganization, including, but not limited to, all costs
related to the preparation and distribution of materials
distributed to each Fund's Board of Trustees; expenses
incurred in connection with the preparation of the Agreement
and Plan of Reorganization and a registration statement on
Form N-14; SEC and state securities commission filing fees and
legal and audit fees in connection with the Reorganization;
costs of printing and distributing the Joint Proxy Statement/
Prospectus; legal fees incurred preparing each Fund's board
materials, attending each Fund's board meetings and preparing
the minutes; auditing fees associated with each Fund's
financial statements; stock exchange fees, rating agency fees,
portfolio transfer taxes (if any) and any similar expenses
incurred in connection with the Reorganization.
(b) If for any reason the Reorganization is not consummated, no
party shall be liable to any other party for any damages
resulting therefrom, including, without limitation,
consequential damages, and the investment adviser shall pay
all expenses incurred by each Fund in connection with the
Reorganization.
A-8
6. Covenants of the Funds.
(a) Each Fund covenants to operate its business as presently
conducted between the date hereof and the Closing Date.
(b) The Target Fund agrees that following the consummation of the
Reorganization, it will terminate in accordance with the laws
of The Commonwealth of Massachusetts and any other applicable
law, it will not make any distributions of any Acquiring Fund
Common Shares or Acquiring Fund APS other than to its
respective shareholders and without first paying or adequately
providing for the payment of all of its respective liabilities
not assumed by the Acquiring Fund, if any, and on and after
the Closing Date it shall not conduct any business except in
connection with its termination.
(c) The Target Fund undertakes that if the Reorganization is
consummated, it will file an application pursuant to Section
8(f) of the 1940 Act for an order declaring that the Target
Fund has ceased to be a registered investment company.
(d) The Acquiring Fund will file the N-14 Registration Statement
with the Securities and Exchange Commission (the "Commission")
and will use its best efforts to provide that the N-14
Registration Statement becomes effective as promptly as
practicable. Each Fund agrees to cooperate fully with the
other, and each will furnish to the other the information
relating to itself to be set forth in the N-14 Registration
Statement as required by the 1933 Act, the 1934 Act the 1940
Act, and the rules and regulations thereunder and the state
securities laws.
(e) The Acquiring Fund has no plan or intention to sell or
otherwise dispose of the Target Fund Investments, except for
dispositions made in the ordinary course of business.
(f) Each of the Funds agrees that by the Closing Date all of its
federal and other tax returns and reports required to be filed
on or before such date shall have been filed and all taxes
shown as due on said returns either have been paid or adequate
liability reserves have been provided for the payment of such
taxes.
The intention of the parties is that the transaction
contemplated by this Agreement will qualify as a
reorganization within the meaning of Section 368(a) of the
Internal Revenue Code. Neither the Acquiring Fund nor the
Target Fund shall take any action or cause any action to be
taken (including, without limitation, the filing of any tax
return) that is inconsistent with such treatment or results in
the failure of the transaction to qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue
Code. At or prior to the Closing Date, the Acquiring Fund and
the Target Fund will take such action, or cause such action to
be taken, as is reasonably necessary to enable Skadden, Arps,
Slate, Meagher & Flom LLP ("Skadden"), special counsel to the
Funds, to render the tax opinion required herein (including,
without limitation, each party's execution of representations
reasonably requested by and addressed to Skadden.
In connection with this covenant, the Funds agree to
cooperate with each other in filing any tax return, amended
return or claim for refund, determining a liability for taxes
or a right to a refund of taxes or participating in or
conducting any audit or other proceeding in respect of taxes.
The Acquiring Fund agrees to retain for a period of ten (10)
years following the Closing Date all returns, schedules and
work papers and all material records or other documents
relating to tax matters of the Target Fund for each of such
Fund's taxable period first ending after the Closing Date and
for all prior taxable periods.
After the Closing Date, the Target Fund shall
prepare, or cause its agents to prepare, any federal, state or
local tax returns required to be filed by such fund with
respect to its final taxable year ending with its complete
liquidation and for any prior periods or taxable years and
further shall cause such tax returns to be duly filed with the
appropriate taxing authorities. Notwithstanding the
aforementioned provisions of this subsection, any expenses
incurred by the Target Fund (other than for payment of taxes)
in connection with the preparation and filing of said tax
returns after the Closing Date shall be borne by such Fund to
the extent such expenses have been accrued by such Fund in the
ordinary course without regard to the Reorganization; any
excess expenses shall be borne by the investment adviser or an
affiliate thereof.
A-9
(g) The Target Fund agrees to mail to its shareholders of record
entitled to vote at the special meeting of shareholders at
which action is to be considered regarding this Agreement, in
sufficient time to comply with requirements as to notice
thereof, a combined proxy statement and prospectus which
complies in all material respects with the applicable
provisions of Section 14(a) of the 1934 Act and Section 20(a)
of the 1940 Act, and the rules and regulations, respectively,
thereunder.
(h) Following the consummation of the Reorganization, the
Acquiring Fund will continue its business as a diversified,
closed-end management investment company registered under the
1940 Act.
7. Closing Date.
(a) Delivery of the assets of the Target Fund to be transferred,
together with any other Target Fund Investments, and the
Acquiring Fund Common Shares and Acquiring Fund APS to be
issued as provided in this Agreement, shall be made at such
place and time as the Funds shall mutually agree on the next
full business day following the Valuation Time, or at such
other time and date agreed to by the Funds, the date and time
upon which such delivery is to take place being referred to
herein as the "Closing Date." To the extent that any Target
Fund Investments, for any reason, are not transferable on the
Closing Date, the Target Fund shall cause such Target Fund
Investments to be transferred to the Acquiring Fund's account
with its custodian at the earliest practicable date
thereafter.
(b) The Target Fund will deliver to the Acquiring Fund on the
Closing Date confirmation or other adequate evidence as to the
tax basis of the Target Fund Investments delivered to the
Acquiring Fund hereunder.
(c) As soon as practicable after the close of business on the
Closing Date, the Target Fund shall deliver to the Acquiring
Fund a list of the names and addresses of all of the
shareholders of record of the Target Fund on the Closing Date
and the number of Target Fund Common Shares and Target Fund
Preferred Shares owned by each such shareholder, certified to
the best of its knowledge and belief by the transfer agent for
the Target Fund or by its President.
8. Conditions of the Target Fund.
The obligations of the Target Fund hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the Board of
Trustees of the Target Fund and by the affirmative vote of the
holders of a majority of each of the outstanding Target Fund
Common Shares and Target Fund Preferred Shares, each voting
separately as a class; and that the Acquiring Fund shall have
delivered to the Target Fund a copy of the resolution
approving this Agreement adopted by the Board of Trustees of
the Acquiring Fund, and a certificate setting forth the vote
of holders of Acquiring Fund Common Shares approving the
issuance of additional Acquiring Fund Common Shares, each
certified by its Secretary.
(b) That the Target Fund shall have received from the Acquiring
Fund a statement of assets, liabilities and capital, with
values determined as provided in Section 4 of this Agreement,
together with a schedule of such Fund's investments, all as of
the Valuation Time, certified on the Target Fund's behalf by
its President (or any Vice President) or its Treasurer, and a
certificate signed by the Fund's President (or any Vice
President) and its Treasurer, dated as of the Closing Date,
certifying that as of the Valuation Time and as of the Closing
Date there has been no material adverse change in the
financial position of the Target Fund since the date of such
Fund's most recent Annual or Semi-Annual Report,
A-10
as applicable, other than changes in its portfolio securities
since that date or changes in the market value of its
portfolio securities.
(c) That the Acquiring Fund shall have furnished to the Target
Fund a certificate signed by the Acquiring Fund's President
(or any Vice President) or its Treasurer, dated as of the
Closing Date, certifying that, as of the Valuation Time and as
of the Closing Date, all representations and warranties of the
Acquiring Fund made in this Agreement are true and correct in
all material respects with the same effect as if made at and
as of such dates, and that the Acquiring Fund has complied
with all of the agreements and satisfied all of the conditions
on its part to be performed or satisfied at or prior to each
of such dates.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) The Target Fund shall have received the opinion(s) of Skadden,
counsel for the Acquiring Fund, dated as of the Closing Date,
addressed to the Target Fund substantially in the form and to
the effect that:
(i) the Acquiring Fund is duly formed and validly
existing under the laws of its state of organization;
(ii) the Acquiring Fund is registered as a closed-end,
management investment company under the 1940 Act;
(iii) this Agreement and the Reorganization provided for
herein and the execution of this Agreement have been
duly authorized and approved by all requisite action
of the Acquiring Fund, and this Agreement has been
duly executed and delivered by the Acquiring Fund and
(assuming this Agreement is a valid and binding
obligation of the other party hereto) is a valid and
binding obligation of the Acquiring Fund;
(iv) neither the execution or delivery by the Acquiring
Fund of this Agreement nor the consummation by the
Acquiring Fund of the transactions contemplated
hereby violate any provision of any statute or any
published regulation or any judgment or order
disclosed to counsel by the Acquiring Fund as being
applicable to the Acquiring Fund;
(v) the Acquiring Fund Common Shares and Acquiring Fund
APS have each been duly authorized and, upon issuance
thereof in accordance with this Agreement, each will
be validly issued, fully paid and, except as provided
in Section 5.1 of the Acquiring Fund's Declaration of
Trust, nonassessable; and
(vi) to their knowledge and subject to the qualifications
set forth below, the execution and delivery by the
Acquiring Fund of this Agreement and the consummation
of the transactions herein contemplated do not
require, under the laws of its state of organization
or any state in which the Acquiring Fund is qualified
to do business or the federal laws of the United
States, the consent, approval, authorization,
registration, qualification or order of, or filing
with, any court or governmental agency or body
(except such as have been obtained). Counsel need
express no opinion, however, as to any such consent,
approval, authorization, registration, qualification,
order or filing which may be required as a result of
the involvement of other parties to this Agreement in
the transactions herein contemplated because of their
legal or regulatory status or because of any other
facts specifically pertaining to them;
A-11
(f) The Target Fund shall have obtained an opinion from Skadden,
Arps, dated as of the Closing Date, addressed to the Target
Fund, that the consummation of the transactions set forth in
this Agreement comply with the requirements of a
reorganization as described in Section 368(a) of the Internal
Revenue Code.
(g) That all proceedings taken by each of the Funds and its
counsel in connection with the Reorganization and all
documents incidental thereto shall be satisfactory in form and
substance to the others.
(h) That the N-14 Registration Statement shall have become
effective under the 1933 Act, and no stop order suspending
such effectiveness shall have been instituted or, to the
knowledge of the Acquiring Fund, be contemplated by the SEC.
9. Acquiring Fund Conditions.
The obligations of the Acquiring Fund hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the Board of
Trustees of the Acquiring Fund and that the issuance of
additional Acquiring Fund Common Shares shall have been
approved by the affirmative vote of a majority of votes cast,
where total votes cast represented over 50% of all securities
entitled to vote; and the Target Fund shall have delivered to
the Acquiring Fund a copy of the resolution approving this
Agreement adopted by the Target Fund's Board of Trustees, and
a certificate setting forth the vote of the holders of Target
Fund Common Shares and Target Fund Preferred Shares obtained,
each certified by its Secretary.
(b) That the Target Fund shall have furnished to the Acquiring
Fund a statement of its assets, liabilities and capital, with
values determined as provided in Section 4 of this Agreement,
together with a schedule of investments with their respective
dates of acquisition and tax costs, all as of the Valuation
Time, certified on such Fund's behalf by its President (or any
Vice President) or its Treasurer, and a certificate signed by
such Fund's President
A-12
(or any Vice President) or its Treasurer, dated as of the
Closing Date, certifying that as of the Valuation Time and as
of the Closing Date there has been no material adverse change
in the financial position of the Target Fund since the date of
such Fund's most recent Annual Report or Semi-Annual Report,
as applicable, other than changes in the Target Fund
Investments since that date or changes in the market value of
the Target Fund Investments.
(c) That the Target Fund shall have furnished to the Acquiring
Fund a certificate signed by such Fund's President (or any
Vice President) or its Treasurer, dated the Closing Date,
certifying that as of the Valuation Time and as of the Closing
Date all representations and warranties of the Target Fund
made in this Agreement are true and correct in all material
respects with the same effect as if made at and as of such
dates and the Target Fund has complied with all of the
agreements and satisfied all of the conditions on its part to
be performed or satisfied at or prior to such dates.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) That the Acquiring Fund shall have received the opinion of
Skadden, counsel for the Target Fund, dated as of the Closing
Date, addressed to the Acquiring Fund, substantially in the
form and to the effect that:
(i) the Target Fund is duly formed and validly existing
under the laws of its state of organization;
(ii) the Target Fund is registered as a closed-end,
management investment company under the 1940 Act;
(iii) this Agreement and the Reorganization provided for
herein and the execution of this Agreement have been
duly authorized by all requisite action of the
Target Fund, and this Agreement has been duly
executed and delivered by the Target Fund and
(assuming this Agreement is a valid and binding
obligation of the other party hereto) is a valid and
binding obligation of the Target Fund;
(iv) neither the execution or delivery by the Target Fund
of this Agreement nor the consummation by the Target
Fund of the transactions contemplated hereby violate
any provision of any statute, or any published
regulation or any judgment or order disclosed to
them by the Target Fund as being applicable to the
Target Fund; and
(v) to their knowledge and subject to the qualifications
set forth below, the execution and delivery by the
Target Fund of the Agreement and the consummation of
the transactions herein contemplated do not require,
under the laws of its state of organization or any
state in which the Target Fund is qualified to do
business, or the federal laws of the United States,
the consent, approval, authorization, registration,
qualification or order of, or filing with, any court
or governmental agency or body (except such as have
been obtained under the 1933 Act, 1934 Act, the 1940
Act or the rules and regulations thereunder).
Counsel need express no opinion, however, as to any
such consent, approval, authorization, registration,
qualification, order or filing
A-13
which may be required as a result of the involvement
of other parties to this Agreement in the
transactions herein contemplated because of their
legal or regulatory status or because of any other
facts specifically pertaining to them;
(f) That the Acquiring Fund shall have obtained an opinion from
Skadden, counsel for the Target Fund, dated as of the Closing
Date, addressed to the Acquiring Fund, that the consummation
of the transactions set forth in this Agreement comply with
the requirements of a reorganization as described in Section
368(a) of the Code.
(g) That the N-14 Registration Statement shall have become
effective under the 1933 Act and no stop order suspending such
effectiveness shall have been instituted or, to the knowledge
of the Target Fund, be contemplated by the SEC.
(h) That all proceedings taken by the Target Fund and its counsel
in connection with the Reorganization and all documents
incidental thereto shall be satisfactory in form and substance
to the Acquiring Fund.
(i) That prior to the Closing Date the Target Fund shall have
declared a dividend or dividends which, together with all such
previous dividends, shall have the effect of distributing to
its shareholders all of its net investment company taxable
income for the period to and including the Closing Date, if
any (computed without regard to any deduction for dividends
paid), and all of its net capital gain, if any, realized to
and including the Closing Date. In this regard, the last
dividend period for the Target Fund Preferred Shares may be
shorter than the dividend period for such APS determined as
set forth in the applicable Certificate of Vote.
10. Termination, Postponement and Waivers.
(a) Notwithstanding anything contained in this Agreement to the
contrary, this Agreement may be terminated and the
Reorganization abandoned at any time (whether before or after
adoption thereof by the shareholders of the Funds) prior to
the Closing Date, or the Closing Date may be postponed, (i) by
mutual consent of the Boards of Trustees of the
A-14
Funds, (ii) by the Board of Trustees of the Target Fund if any
condition of the Target Fund's obligations set forth in
Section 8 of this Agreement has not been fulfilled or waived
by such Board; or (iii) by the Board of Trustees of the
Acquiring Fund if any condition of the Acquiring Fund's
obligations set forth in Section 9 of this Agreement have not
been fulfilled or waived by such Board.
(b) If the transactions contemplated by this Agreement have not
been consummated by December 31, 2005, this Agreement
automatically shall terminate on that date, unless a later
date is mutually agreed to by the Boards of Trustees of the
Funds.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no
further effect, and there shall not be any liability on the
part of any Fund or persons who are their directors, trustees,
officers, agents or shareholders in respect of this Agreement.
(d) At any time prior to the Closing Date, any of the terms or
conditions of this Agreement may be waived by the Board of
Trustees of any Fund (whichever is entitled to the benefit
thereof), if, in the judgment of such Board after consultation
with its counsel, such action or waiver will not have a
material adverse effect on the benefits intended under this
Agreement to the shareholders of their respective fund, on
behalf of which such action is taken.
(e) The respective representations and warranties contained in
Sections 1 and 2 of this Agreement shall expire with, and be
terminated by, the consummation of the Reorganization, and
neither Fund nor any of its officers, trustees, agents or
shareholders shall have any liability with respect to such
representations or warranties after the Closing Date. This
provision shall not protect any officer, trustee, agent or
shareholder of either Fund against any liability to the entity
for which that officer, trustee, agent or shareholder so acts
or to its shareholders, to which that officer, trustee, agent
or shareholder otherwise would be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless
disregard of the duties in the conduct of such office.
(f) If any order or orders of the Commission with respect to this
Agreement shall be issued prior to the Closing Date and shall
impose any terms or conditions which are determined by action
of the Boards of Trustees of the Funds to be acceptable, such
terms and conditions shall be binding as if a part of this
Agreement without further vote or approval of the shareholders
of the Funds unless such terms and conditions shall result in
a change in the method of computing the number of Acquiring
Fund Common Shares or Acquiring Fund APS to be issued to the
Acquired Funds, as applicable, in which event, unless such
terms and conditions shall have been included in the proxy
solicitation materials furnished to the shareholders of the
Funds prior to the meetings at which the Reorganization shall
have been approved, this Agreement shall not be consummated
and shall terminate unless the Funds promptly shall call a
special meeting of shareholders at which such conditions so
imposed shall be submitted for approval.
11. Indemnification.
(a) Each party (an "Indemnitor") shall indemnify and hold the
other and its officers, trustees, agents and persons
controlled by or controlling any of them (each an "Indemnified
A-15
Party") harmless from and against any and all losses, damages,
liabilities, claims, demands, judgments, settlements,
deficiencies, taxes, assessments, charges, costs and expenses
of any nature whatsoever (including reasonable attorneys'
fees) including amounts paid in satisfaction of judgments, in
compromise or as fines and penalties, and counsel fees
reasonably incurred by such Indemnified Party in connection
with the defense or disposition of any claim, action, suit or
other proceeding, whether civil or criminal, before any court
or administrative or investigative body in which such
Indemnified Party may be or may have been involved as a party
or otherwise or with which such Indemnified Party may be or
may have been threatened (collectively, the "Losses") arising
out of or related to any claim of a breach of any
representation, warranty or covenant made herein by the
Indemnitor, provided, however, that no Indemnified Party shall
be indemnified hereunder against any Losses arising directly
from such Indemnified Party's (i) willful misfeasance, (ii)
bad faith, (iii) gross negligence or (iv) reckless disregard
of the duties involved in the conduct of such Indemnified
Party's position.
(b) The Indemnified Party shall use its best efforts to minimize
any liabilities, damages, deficiencies, claims, judgments,
assessments, costs and expenses in respect of which indemnity
may be sought hereunder. The Indemnified Party shall give
written notice to Indemnitor within the earlier of ten (10)
days of receipt of written notice to Indemnified Party or
thirty (30) days from discovery by Indemnified Party of any
matters which may give rise to a claim for indemnification or
reimbursement under this Agreement. The failure to give such
notice shall not affect the right of Indemnified Party to
indemnity hereunder unless such failure has materially and
adversely affected the rights of the Indemnitor; provided that
in any event such notice shall have been given prior to the
expiration of the Survival Period. At any time after ten (10)
days from the giving of such notice, Indemnified Party may, at
its option, resist, settle or otherwise compromise, or pay
such claim unless it shall have received notice from
Indemnitor that Indemnitor intends, at Indemnitor's sole cost
and expense, to assume the defense of any such matter, in
which case Indemnified Party shall have the right, at no cost
or expense to Indemnitor, to participate in such defense. If
Indemnitor does not assume the defense of such matter, and in
any event until Indemnitor states in writing that it will
assume the defense, Indemnitor shall pay all costs of
Indemnified Party arising out of the defense until the defense
is assumed; provided, however, that Indemnified Party shall
consult with Indemnitor and obtain indemnitor's prior written
consent to any payment or settlement of any such claim.
Indemnitor shall keep Indemnified Party fully apprised at all
times as to the status of the defense. If Indemnitor does not
assume the defense, Indemnified Party shall keep Indemnitor
apprised at all times as to the status of the defense.
Following indemnification as provided for hereunder,
Indemnitor shall be subrogated to all rights of Indemnified
Party with respect to all third parties, firms or corporations
relating to the matter for which indemnification has been
made.
12. Other Matters.
A-16
(a) All covenants, agreements, representations and warranties made
under this Agreement and any certificates delivered pursuant
to this Agreement shall be deemed to have been material and
relied upon by each of the parties, notwithstanding any
investigation made by them or on their behalf.
(b) All notices hereunder shall be sufficiently given for all
purposes hereunder if in writing and delivered personally or
sent by registered mail or certified mail, postage prepaid.
Notice to the Target Fund shall be addressed to the Target
Fund c/o Van Kampen Asset Management, 1221 Avenue of the
Americas, New York, New York 10020, Attention: General
Counsel, or at such other address as the Target Fund may
designate by written notice to the Acquiring Fund. Notice to
the Acquiring Fund shall be addressed to the Acquiring Fund
c/o Van Kampen Asset Management, 1221 Avenue of the Americas,
New York, New York 10020, Attention: General Counsel, or at
such other address and to the attention of such other person
as the Acquiring Fund may designate by written notice to the
Target Fund. Any notice shall be deemed to have been served or
given as of the date such notice is delivered personally or
mailed.
(c) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the
Reorganization, constitutes the only understanding with
respect to the Reorganization, may not be changed except by a
letter of agreement signed by each party and shall be governed
by and construed in accordance with the laws of the State of
Illinois applicable to agreements made and to be performed in
said state.
(d) It is expressly agreed that the obligations of the Funds
hereunder shall not be binding upon any of their respective
trustees, shareholders, nominees, officers, agents, or
employees personally, but shall bind only the trust property
of the respective Fund as provided in such Fund's Declaration
of Trust. The execution and delivery of this Agreement has
been authorized by the trustees of each Fund and signed by
authorized officers of each Fund, acting as such, and neither
such authorization by such trustees, nor such execution and
delivery by such officers shall be deemed to have been made by
any of them individually or to impose any liability on any of
them personally, but shall bind only the trust property of
each Fund as provided in such Funds' Declaration of Trust.
This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original but all
such counterparts together shall constitute but one instrument.
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to
be executed and delivered by their duly authorized officers as of the day and
year first written above.
A-17
VAN KAMPEN XXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXX
-----------------------------------------
[Name]
[Title]
Attest: [Name]
[Title]
VAN KAMPEN XXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXX
-----------------------------------------
[Name]
[Title]
Attest: [Name]
[Title]
A-18
APPENDIX B
Federal Identification
No. 36-3810337
THE COMMONWEALTH OF MASSACHUSETTS
Office of the Massachusetts Secretary of State
Michael J. Connolly, Secretary
One Ashburton Place, Boston, Mass. 02108
CERTIFICATE OF VOTE OF TRUSTEES ESTABLISHING
TWO SERIES OF PREFERRED SHARES
I, Ronald A. Nyberg, Secretary, of Van Kampen Merritt Municipal Opportunity
Trust (the "Fund") located at One Parkview Plaza, Oakbrook Terrace, IL 60181, do
hereby certify that at a meeting of the trustees of the Fund held on May 14,
1992, the following vote establishing and designating two series of preferred
shares of beneficial interest and determining the relative rights and
preferences thereof was duly adopted:
First: Pursuant to authority expressly vested in the Board of Trustees of
the Fund by Article VI of its Declaration of Trust (which, as amended or
restated from time to time, is, together with this Certificate of Vote, herein
called the "Declaration of Trust"), the Board of Trustees hereby authorizes the
issuance of two series of 3,000 shares of its authorized preferred shares of
beneficial interest, par value $.01 per share ("Preferred Shares"), liquidation
preference of $50,000 per share, designated, respectively, Auction Preferred
Shares, Series A ("APS Series A") and Auction Preferred Shares, Series B ("APS
Series B") (collectively the APS Series A and APS Series B are referred to
herein as "APS").
Second: The preferences, voting powers, qualifications, and special or
relative rights or privileges of each such series of preferred shares of
beneficial interest are as follows:
DESIGNATION
APS SERIES A: A series of 1,500 preferred shares of beneficial interest,
$.01 par value, liquidation preference $50,000 per share, is hereby designated
"Auction Preferred Shares, Series A" (hereinafter, "APS Series A"). Each share
of APS Series A shall be issued on June 10, 1992; have an Applicable Rate for
its Initial Dividend Period
(which period shall continue to and including Tuesday, January 12, 1993) equal
to 3.50% per annum; have an initial Dividend Payment Date of Wednesday, July 1,
1992; and have such other preferences, limitations and relative voting rights,
in addition to those required by applicable law or set forth in the Declaration
of Trust applicable to preferred shares of beneficial interest of the Fund, as
are set forth in Part I and Part II of this Certificate of Vote. The APS Series
A shall constitute a separate series of Preferred Shares of beneficial interest
of the Fund, and each share of APS Series A shall be identical except as
provided in Section 3 of Part I of this Certificate of Vote.
APS SERIES B: A series of 1,500 preferred shares of beneficial interest,
par value $.01 per share, liquidation preference $50,000 per share, is hereby
designated "Auction Preferred Shares, Series B" (hereinafter, "APS Series B").
Each share of APS Series B shall be issued on June 10, 1992; have an Applicable
Rate for its Initial Dividend Period (which period shall continue to and
including Thursday, January 21, 1993) equal to 3.50% per annum; have an initial
Dividend Payment Date of Wednesday, July 1, 1992; and have such other
preferences, limitations and relative voting rights, in addition to those
required by applicable law or set forth in the Declaration of Trust applicable
to preferred shares of beneficial interest of the Fund, as are set forth in Part
I and Part II of this Certificate of Vote. The APS Series B shall constitute a
separate series of Preferred Shares of the Fund, and each share of APS Series B
shall be identical except as provided in Section 3 of Part I of this Certificate
of Vote.
No holder of any series of APS shall have, solely by reason of being such a
holder of any series of APS, any right to acquire, purchase or subscribe for any
APS, common shares of beneficial interest, par value $.01 per share, of the Fund
or other securities of the Fund which it may hereafter issue or sell (whether
out of the number of shares authorized by the Declaration of Trust, or out of
any shares acquired by the Fund after the issuance thereof, or otherwise).
PART I.
1. Number of Shares; Ranking. (a) No fractional APS shall be issued.
(b) APS which at any time have been redeemed or purchased by the Fund
shall, after such redemption or purchase, have the status of authorized but
unissued Preferred Shares, without designation as to series.
(c) The shares of each series of APS shall rank on a parity with shares
of any other series of Preferred Shares (including any other series of APS) as
to the payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Fund.
2. Dividends. (a) The Holder of shares of any series of APS shall be
entitled to receive, when, as and if declared by the Board of Trustees, out of
funds legally available therefor, cumulative cash dividends at the Applicable
Rate per annum thereof, determined as set forth in paragraph (c) of this Section
2, and no more (except to the
2
extent set forth in Section 12 of this Part I), payable on the respective dates
(each a "Dividend Payment Date") determined as set forth in paragraph (b) of
this Section 2. Dividends on shares of any series of APS shall accumulate at the
Applicable Rate per annum from the Date of Original Issue thereof.
(b) (i) Dividends shall be payable subject to subparagraph (b)(ii) of
this Section 2, on shares of:
(A) APS Series A, on Wednesday, July 1, 1992 and the first
Business Day of each calendar month thereafter, provided that in any
calendar month in which an Auction Date for such series is scheduled to
occur, dividends shall be payable on the first Business Day next
succeeding such Auction Date, and
(B) APS Series B, on Wednesday, July 1, 1992 and the first
Business Day of each claendar month thereafter, provided that in any
calendar month in which an Auction Date for such series is scheduled to
occur, dividends shall be payable on the first Business Day next
succeeding such Auction Date,
provided that if the Fund, subject to the conditions set forth in Section 4 of
this Part I, designates any Subsequent Dividend Period as a Special Dividend
Period, dividends will be payable: (1) with respect to a Special Dividend Period
of less than 35 days, the day after the last day thereof and (2) with respect to
a Special Dividend Period of 35 days or more, the first Business Day of each
calendar month thereafter provided that, in any calendar month in which an
Auction Date is scheduled to occur, dividends shall be payable on the first
Business Day next succeeding such Auction Date.
After any Special Dividend Period, dividends on shares of such series of APS
shall be payable, subject to subparagraph (b)(ii) of this Section 2, on the
first Business Day of each calendar month thereafter, provided that in any
calendar month in which an Auction Date for such series is scheduled to occur,
dividends shall be payable on the first Business Day next succeeding such
Auction Date if such series is APS Series A, and on the first Business Day of
each calendar month thereafter, provided that in any calendar month in which an
Auction Date for such series is scheduled to occur, dividends shall be payable
on the first Business day next succeeding such Auction Date if such series is
APS Series B, subject in each case to the options of the Fund to further
designate from time to time any Subsequent Dividend Period hereof as a Special
Dividend Period.
(ii) In the case of dividends that would otherwise be payable on a
Sunday, Tuesday, Wednesday, Thursday, Friday or Saturday as determined by
subparagraph (b)(i) of this Section 2, including clause (1), (2) or (3) of the
proviso thereto, if (i) the Sunday, Monday or Tuesday that would otherwise be
the Dividend Payment Date is not a Business Day, then dividends shall be payable
on the first Business Day that falls after such Sunday, Monday or Tuesday, or
(ii) the Wednesday, Thursday, Friday or Saturday that would otherwise be the
Dividend Payment Date is not a Business
3
Day, then dividends shall be payable on the first Business Day that falls prior
to such Wednesday, Thursday, Friday or Saturday.
(iii) The Fund shall pay to the Auction Agent not later than 12:00
Noon, New York City time, on the Business Day next preceding each Dividend
Payment Date for shares of such series, an aggregate amount of funds available
on the next Business Day in The City of New York, New York, equal to the
dividends to be paid to all Holders of shares of such series on such Dividend
Payment Date.
(iv) All moneys paid to the Auction Agent for the payment of dividends
(or for the payment of any late charges pursuant to subparagraph (c)(i) of this
Section 2) shall be held in trust for the payment of such dividends (and any
such late charge) by the Auction Agent for the benefit of the Holders specified
in subparagraph (b)(v) of this Section 2. Any moneys paid to the Auction Agent
in accordance with the foregoing but not applied by the Auction Agent to the
payment of dividends (and any late charge) will, to the extent permitted by law,
be repaid to the Fund at the end of 90 days from the date on which such moneys
were so to have been applied.
(v) Each dividend on the APS shall be paid on the Dividend Payment
Date therefor to the Holders as their names appear on the share books of the
Fund on the Business Day next preceding such Dividend Payment Date. Dividends
in arrears for any past Dividend Period may be declared and paid at any time,
without reference to any regular Dividend Payment Date, to the Holders as their
names appear on the share books of the Fund on such date, not exceeding 15 days
preceding the payment date thereof, as may be fixed by the Board of Trustees.
(c) (i) The dividend rate on shares of any series of APS during the
period from and after the Date of Original Issue thereof to and including the
last day of the Initial Dividend Period therefor shall be equal to the rate per
annum set forth with respect to such series under "Designation," above. For each
Subsequent Dividend Period of any series of APS outstanding thereafter, the
dividend rate on shares of such series shall be equal to the rate per annum that
results from an Auction for such series on the Auction Date next preceding such
Subsequent Dividend Period; provided, however, that if an Auction for any
Subsequent Dividend Period of any series of APS is not held for any reason or if
a Failure to Deposit occurs and such failure has not been cured as set forth
below prior to any succeeding Subsequent Dividend Period thereof, then, subject
to the next succeeding provision, the dividend rate on the shares of such series
for any such Subsequent Dividend Period shall be the Maximum Rate (as defined
herein) for such series on the Auction Date for such Subsequent Dividend Period;
provided, further, however, that if any Failure to Deposit shall have occurred
with respect to shares of any series of APS during any Rate Period thereof, and
prior to 12:00 noon, New York City time, on the third Business Day next
succeeding the date on which such Failure to Deposit occurred, such Failure to
Deposit shall not have been cured in accordance with the next succeeding
sentence or the Fund shall not have paid to the Auction Agent a late charge
equal to the sum of (1) if such Failure to Deposit consisted of the failure
timely to pay to the Auction Agent the full amount of dividends with respect to
any Dividend Period on the shares of such series, an amount computed by
multiplying (x) 200% of the
4
"AA" Composite Commercial Paper Rate (or Treasury Rate, if applicable) for the
Rate Period during which such Failure to Deposit occurs on the Dividend Payment
Date for such Dividend Period by (y) a fraction, the numerator of which shall be
the number of days for which such Failure to Deposit has not been cured in
accordance with the next succeeding sentence (including the day such Failure to
Deposit occurs and excluding the day such Failure to Deposit is cured) and the
denominator of which shall be 365, and applying the rate obtained against the
aggregate liquidation preference of the outstanding shares of such series of APS
and (2) if such Failure to Deposit consisted of the failure timely to pay to the
Auction Agent the Redemption Price of the shares of such series of APS, if any,
for which Notice of Redemption has been given by the Fund pursuant to paragraph
(b) of Section 3 of this Part I, an amount computed by multiplying (x) 200% of
the "AA" Composite Commercial Paper Rate (or Treasury Rate, if applicable) for
the Rate Period during which such Failure to Deposit occurs on the redemption
date by (y) a fraction, the numerator of which shall, then the dividend rate for
shares of such series of APS for each Subsequent Dividend Period thereof
commencing after such failure to and including the Subsequent Dividend Period,
if any, during which such Failure to Deposit is so cured shall be a rate per
annum equal to the Maximum Rate on the Auction Date for such Subsequent Dividend
Period (but with the prevailing rating for such shares, for purposes of
determining such Maximum Rate, being deemed to be "Below "ba3"/BB-") (the rate
per annum at which dividends are payable on the APS for any Rate Period for such
shares being herein referred to as the "Applicable Rate" for such shares). A
Failure to Deposit with respect to shares of any series of APS shall have been
cured (if such Failure to Deposit is not solely due to the willful failure of
the Fund to make the required payment to the Auction Agent) with respect to any
Rate Period if, not later than 12:00 Noon, New York City time, on the fourth
Business Day preceding the Auction Date for the Rate Period subsequent to such
Rate Period the Fund shall have paid to the Auction Agent (A) all accumulated
and unpaid dividends on the shares of such series of APS and (B) without
duplication, the Redemption Price for the APS, if any, for which Notice of
Redemption has been given by the Fund pursuant to paragraph (b) of Section 3 of
this Part I.
(ii) The amount of dividends per share payable on shares of any series
of APS on any date on which dividends shall be payable on shares of such series
shall be computed by multiplying the respective Applicable Rate for such series
in effect for such Dividend Period or Dividend Periods or part thereof for which
dividends have not been paid by a fraction, the numerator of which shall be the
number of days in such Dividend Period or Dividend Periods or part thereof and
the denominator of which shall be 365 if such Dividend Period is a Rate Period,
or is contained in a Rate Period, of less than one year and 360 for all other
Dividend Periods, and applying the rate obtained against $50,000.
(d) Any dividend payment made on the APS shall first be credited against
the earliest accumulated but unpaid dividends due with respect to such APS.
(e) Except as set forth in the next sentence, no dividends shall be
declared or paid or set apart for payment on the shares of any class or series
of shares
5
ranking, as to the payment of dividends, on a parity with the APS for any period
unless full cumulative dividends have been or contemporaneously are declared and
paid on the shares of each series of APS through the most recent Dividend
Payment Date for each such series. When dividends are not paid in full upon the
APS through their most recent respective Dividend Payment Dates or upon the
shares of any other class or series of shares ranking on a parity as to the
payment of dividends with the APS through their most recent respective dividend
payment dates, all dividends declared upon the APS and any other such class or
series of shares ranking on a parity as to the payment of dividends with the APS
shall be declared pro rata so that the amount of dividends declared per share on
the APS and such other class or series of shares shall in all cases bear to each
other the same ratio that accumulated dividends per share on the APS and such
other class or series of shares bear to each other (for purposes of this
sentence, the amount of dividends declared per share shall be based on the
Applicable Rate for such shares for the Dividend Periods during which dividends
were not paid in full). Holders of the APS shall not be entitled to any
dividend, whether payable in cash, property or shares, in excess of full
cumulative dividends, as herein provided, on the APS. No interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend payment
or payments on the APS which may be in arrears, and, except to the extent set
forth in subsection (c)(i) of this Section 2, no additional sum of money shall
be payable in respect of any such arrearage.
(f) Dividends on the APS shall be designated as exempt-interest dividends
up to the amount of tax-exempt income of the Fund, to the extent permitted by,
and for purposes of, Section 852 of the Internal Revenue Code of 1986, as
amended from time to time.
(g) The Board of Trustees shall not declare any dividend (except a
dividend payable in Common Shares), or declare any other distribution, upon the
Common Shares, or purchase Common Shares, unless in every such case the APS
have, at the time of any such declaration or purchase, an asset coverage (as
defined in and determined pursuant to the 1940 Act) of at least 200% (or such
other asset coverage as may in the future be specified in or under the 1940 Act
as the minimum asset coverage for senior securities which are stock of a
closed-end investment company as a condition of declaring dividends on its
common stock) after deducting the amount of such dividend, distribution or
purchase price, as the case may be.
3. Redemption. (a) (i) Upon giving a Notice of Redemption, as provided
below, the Fund at its option may redeem shares of any series of APS, in whole
or in part, on the Second Business Day next preceding any Dividend Payment Date
applicable to those shares of APS called for redemption, out of funds legally
available therefor, at the Optional Redemption Price; provided that during a
Special Dividend Period of 365 days or more no share of APS will be subject to
optional redemption during any Non-Call Period; provided, that shares of any
series of APS may not be redeemed in part if after such partial redemption fewer
than 250 shares of such series remain outstanding.
6
(ii) If fewer than all of the outstanding shares of any series of APS
are to be redeemed pursuant to subparagraph (a)(i) of this Section 3, the number
of shares of such series to be redeemed shall be determined by the Board of
Trustees, and such shares shall be redeemed pro rata from the Holders of such
series in proportion to the number of such shares held by such Holders.
(iii) No APS shall be redeemed pursuant to subparagraphs (a)(i) or
(a)(ii) of this Section 3 unless, on the date on which the Fund intends to give
notice of such redemption pursuant to paragraph (b) of this Section 3, (a) the
Fund has available Deposit Securities with maturity or tender dates not later
than the day preceding the applicable redemption date and having a value not
less than the amount (including the applicable premium, if any) due to Holders
of the APS by reason of the redemption of such shares on such redemption date
and (b) Moody's Eligible Assets (if Moody's is then rating the APS) and S&P
Eligible Assets (if S&P is then rating the APS) each at least equal the APS
Basic Maintenance Amount, and would at least equal the APS Basic Maintenance
Amount immediately subsequent to such redemption, if such redemption were to
occur on such date, and on the date of redemption.
(iv) Subject to Section 3(g), the Fund shall redeem at the Mandatory
Redemption Price certain of the APS if the Fund fails to maintain the APS Basic
Maintenance Amount or 1940 Act APS Asset Coverage in accordance with the
requirements of the rating agency or agencies then rating the APS and such
failure is not cured on or before the APS Basic Maintenance Cure Date or the
1940 Act Cure Date, as the case may be. The number of APS to be redeemed shall
be equal to the lesser of (i) the minimum number of APS the redemption of which,
if deemed to have occurred immediately prior to the opening of business on the
Cure Date, together with all other Preferred Shares subject to redemption or
retirement, would result in the satisfaction of the APS Basic Maintenance Amount
or the 1940 Act APS Asset Coverage, as the case may be, on such Cure Date
(provided that, if there is no such minimum number of APS and other Preferred
Shares the redemption of which would have such result, all the APS and Preferred
Shares then outstanding shall be redeemed), and (ii) the maximum number of APS,
together with all other Preferred Shares subject to redemption or retirement,
that can be redeemed out of funds expected to be legally available therefor. In
determining the APS required to be redeemed in accordance with the foregoing,
the Fund shall allocate the number required to be redeemed to satisfy the APS
Basic Maintenance Amount or the 1940 Act APS Asset Coverage, as the case may be,
pro rata among each series of APS and other Preferred Shares subject to
redemption provisions similar to those contained in this subparagraph (a)(iv) of
this Section 3. The Fund shall effect such redemption not earlier than 20 days
and not later than 40 days after such Cure Date, except that if the Fund does
not have funds legally available for the redemption of all of the required
number of APS and other Preferred Shares which are subject to redemption
provisions similar to those contained in this subparagraph (a)(iv) of this
Section 3 or the Fund otherwise is unable to effect such redemption on or prior
to 40 days after such Cure Date, the Fund shall redeem those APS and other
Preferred Shares which it was unable to redeem on the earliest practicable date
on which it is able to effect such redemption. If fewer than all of the
outstanding shares of any series of APS are to be redeemed pursuant to this
Section 3(a)(iv), the number of shares of such series to be redeemed shall be
7
redeemed pro rata from the Holders of such shares in proportion to the number of
shares held by such Holders.
(b) The Fund is required to give 30 days Notice of Redemption. In the
event the Fund obtains appropriate exemptive or no-action relief from the
Securities and Exchange Commission, the number of days' notice required for a
mandatory redemption may be reduced by the Board of Trustees of the Fund to as
few as two Business Days if Moody's and S&P each has agreed in writing that the
revised notice provision would not adversely affect its then-current ratings of
the APS. The Auction Agent will use its reasonable efforts to provide telephonic
notice to each holder of APS called for redemption not later than the close of
business on the Business Day on which the Auction Agent determines the shares to
be redeemed (as described above) (or, during the occurrence of a Failure to
Deposit with respect to such shares, not later than the close of business on the
Business Day immediately following the day on which the Auction Agent receives
Notice of Redemption from the Fund). Such telephonic notice will be confirmed
promptly in writing not later than the close of business on the third Business
Day preceding the redemption date by notice sent by the Auction Agent to each
holder of record of APS called for redemption, the Broker-Dealers and the
Securities Depository. Every Notice of Redemption and other redemption notice
with respect to APS will state: (1) the redemption date, (2) the number of APS
to be redeemed, (3) the redemption price, (4) that dividends on the APS to be
redeemed will cease to accumulate as of such redemption date and (5) the
provision of the APS Provisions pursuant to which such shares are being
redeemed. No defect in the Notice of Redemption or other redemption notice or in
the transmittal or the mailing thereof will affect the validity of the
redemption proceedings, except as required by applicable law. If fewer than all
shares of any series held by any Holder are to be redeemed, the Notice of
Redemption mailed to such Holder shall also specify the number of shares of such
series to be redeemed from such Holder.
(c) Notwithstanding the provisions of paragraph (a) of this Section 3, if
any dividends on shares of any series of APS are in arrears, no shares of such
series of APS shall be redeemed unless all outstanding shares of such series of
APS are simultaneously redeemed, and the Fund shall not purchase or otherwise
acquire any shares of such series of APS; provided, however, that the foregoing
shall not prevent the purchase or acquisition of all outstanding shares of such
series of APS pursuant to the successful completion of an otherwise lawful
purchase or exchange offer made on the same terms to, and accepted by, Holders
of all outstanding shares of such series of APS.
(d) Upon the deposit of funds sufficient to redeem the APS with the
Auction Agent and the giving of Notice of Redemption under Paragraph (b) of this
Section 3, dividends on such shares shall cease to accumulate and such shares
shall no longer be deemed to be outstanding for any purpose, and all rights of
the Holders of the shares so called for redemption shall cease and terminate,
except the right of such Holders to receive the Optional Redemption Price or
Mandatory Redemption Price, as the case may be, but without any interest or
other additional amount, except as provided in Section 2(c)(i) and in Section
12. Upon surrender in accordance with the Notice of Redemption of the
certificates for any shares so redeemed (properly endorsed or assigned for
transfer, if the Board of Trustees shall so require and the Notice of Redemption
shall
8
so state), the Optional Redemption Price or Mandatory Redemption Price, as the
case may be, shall be paid by the Auction Agent to the Holders of the APS
subject to redemption. In the case that fewer than all of the shares represented
by any such certificate are redeemed, a new certificate shall be issued,
representing the unredeemed shares, without cost to the Holder thereof. The Fund
shall be entitled to receive from the Auction Agent, promptly after the date
fixed for redemption, any cash deposited with the Auction Agent in excess of (i)
the aggregate Optional Redemption Price of the APS called for redemption on such
date and (ii) all other amounts to which Holders of the APS called for
redemption may be entitled. Any funds so deposited that are unclaimed at the end
of 90 days from such redemption date shall, to the extent permitted by law, be
repaid to the Fund, after which time the Holders of the APS so called for
redemption may look only to the Fund for payment of the Optional Redemption
Price or Mandatory Redemption Price, as the case may be, and all other amounts
to which they may be entitled. The Fund shall be entitled to receive, from time
to time after the date fixed for redemption, any interest on the funds so
deposited.
(e) To the extent that any redemption for which Notice of Redemption has
been given is not made by reason of the absence of legally available funds
therefor, such redemption shall be made as soon as practicable to the extent
such funds become available. Failure to redeem the APS shall be deemed to exist
at any time after the date specified for redemption in a Notice of Redemption
when the Fund shall have failed, for any reason whatsoever, to deposit in trust
with the Auction Agent the Redemption Price with respect to any shares for which
such Notice of Redemption has been given. Notwithstanding the fact that the Fund
may not have redeemed the APS for which a Notice of Redemption has been given,
dividends may be declared and paid on the APS and shall include those APS for
which a Notice of Redemption has been given.
(f) All moneys paid to the Auction Agent for payment of the Optional
Redemption Price or Mandatory Redemption Price, as the case may be, of the APS
called for redemption shall be held in trust by the Auction Agent for the
benefit of Holders of shares so to be redeemed.
(g) In effecting any redemption pursuant to this Section 3, the Fund
shall use its best efforts to comply with all applicable procedural conditions
precedent to effecting such redemption under the 1940 Act and Massachusetts law,
but shall effect no redemption except to the extent permitted by the 1940 Act
and Massachusetts law.
(h) In the case of any redemption pursuant to this Section 3, only whole
APS shall be redeemed, and in the event that any provision of the Declaration of
Trust would require redemption of a fractional share, the Auction Agent shall be
authorized to round up so that only whole shares are redeemed.
4. Designation of Special Dividend Periods. (a) The Fund, at its option,
may designate any succeeding Subsequent Dividend Period of any series of APS as
a Special Dividend Period; provided, however, that such designation shall be
effective only if (A) notice thereof shall have been given in accordance with
paragraph (b) and
9
clause (i) of paragraph (c) of this Section 4, (B) any Failure to Deposit that
shall have occurred with respect to shares of such series during any Dividend
Period shall have been cured in accordance with the provisions of the third
sentence of paragraph (c)(i) of Section 2 of this Part I, (C) Sufficient
Clearing Bids (as defined in Section 1 of Part II hereof) for such series shall
have existed in an Auction held on the Auction Date immediately preceding the
first day of such proposed Special Dividend Period, (D) if any Notice of
Redemption shall have been mailed by the Fund pursuant to paragraph (b) of
Section 3 of this Part I with respect to any shares of such series of APS, the
Redemption Price with respect to such shares shall have been deposited with the
Auction Agent and (E) in the event the Fund wishes to designate any succeeding
Subsequent Dividend Period for such series as a Special Dividend Period
consisting of more than 28 Rate Period Days, the Fund has received written
confirmation from S&P (if S&P is then rating the APS) and Moody's (if Moody's is
then rating the APS) that such designation would not affect the rating then
assigned by S&P and Moody's to such series.
(b) If the Fund proposes to designate any succeeding Subsequent Dividend
Period of any series of APS as a Special Dividend Period of more than 28 Rate
Period Days pursuant to paragraph (a) of this Section 4, not less than 20 nor
more than 30 days prior to the date the Fund proposes to designate as the first
day of such Special Dividend Period (which shall be such day that would
otherwise be the first day of a Minimum Dividend Period), notice shall be (i)
published or caused to be published by the Fund in a newspaper of general
circulation to the financial community in The City of New York, New York, which
carries financial news, and (ii) communicated by the Fund by telephonic or other
means to the Auction Agent and confirmed in writing promptly thereafter. Each
such notice shall state (A) that the Fund may exercise its option to designate a
succeeding Subsequent Dividend Period of such series of APS as a Special
Dividend Period, specifying the first day thereof and (B) that the Fund will by
11:00 A.M., New York City time, on the second Business Day next preceding such
date notify the Auction Agent of either (x) its determination, subject to
certain conditions, to exercise such option, in which case the Fund shall
specify the Special Dividend Period designated and the terms of the Specific
Redemption Provisions, if any, or (y) its determination not to exercise such
option.
(c) No later than 11:00 A.M., New York City time, on the second Business
Day next preceding the first day of any proposed Special Dividend Period the
Fund shall delivery to the Auction Agent either:
(i) a notice stating (A) that the Fund has determined to designate
the next succeeding Dividend Period of such series as a Special Dividend Period,
specifying the same and the first day thereof, (B) the Auction Date immediately
prior to the first day of such Special Dividend Period, (C) the terms of the
Specific Redemption Provisions, if any, for such series, (D) that such Special
Dividend Period shall not commence if (1) on such Auction Date Sufficient
Clearing Bids for such series shall not exist (in which case the succeeding Rate
Period shall be a Minimum Dividend Period) or (2) a Failure to Deposit shall
have occurred prior to the first day of such Special Dividend Period with
respect to shares of such series and (E) the scheduled Dividend Payment Dates
for such series of APS during such Special Dividend Period;
10
provided that, if such Special Dividend Period consists of more than 28 Rate
Period Days, such notice will be accompanied by an APS Basic Maintenance Report
showing that, as of the third Business Day next preceding such proposed Special
Dividend Period, (1) Moody's Eligible Assets, assuming for the purposes of
calculating Moody's Eligible Assets, in connection with an APS Basic Maintenance
Report required to be prepared pursuant to this Section 4(c)(i), a Moody's
Exposure Period of "eight weeks or less but greater than seven weeks" (if
Moody's is then rating such series) and (2) S&P Eligible Assets (if S&P is then
rating such series) each at least equal to the APS Basic Maintenance Amount as
of such Business Day (assuming for purposes of the foregoing calculation that
the Maximum Rate is the Maximum Rate on such Business Day as if such Business
Day were the Auction Date for the proposed Special Dividend Period); or
(ii) a notice stating that the Fund has determined not to exercise its
option to designate a Special Dividend Period for such series of APS and that
the next succeeding Dividend Period of such series shall be a Minimum Dividend
Period.
If the Fund fails to deliver either such notice with respect to any designation
of any proposed Special Dividend Period to the Auction Agent by 11:00 A.M., New
York City time, on the second Business Day next preceding the first day of such
proposed Special Dividend Period, the Fund shall be deemed to have delivered a
notice to the Auction Agent with respect to such Special Dividend Period to the
effect set forth in clause (ii) of the preceding sentence.
5. Voting Rights. (a) Except as otherwise provided in the Declaration of
Trust or as otherwise required by law, (i) each holder of APS shall be entitled
to one vote for each of the APS held on each matter submitted to a vote of
shareholders of the Fund, and (ii) the holders of outstanding Preferred Shares,
including APS, and of Common Shares shall vote together as a single class;
provided that, at a meeting of the shareholders of the Fund held for the
election of the trustees, the holders of outstanding Preferred Shares, including
APS, represented in person or by proxy at said meeting, shall elect two trustees
of the Fund, each Preferred Share, including each of the APS, entitling the
holder thereof to one vote. Subject to paragraph (b) of this Section 5, the
holders of outstanding Common Shares shall elect the balance of the trustees.
(b) During any period in which any one or more of the conditions
described below shall exist (such period being referred to herein as a "Voting
Period"), the number of trustees constituting the Board of Trustees shall be
automatically increased by the smallest number that, when added to the two
trustees elected exclusively by the holders of Preferred Shares, including APS,
would constitute a majority of the Board of Trustees as so increased by such
smallest number, and the holders of Preferred Shares, including APS, shall be
entitled, voting as a class on a one-vote-per-share basis (to the exclusion of
the holders of all other securities and class of capital shares of the Fund), to
elect such smallest number of additional trustees, together with the two
trustees that such holders are in any event entitled to elect. A Voting Period
shall commence:
(i) if at the close of business on any Dividend Payment Date
accumulated dividends (whether or not earned or declared) on any outstanding
APS,
11
equal to at least two full years' dividends shall be due and unpaid and
sufficient cash or specified securities shall not have been deposited with the
Auction Agent for the payment of such accumulated dividends; or
(ii) if at any time holders of any other Preferred Shares are entitled
under the 1940 Act to elect a majority of the trustees of the Fund.
Upon the termination of a Voting Period, the voting rights described in this
paragraph (b) of Section 5 shall cease, subject always, however, to the
revesting of such voting rights in the Holders upon the further occurrence of
any of the events described in this paragraph (b) of Section 5.
(c) (i) As soon as practicable after the accrual of any right of the
holders of Preferred Shares to elect additional trustees as described in
paragraph (b) of this Section 5, the Fund shall notify the Auction Agent and the
Auction Agent shall call a special meeting of such holders, by mailing a notice
of such special meeting to such holders, such meeting to be held not less than
10 nor more than 20 days after the date of mailing of such notice. If the Fund
fails to send such notice to the Auction Agent or if the Auction Agent does not
call such a special meeting, it may be called by any such holder on like notice.
The record date for determining the holders entitled to notice of and to vote at
such special meeting shall be the close of business on the fifth Business Day
preceding the day on which such notice is mailed. At any such special meeting
and at each meeting of holders of Preferred Shares held during a Voting Period
at which trustees are to be elected, such holders, voting together as a class
(to the exclusion of the holders of all other securities and classes of capital
shares of the Fund), shall be entitled to elect the number of trustees
prescribed in paragraph (b) of this Section 5 on a one-vote-per-share basis.
(ii) For purposes of determining any rights of the Holders to vote on
any matter, whether such right is created by this Certificate of Vote, by the
other provisions of the Declaration of Trust, by statute or otherwise, no Holder
shall be entitled to vote and no APS shall be deemed to be "outstanding" for the
purpose of voting or determining the number of shares required to constitute a
quorum if, prior to or concurrently with the time of determination of shares
entitled to vote or shares deemed outstanding for quorum purposes, as the case
may be, the Redemption Price for the redemption of such shares has been
deposited in trust with the Auction Agent for that purpose and the requisite
Notice of Redemption with respect to such shares shall have been given as
provided in Section 3 of this Part I. None of the APS held by the Fund or any
affiliate of the Fund shall have any voting rights or be deemed to be
outstanding for voting or other purposes.
(iii) The terms of office of all persons who are Trustees of the Fund
at the time of a special meeting of Holders and holders of other Preferred
Shares to elect trustees shall continue, notwithstanding the election at such
meeting by the Holders and such other holders of the number of trustees that
they are entitled to elect, and the persons so elected by the Holders and such
other holders, together with the two incumbent trustees elected by the Holders
and such other holders of Preferred Shares
12
and the remaining incumbent trustees elected by the holders of the Common
Shares, shall constitute the duly elected trustees of the Fund.
(iv) Simultaneously with the termination of a Voting Period, the terms
of office of the additional trustees elected by the Holders and holders of other
Preferred Shares pursuant to paragraph (b) of this Section 5 shall terminate,
the remaining trustees shall constitute the trustees of the Fund and the voting
rights of the Holders and such other holders to elect additional trustees
pursuant to paragraph (b) of this Section 5 shall cease, subject to the
provisions of the last sentence of paragraph (b) of this Section 5.
(d) (i) So long as any of the APS are outstanding, the Fund shall not,
without the affirmative vote of the Holders of the Outstanding APS determined
with reference to a "majority of outstanding voting securities" as that term is
defined in Section 2(a)(42) of the 1940 Act (voting separately as one class):
(a) authorize, create or issue any class or series of shares of beneficial
interest ranking prior to or on a parity with the APS with respect to the
payment of dividends or the distribution of assets upon dissolution, liquidation
or winding up of the affairs of the Fund, or increase the authorized amount of
any series of APS (except that, notwithstanding the foregoing, but subject to
the provisions of Section 13, the Board of Trustees, without the vote or consent
of the Holders of APS, may from time to time authorize and create, and the Fund
may from time to time issue, classes or series of Preferred Shares, including
APS, ranking on a parity with the APS with respect to the payment of dividends
and the distribution of assets upon dissolution, liquidation or winding up of
the affairs of the Fund, subject to continuing compliance by the Fund with 1940
Act APS Asset Coverage and APS Basic Maintenance Amount requirements, provided
that the Fund obtains written confirmation from Moody's (if Moody's is then
rating APS) and S&P (if S&P is then rating APS) that the issuance of such class
or series would not impair the rating then assigned by such rating agency to the
APS), (b) amend, alter or repeal the provisions of the Declaration of Trust,
including this Certificate of Vote, whether by merger, consolidation or
otherwise, so as to affect any preferences, right or power of such APS or the
Holders thereof; provided that (i) none of the actions permitted by the
exception to (a) above will be deemed to affect such preferences, rights or
powers and (ii) the authorization, creation and issuance of classes or series of
shares ranking junior to the APS with respect to the payment of dividends and
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund, will be deemed to affect such preferences, rights or powers
only if Moody's or S&P is then rating the APS and such issuance would, at the
time thereof, cause the Fund not to satisfy the 1940 Act APS Asset Coverage or
the APS Basic Maintenance Amount, or (c) file a voluntary application for relief
under Federal bankruptcy law or any similar application under state law for so
long as the Fund is solvent and does not foresee becoming insolvent.
(ii) The Board of Trustees, without the vote or consent of the Holders
of APS, may from time to time amend, alter or repeal any or all of the
definitions of the terms listed below, and any such amendment, alteration or
repeal will not be deemed to affect the preferences, rights or powers of the
APS or the Holders thereof, provided the Board of Trustees receives written
confirmation from Moody's
13
(such confirmation being required to be obtained only in the event Moody's is
rating the APS and in no event being required to be obtained in the case of the
definitions of Deposit Securities, Discounted Value and Receivables for
Municipal Securities Sold as such terms apply to S&P Eligible Assets, Dividend
Coverage Amount, Dividend Coverage Assets, Minimum Liquidity Level, S&P Discount
Factor, S&P Eligible Assets, S&P Exposure Period and Valuation Date as such term
applies to the definitions of Dividend Coverage Amount, Dividend Coverage Assets
and Minimuum Liquidity Level) and S&P (such confirmation being required to be
obtained only in the event S&P is rating the APS and in no event being required
to be obtained in the case of the definitions of Discounted Value and
Receivables for Municipal Securities Sold as such terms apply to Moody's
Eligible Assets, Moody's Discount Factor, Moody's Eligible Asset and Moody's
Exposure Period) that any such amendment, alteration or repeal would not impair
the ratings then assigned by Moody's or S&P, as the case may be, to the APS
(provided that, with respect to the Maximum Rate, such amendment or alteration
shall not, in any event, cause the Maximum Rate to fall below the Maximum Rate
that would have resulted absent such amendment or alteration):
APS Basic
Maintenance Amount
APS Basic
Maintenance Cure Date
APS Basic
Maintenance Report
Deposit Securities
Discounted Value
Dividend Coverage Amount
Dividend Coverage Assets
Market Value
Maximum Potential
Gross-up
Payment Liability
Maximum Rate
Minimum Liquidity Level
Moody's Discount Factor
Moody's Eligible Asset
Moody's Exposure Period
1940 Act Cure Date
1940 Act APS
Asset Coverage
Quarterly Valuation Date
Receivables for Municipal
Securities Sold
S&P Discount Factor
14
S&P Eligible Asset
S&P Exposure Period
Valuation Date
(e) Unless otherwise required by law, the Holders of the APS shall not
have any relative rights or preferences or other special rights other than those
specifically set forth herein. The Holders of the APS shall have no preemptive
rights or rights to cumulative voting. In the event that the Fund fails to pay
any dividends on the APS, the exclusive remedy of the Holders shall be the right
to vote for trustees pursuant to the provisions of this Section 5.
(f) Unless a higher percentage is provided for in the Declaration of
Trust, the affirmative vote of the Holders of a majority of the outstanding APS,
voting as a separate class, shall be required to approve any plan of
reorganization (as such term is used in the 1940 Act) adversely affecting such
shares or any action requiring a vote of security holders of the Fund under
Section 13(a) of the 1940 Act. In the event a vote of Holders of APS is required
pursuant to the provisions of Section 13(a) of the 1940 Act, the Fund shall, not
later than ten Business Days prior to the date on which such vote is to be
taken, notify Moody's (if Moody's is then rating the APS) and S&P (if S&P is
then rating the APS) that such vote is to be taken and the nature of the action
with respect to which such vote is to be taken. In addition, the Fund shall
notify Moody's (if Moody's is then rating the APS) and S&P (if S&P is then
rating the APS) of the results of any vote described in the proceeding sentence.
(g) Right to Vote with Respect to Certain Other Matters. The affirmative
vote of the holders of a majority (unless a higher percentage vote is required
under the Declaration of Trust or under this Certificate of Vote) of the
outstanding shares of each series of APS, each voting as a separate class, is
required with respect to any matter that materially affects the series in a
manner different from that of other series of classes of the Fund's shares,
including without limitation any proposal to do the following: (1) increase or
decrease the aggregate number of authorized shares of the series; (2) effect an
exchange, reclassification, or cancellation of all or part of the shares of the
series; (3) effect an exchange, or create a right of exchange, of all or any
part of the shares of the series; (4) change the rights or preferences of the
shares of the series; (5) change the shares of the series, whether with or
without par value, into the same or a different number of shares, either with or
without par value, of the same or another class or series; (6) create a new
class or series of shares having rights and preferences prior and superior to
the shares of the series, or increase the rights and preferences or the number
of authorized shares of a series having rights and preferences prior or superior
to the shares of the series; or (7) cancel or otherwise affect distributions on
the shares of the series that have accrued but have not been declared. To the
extent that the interests of a series of APS affected by a matter are
substantially identical to the interests of another series of APS affected by
such matter (e.g., a vote of shareholders required under Section 13(a) of the
1940 Act), each such series shall vote together collectively as one class. The
vote of holders of APS described above will in each case be in addition to a
separate vote of the requisite percentage of Common Shares and APS necessary to
authorize the action in question.
15
6. Liquidation Rights. (a) Upon the dissolution, liquidation or winding up
of the affairs of the Fund, whether voluntary or involuntary, the Holders of the
APS then outstanding shall be entitled to receive and to be paid out of the
assets of the Fund available for distribution to its shareholders, before any
payment or distribution shall be made on the Common Shares or on any other class
of shares of the Fund ranking junior to the APS upon dissolution, liquidation or
winding up, an amount equal to the liquidation preference with respect to such
shares. The liquidation preference for the APS shall be $50,000 per share, plus
an amount equal to all dividends thereon (whether or not earned or declared)
accumulated but unpaid to the date of final distribution in same-day funds,
together with any payments required to be made pursuant to Section 12 in
connection with the liquidation of the Fund.
(b) Neither the sale of all or substantially all the property or business
of the Fund, nor the merger or consolidation of the Fund into or with any other
corporation nor the merger or consolidation of any other corporation into or
with the Fund shall be a dissolution, liquidation or winding up, whether
voluntary or involuntary, for the purposes of this Section 6.
(c) After the payment to the Holders of the APS of the full preferential
amounts provided for in this Section 6, the Holders of the APS as such shall
have no right or claim to any of the remaining assets of the Fund.
(d) In the event the assets of the Fund available for distribution to the
Holders of the APS upon any dissolution, liquidation or winding up of the
affairs of the Fund, whether voluntary or involuntary, shall be insufficient to
pay in full all amounts to which such Holders are entitled pursuant to paragraph
(a) of this Section 6, no such distribution shall be made on account of any
shares of any other class or series of Preferred Shares ranking on a parity with
the APS with respect to the distribution of assets upon such dissolution,
liquidation or winding up unless proportionate distributive amounts shall be
paid on account of the APS, ratably, in proportion to the full distributable
amounts for which holders of all such parity shares are respectively entitled
upon such dissolution, liquidation or winding up.
(e) Subject to the rights of the holders of shares of any series or class
or classes of shares ranking on a parity with the APS with respect to the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund, after payment shall have been made in full to the Holders
of the APS as provided in paragraph (a) of this Section 6, but not prior
thereto, any other series or class or classes of shares ranking junior to the
APS with respect to the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Fund shall, subject to the respective terms and
provisions (if any) applying thereto, be entitled to receive any and all assets
remaining to be paid or distributed, and the Holders of the APS shall not be
entitled to share therein.
7. Auction Agent. For so long as any of the APS is outstanding, the Auction
Agent, duly appointed by the Fund to so act, shall be in each case a commercial
bank, trust company or other financial institution independent of the Fund and
its
16
affiliates (which, however, may engage or have engaged in business transactions
with the Fund or its affiliates) and at no time shall the Fund or any of its
affiliates act as the Auction Agent in connection with the Auction Procedures.
If the Auction Agent resigns or for any reason its appointment is terminated
during any period that any of the APS is outstanding, the Board of Trustees
shall use its best efforts promptly thereafter to appoint another qualified
commercial bank, trust company or financial institution to act as the Auction
Agent.
8. 1940 Act APS Asset Coverage. The Fund shall maintain, as of the last
Business Day of each month in which any of the APS is outstanding, the 1940 Act
APS Asset Coverage.
9. APS Basic Maintenance Amount. (a) So long as APS are Outstanding, the
Fund shall maintain, on each Valuation Date, and shall verify to its
satisfaction that it is maintaining on such Valuation Date, (i) S&P Eligible
Assets having an aggregate Discounted Value equal to or greater than the APS
Basic Maintenance Amount (if S&P is then rating the APS) and (ii) Moody's
Eligible Assets having an aggregate Discounted Value equal to or greater than
the APS Basic Maintenance Amount (if Moody's is then rating the APS). In
managing the Fund's portfolio, the Adviser will not alter the composition of the
Fund's portfolio if, in the reasonable belief of the Adviser, the effect of any
such alteration would be to cause the Fund to have Eligible Assets with an
aggregate Discounted Value, as of the immediately preceding Valuation Date, less
than the APS Basic Maintenance Amount as of such Valuation Date; provided,
however, that in the event that, as of the immediately preceding Valuation Date,
the aggregate Discounted Value of the Fund's Eligible Assets exceeded the APS
Basic Maintenance Amount by five percent or less, the Adviser will not alter the
composition of the Fund's portfolio in a manner reasonably expected to reduce
the aggregate Discounted Value of the Fund's Eligible Assets unless the
Corporation shall have confirmed that, after giving effect to such alteration,
the aggregate Discounted Value of the Fund's Eligible Assets would exceed the
APS Basic Maintenance Amount.
(b) On or before 5:00 P.M., New York City time, on the third Business Day
after a Valuation Date on which the Fund fails to satisfy the APS Basic
Maintenance Amount, and on the third Business Day after the APS Basic
Maintenance Cure Date with respect to such Valuation Date, the Fund shall
complete and deliver to S&P (if S&P is then rating the APS), Moody's (if Moody's
is then rating the APS) and the Auction Agent (if either S&P or Moody's is then
rating the APS) an APS Basic Maintenance Report as of the date of such failure
or such APS Basic Maintenance Cure Date, as the case may be, which will be
deemed to have been delivered to the Auction Agent if the Auction Agent receives
a copy or telecopy, telex or other electronic transcription thereof and on the
same day the Fund mails to the Auction Agent for delivery on the next Business
Day the full APS Basic Maintenance Report. The Fund shall also deliver an APS
Basic Maintenance Report to S&P (if S&P is then rating the APS), and the Auction
Agent (if S&P is then rating the APS) as of (i) the fifteenth day of each month
(or, if such day is not a Business Day, the next succeeding Business Day) and
(ii) the last Business Day of each month, in each case on or before the third
Business Day after such day. The Fund will also deliver an APS Basic Maintenance
Report to Moody's
17
on any Valuation Date that (i) the Discounted Value of Moody's Eligible Assets,
is greater than the APS Basic Maintenance Amount by 5% or less or (ii) on any
date which the Fund redeems Common Shares. A failure by the Fund to deliver an
APS Basic Maintenance Report under subparagraph (b) of this Section 9 shall be
deemed to be delivery of an APS Basic Maintenance Report indicating the
Discounted Value for all assets of the Fund is less than the APS Basic
Maintenance Amount, as of the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery of an APS Basic
Maintenance Report in accordance with paragraph (b) of this Section 9 relating
to a Quarterly Valuation Date, the Fund shall cause the Independent Accountant
to confirm in writing to S&P (if S&P is then rating the APS), Moody's (if
Moody's is then rating the APS) and the Auction Agent (if either S&P or Moody's
is then rating the APS) (i) the mathematical accuracy of the calculations
reflected in such Report (and in any other APS Basic Maintenance Report,
randomly selected by the Independent Accountant, that was delivered by the Fund
during the quarter ending on such Quarterly Valuation Date) and (ii) that, in
such Report (and in such randomly selected Report), the Fund determined in
accordance with this Certificate of Vote whether the Fund had, at such Quarterly
Valuation Date (and at the Valuation Date addressed in such randomly-selected
Report), S&P Eligible Assets (if S&P is then rating the APS) of an aggregate
Discounted Value at least equal to the APS Basic Maintenance Amount and Moody's
Eligible Assets (if Moody's is then rating the APS) of an aggregate Discounted
Value at least equal to the APS Basic Maintenance Amount (such confirmation
being herein called the "Accountant's Confirmation").
(d) Within ten Business Days after the date of delivery of an APS Basic
Maintenance Report in accordance with paragraph (b) of this Section 9 relating
to any Valuation Date on which the Fund failed to satisfy the APS Basic
Maintenance Amount, and relating to the APS Basic Maintenance Cure Date with
respect to such failure to exceed or equal the APS Basic Maintenance Amount, the
Fund shall cause the Independent Accountant to provide to S&P (if S&P is then
rating the APS), Moody's (if Moody's is then rating the APS) and the Auction
Agent (if either S&P or Moody's is then rating the APS) an Accountant's
Confirmation as to such APS Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to subparagraph
(c) or (d) of this Section 9 shows that an error was made in the APS Basic
Maintenance Report for a particular Valuation Date for which such Accountant's
Confirmation was required to be delivered, or shows that a lower aggregate
Discounted Value for the aggregate of all S&P Eligible Assets (if S&P is then
rating the APS) or Moody's Eligible Assets (if Moody's is then rating the APS),
as the case may be, of the Fund was determined by the Independent Accountant,
the calculation or determination made by such Independent Accountant shall be
final and conclusive and shall be binding on the Fund, and the Fund shall
accordingly amend and deliver the APS Basic Maintenance Report to S&P (if S&P is
then rating the APS), Moody's (if Moody's is then rating the APS) and the
Auction Agent (if either S&P or Moody's is then rating the APS) promptly
following receipt by the Fund of such Accountant's Confirmation.
18
(f) On or before 5:00 p.m., New York City time, on the first Business Day
after the Date of Original Issue of the APS, the Fund shall complete and deliver
to S&P (if S&P is then rating the APS) and to Moody's (if Moody's is then rating
the APS), an APS Basic Maintenance Report as of the close of business on such
Date of Original Issue. Within five Business Days of such Date of Original
Issue, the Fund shall cause the Independent Accountant to confirm in writing to
S&P (if S&P is then rating the APS) and to Moody's (if Moody's is then rating
the APS) (i) the mathematical accuracy of the calculations reflected in such
Report and (ii) that the amount of S&P Eligible Assets or Moody's Eligible
Assets, as the case may be, reflected thereon equals or exceeds the APS Basic
Maintenance Amount reflected thereon.
10. Minimum Liquidity Level. So long as S&P is rating the APS, the Fund
shall have, as of each Valuation Date, Dividend Coverage Assets, with respect to
each then Outstanding share of each series of APS, having a value not less than
the Dividend Coverage Amount with respect to such share (the "Minimum Liquidity
Level"). If, as of each Valuation Date, the Fund does not have the required
Dividend Coverage Assets, the Fund shall, as soon as practicable, adjust its
portfolio in order to meet the Minimum Liquidity Level, but only so long as S&P
is rating the APS. So long as S&P is rating the APS, the Fund shall notify S&P
on any Valuation Date which the Fund does not have the required Dividend
Coverage Assets and does not adjust its portfolio as described in the
immediately preceding sentence.
11. Restrictions on Certain Distributions. For so long as any of the APS is
Outstanding, and except as set forth in Sections 2(e) and 6(d) of this Part I,
(A) the Fund shall not declare, pay or set apart for payment any dividend or
other distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase, Common Shares or other
shares, if any, ranking junior to the APS as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up) in respect
of the Common Shares or any other shares of the Fund ranking junior to or on a
parity with the APS as to the payment of dividends or the distribution of assets
upon dissolution, liquidation or winding up, or call for redemption, redeem,
purchase or otherwise acquire for consideration any Common Shares or any other
such junior shares (except by conversion into or exchange for shares of the Fund
ranking junior to the APS as to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up), or any such parity shares
(except by conversion into or exchange for shares of the Fund ranking junior to
or on a parity with APS as to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up), unless (i) full cumulative
dividends on shares of each series of APS through its most recently ended
Dividend Period shall have been paid or shall have been declared and sufficient
funds for the payment thereof deposited with the Auction Agent and (ii) the Fund
has redeemed the full number of shares of each series of APS required to be
redeemed by any provision for mandatory redemption pertaining thereto, and (B)
if either Moody's or S&P is rating the APS, the Fund shall not declare, pay or
set apart for payment any dividend or other distribution (other than a dividend
or distribution paid in shares of, or options, warrants or rights to subscribe
for or purchase, Common Shares or other shares, if any, ranking junior to the
APS as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up) in respect of
19
Common Shares or any other shares of the Fund ranking junior to the APS as to
the payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up, or call for redemption, redeem, purchase or otherwise
acquire for consideration any shares of Common Shares or any other such junior
shares (except by conversion into or exchange for shares of the Fund ranking
junior to the APS as to the payment of dividends and the distribution of assets
upon dissolution, liquidation or winding up), unless immediately after such
transaction the Discounted Value of Moody's Eligible Assets and S&P Eligible
Assets would each at least equal the APS Basic Maintenance Amount.
12. Additional Dividends. If the Fund retroactively allocates any net
capital gains or other income taxable for federal income tax purposes to the APS
without having given advance notice thereof to the Autcion Agent as provided in
Section 6 of Part II by reason of the fact that such allocation is made as a
result of (i) the realization of net capital gains or other income taxable for
federal income tax purposes, (ii) the redemption of all or a portion of the
outstanding APS or (iii) the liquidation of the Fund (such allocation being
referred to herein as a "Retroactive Taxable Allocation"), the Fund will
simultaneously, if practicable, with such allocation but in no event later than
270 days after the end of the Fund's taxable year in which a Retroactive Taxable
Allocation is made, provide notice thereof to the Auction Agent and to each
Holder of such shares during such taxable year at such Holder's address as the
same appears or last appeared on the share books of the Fund. Such Holders of
such shares shall be entitled to receive, when, as and if declared by the Board
of Trustees, out of funds legally available therefor, dividends in an amount
equal to the aggregate Additional Dividends with respect to all Retroactive
Taxable Allocations made to such shares during the taxable year in question,
such dividends to be payable by the Fund to the Auction Agent, for distribution
to such Holders, within 30 days after the notice described above is given to the
Auction Agent.
13. Certain Other Restrictions. (a) For so long as any of the APS is
outstanding and Moody's is then rating such shares, the Fund will not, unless it
has received written confirmation from Moody's that any such action would not
impair the ratings then assigned by Moody's to the APS, engage in any one or
more of the following transactions:
(i) transactions in options on securities, futures contracts or
options on futures contracts except that in connection with Moody's Hedging
Transactions: (A) the Fund may buy call or put option contracts on securities;
(B) the Fund may write covered call options on securities; (C) the Fund may
write put options on securities; (D) the Fund may enter into positions in
futures contracts based on the Municipal Index provided that the Fund shall not
engage in any such transaction which would cause the Fund at the time of such
transaction to own or have sold (1) outstanding futures contracts based on the
Municipal Index exceeding in number 10% of the rolling average number of daily
traded futures contracts based on the Municipal Index in the 30 calendar days
prior to the time of effecting such transaction as reported by The Wall Street
Journal or (2) outstanding futures contracts based on the Municipal Index and
options on such futures contracts having an aggregate fair market value (taking
into account the fair market value of futures contracts based on Treasury Bonds)
exceeding
20
the fair market value of Moody's Eligible Assets owned by the Fund; (E) the Fund
may enter into futures contracts on Treasury Bonds provided that the Fund shall
not engage in any such transaction which would cause the Fund at the time of
such transaction to own or have sold (1) outstanding futures contracts based on
Treasury Bonds and options on such futures contracts having an aggregate fair
market value (taking into account the fair market value of futures contracts
based on the Municipal Index) exceeding 40% of the aggregate fair market value
of Moody's Eligible Assets owned by the Fund and rated Aa by Moody's (or, if not
rated by Moody's but rated by S&P, rated AAA by S&P) or (2) outstanding futures
contracts based on Treasury Bonds and options on such futures contracts having
an aggregate fair market value (taking into account the fair market value of
futures contracts based on the Municipal Index) exceeding 80% of the aggregate
fair market value of Moody's Eligible Assets owned by the Fund and rated Baa or
A by Moody's (or, if not rated by Moody's but rated by S&P, rated A or AA by
S&P); for purposes of the foregoing clauses (D) and (E), the Fund shall be
deemed to own the number of futures contracts that underlie any outstanding
option written by the Fund; and (F) the Fund may buy call or put options on
futures contracts on the Municipal Index or Treasury Bonds, may write put
options on such futures contracts (provided, that if the contract would require
delivery of a security, that security must be held by the Fund) and may write
call options on such futures if it owns the futures contract subject to the
option. For so long as the APS are rated by Moody's, the Fund will engage in
Closing Transactions to close out any outstanding futures contract based on the
Municipal Index if the open interest with respect to such futures contracts
based on the Municipal Index as reported by The Wall Street Journal is less than
5,000. For so long as the APS are rated by Moody's, the Fund will engage in a
Closing Transaction to close out any outstanding futures contract by no later
than the fifth Business Day of the month in which such contract expires and will
engage in a Closing Transaction to close out any outstanding option on a futures
contract by no later than the first Business Day of the month in which such
option expires. For so long as the APS are rated by Moody's, the Fund will
engage in transactions with respect to futures contracts or options thereon
having only the next settlement date or the settlement date immediately
thereafter. For purposes of valuation of Moody's Eligible Assets: (A) if the
Fund writes a call option, the underlying asset will be valued as follows: (1)
if the option is exchange-traded and may be offset readily or if the option
expires before the earliest possible redemption of the APS, at the lower of the
Discounted Value of the underlying security of the option and the exercise price
of the option or (2) otherwise, it has no value; (B) if the Fund writes a put
option, the underlying asset will be valued as follows: the lesser of (1)
exercise price and (2) the Discounted Value of the underlying security; (C) if
the Fund is a seller under a futures contract, the underlying security will be
valued at the lower of (1) settlement price and (2) the Discounted Value of the
underlying security; if a contract matures within the Moody's Exposure Period,
the security may be valued at the settlement price; (D) if the Fund is the buyer
under a futures contract, the underlying security will be valued at the lower of
(1) the settlement price and (2) the Discounted Value of the underlying
security; if the contract matures within the Moody's Exposure Period, the
security may be valued at its Discounted Value and (E) call or put option
contracts which the Fund buys have no value. For so long as APS are rated by
Moody's: (A) the Fund will not engage in options and futures transactions for
leveraging or speculative purposes; (B) the Fund will not
21
write or sell any anticipatory contracts pursuant to which the Fund hedges the
anticipated purchase of an asset prior to completion of such purchase; (C) the
Fund will not enter into an option or futures transaction unless, after giving
effect thereto, the Fund would continue to have Moody's Eligible Assets with an
aggregate Discounted Value equal to or greater than the APS Basic Maintenance
Amount; (D) the Fund will not enter into an option or futures transaction unless
after giving effect to such transaction the fund would continue to be in
compliance with the provisions relating to the APS Basic Maintenance Amount; (E)
for purposes of the APS Basic Maintenance Amount (1) assets in margin accounts
are not Moody's Eligible Assets, (2) 10% of the settlement price of assets sold
under a futures contract, the settlement price of assets purchased under a
futures contract, the settlement price of an underlying futures contract if the
Fund writes put options on futures contracts will constitute liabilities of the
Fund and (3) if the Fund writes call options on futures contracts and does not
own the underlying futures contract, 105% of the Market Value of the underlying
futures contract will constitute a liability of the Fund; (F) the Fund shall
enter into only exchange-traded futures and shall write only exchange-traded
options on exchanges approved by Moody's; (G) where delivery may be made to the
Fund with any of a class of securities, the Fund shall assume for purposes of
the APS Basic Maintenance Amount that it takes delivery of that security which
yields it the least value; (H) the Fund will not engage in forward contracts;
(I) the Fund will enter into futures contracts as seller only if it owns the
underlying security; and (J) there shall be a quarterly audit made of the Fund's
futures and options transactions by the Fund's independent accountants to
confirm that the Fund is in compliance with these standards; or
(ii) incur any indebtedness, without prior written approval of Moody's
that such indebtedness would not adversely affect the then current rating by
Moody's of the APS except that the Fund may, without obtaining the written
confirmation described above, incur indebtedness for the purpose of clearing
securities transactions if the APS Basic Maintenance Amount would continue to be
satisfied after giving effect to such indebtedness; provided, however, that any
such indebtedness shall be repaid within 60 days and will not be extended or
renewed; or
(iii) issue any class or series of shares ranking prior to or on a
parity with the APS with respect to the payment of dividends or the distribution
of assets upon dissolution, liquidation or winding up of the Fund, or reissue
any APS previously purchased or redeemed by the Fund; or
(b) For so long as any of the APS is Outstanding and S&P is rating such
shares, the Fund will not, unless the Fund has received written confirmation
from S&P that any such action would not impair the rating then assigned by such
rating agency to the APS, engage in any one or more of the following
transactions:
(i) transactions in any reverse repurchase agreements; or
(ii) lend portfolio securities; or
22
(iii) borrow money, except that the Fund may, without obtaining the
written confirmation described above, borrow money for the purposes of clearing
securities transactions if the APS Basic Maintenance Amount would continue to be
satisfied after giving effect to such borrowing; or
(iv) issue any class or series of shares ranking prior to or on a
parity with the APS with respect to the payment of dividends or the distribution
of assets upon dissolution, liquidation or winding up of the Fund, or reissue
any APS previously purchased or redeemed by the Fund, or merge or consolidate
with any corporation; or
(v) engage in repurchase agreement transactions in which the term of
such repurchase obligation is longer than 90 days, in which the underlying
security is a security other than United States treasury securities (not
inclusive of zero-coupon securities), demand deposits, certificates of deposits
or bankers acceptance in which the counter-party or its affiliates have
securities rated A-1+ by S&P with respect to such underlying security; or
(vi) engage in short sale transactions; or
(vii) purchase or sell futures contracts or options thereon or write
uncovered put or uncovered call options on portfolio securities except that (A)
the Fund may engage in any S&P Hedging Transactions based on the Municipal
Index, provided that the Fund shall not engage in any S&P Hedging Transaction
based on the Municipal Index (other than Closing Transactions) which would cause
the Fund at the time of such transaction to own or have sold the least of (1)
more than 1,000 outstanding futures contracts based on the Municipal Index, (2)
outstanding futures contracts based on the Municipal Index and on the Treasury
Bonds exceeding in number 25% of the quotient of the fair market value of the
Fund's total assets divided by 100,000 or (3) outstanding futures contracts
based on the Municipal Index exceeding in number 10% of the average number of
daily traded futures contracts based on the Municipal Index in the month prior
to the time of effecting such transaction as reported by The Wall Street Journal
and (B) the Fund may engage in S&P Hedging Transactions based on Treasury Bonds,
provided that the Fund shall not engage in any S&P Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) which would cause the Fund at
the time of such transaction to own or have sold the lesser of (1) outstanding
futures contracts based on Treasury Bonds and on the Municipal Index exceeding
in number 25% of the quotient of the fair market value of the Fund's total
assets divided by 100,000 or (2) outstanding futures contracts based on Treasury
Bonds exceeding in number 10% of the average number of daily traded futures
contracts based on Treasury Bonds in the month prior to the time of effecting
such transaction as reported by The Wall Street Journal. For so
23
long as the APS are rated by S&P, the Fund will engage in Closing Transactions
to close out any outstanding futures contracts which the Fund owns or has sold
or any outstanding option thereon owned by the Fund in the event (A) the Fund
does not have S&P Eligible Assets with an aggregate Discounted Value equal to or
greater than the APS Basic Maintenance Amount on two consecutive Valuation Dates
and (B) the Fund is required to pay Variation Margin on the second such
Valuation Date. For so long as the APS are rated by S&P, the Fund will engage in
a Closing Transaction to close out any outstanding futures contract or option
thereon in the month prior to the delivery month under the terms of such futures
contract or option thereon unless the Fund holds securities deliverable under
such terms. For purposes of determining S&P Eligible Assets to determine
compliance with the APS Basic Maintenance Amount, no amounts on deposit with the
Fund's custodian or broker representing Initial Margin or Variation Margin shall
constitute S&P Eligible Assets. For so long as the APS are rated by S&P, when
the Fund writes a futures contract or option thereon, it will maintain an amount
of cash, cash equivalents or short-term, money market securities in a segregated
account with the Fund's custodian, so that the amount so segregated plus the
amount of Initial Margin and Variation Margin held in the account of the Fund's
broker equals the fair market value of the futures contract, except that in the
event the Fund writes a futures contract or option thereon which requires
delivery of an underlying security, the Fund shall hold such underlying
security.
14. Notice. All notices or communications, unless otherwise specified in
the By-Laws of the Fund or this Certificate of Vote, shall be sufficiently given
if in writing and delivered in person or mailed by first-class mail, postage
prepaid. Notice shall be deemed given on the earlier of the date received or the
date seven days after which such notice is mailed.
15. Definitions. As used in Parts I and II hereof, the following terms
shall have the following meanings (with terms defined in the singular having
comparable meanings when used in the plural and vice versa), unless the context
otherwise requires:
"'AA' Composite Commercial Paper Rate," on any date for any Rate Period,
shall mean (i) (A) in the case of any Minimum Dividend Period or any Rate Period
between 7 and 28 Rate Period Days, the interest equivalent of the 30-day rate;
provided, however, in the case of any Minimum Dividend Period of 7 days or any
Rate Period with 7 Rate Period Days and the "AA" Composite Commercial Paper Rate
is being used to determine the Applicable Rate when all of the Outstanding APS
are subject to Submitted Hold Orders, then the interest equivalent of the 7-day
rate, and (B) in the case of any Rate Period with more than 28 Rate Period Days,
the interest equivalent of the 180-day rate, on commercial paper placed on
behalf of issuers whose corporate bonds are rated "AA" by S&P or the equivalent
of such rating by S&P or another rating agency, as made available on a discount
basis or otherwise by the Federal Reserve Bank of New York for the Business Day
immediately preceding such date; or (ii) in the event that the Federal Reserve
Bank of New York does not make available any such rate, then the arithmetic
average of such rates, as quoted on a discount basis or otherwise, by the
Commercial Paper Dealers to the Auction Agent for the close of business on the
Business Day next preceding such date. If any Commercial Paper Dealer does not
quote a rate required to determine the "AA" Composite Commercial Paper Rate, the
"AA" Composite Commercial Paper Rate shall be determined on the basis of the
quotation or quotations furnished by the remaining Commercial Paper Dealer or
Commercial Paper Dealers and any Substitute Commercial Paper Dealer or
Substitute Commercial Paper Dealers selected by the Fund to provide such rate or
rates not being supplied by any Commercial Paper Dealer or Commercial Paper
Dealers, as the case may be, or, if the Fund does not
24
select any such Substitute Commercial Paper Dealer or Substitute Commercial
Paper Dealers, by the remaining Commercial Paper Dealer or Commercial Paper
Dealers. For purposes of this definition, the "interest equivalent" of a rate
stated on a discount basis (a "discount rate") for commercial paper of a given
days' maturity shall be equal to the quotient (rounded upwards to the next
higher one-thousandth (.001) of 1%) of (A) the discount rate divided by (B) the
difference between (x) 1.00 and (y) a fraction the numerator of which shall be
the product of the discount rate times the number of days in which such
commercial paper matures and the denominator of which shall be 360.
"Accountant's Confirmation" shall have the meaning set forth in paragraph
(c) of Section 9 of this Part I.
"Additional Dividends" means payment to a Holder of APS of an amount which,
when taken together with the aggregate amount of Retroactive Taxable Allocations
made to such Holder with respect to the taxable year in question, would cause
such Holder's dividends in dollars (after federal income tax consequences) from
the aggregate of both the Retroactive Taxable Allocations and the Additional
Dividends to be equal to the dollar amount of the dividends which would have
been received by such Holder if the amount of the aggregate Retroactive Taxable
Allocations would have been excludable from the gross income of such Holder.
Such Additional Dividends shall be calculated (i) without consideration being
given to the time value of money; (ii) assuming that no Holder of APS is subject
to the federal alternative minimum tax with respect to dividends received from
the Fund; and (iii) assuming that each Retroactive Taxable Allocation would be
taxable in the hands of each Holder of APS at the maximum marginal regular
federal individual income tax rate applicable to ordinary income or net capital
gains, as applicable, or the maximum marginal regular federal corporate income
tax rate, whichever is greater, in effect during the taxable year in question.
"Anticipation Notes" means the following municipal securities: tax
anticipation notes, revenue anticipation notes and tax and revenue anticipation
notes.
"Applicable Rate" shall have the meaning specified in subparagraph (c)(i)
of Section 2 of this Part I.
"APS Basic Maintenance Amount," as of any Valuation Date, shall mean the
dollar amount equal to the sum of (i) (A) the product of the number of APS
outstanding on such date multiplied by $50,000; (B) the aggregate amount of
dividends that will have accumulated at the Applicable Rate (whether or not
earned or declared) to (but not including) the first respective Dividend Payment
Dates for each of the APS Outstanding that follow such Valuation Date; (C) the
amount equal to the Projected Dividend Amount (based on the number of APS
Outstanding on such date); (D) the amount of anticipated expenses of the Fund
for the 90 days subsequent to such Valuation Date; (E) the amount of the Fund's
Maximum Potential Additional Dividend Liability as of such Valuation Date; (F)
the amount of any premium payable pursuant to a Premium Call Period; and (G) any
current liabilities as of such Valuation Date to the extent not reflected in any
of (i)(A) through (i)(F) (including, without limitation, any amounts described
in Section 13 of Part I as required to be treated as liabilities in connection
with
25
the Fund's transactions in futures and options and including any payables for
municipal securities purchased as of such Valuation Date) less (ii) either (A)
the face value of any of the Fund's assets irrevocably deposited by the Fund for
the payment of any of (i)(A) through (i)(G) if such assets mature prior to or on
the date of payment of the liability for which such assets are deposited and are
either securities issued or guaranteed by the United States Government or have a
rating assigned by Moody's of P-1, VMIG-1 or MIG-1 (or, with respect to S&P,
SP-1+ or A-1+) or (B) the Discounted Value of such assets. For purposes of the
APS Basic Maintenance Amount in connection with S&P's ratings of the APS, with
respect to any transactions by the Fund in futures contracts, the Fund shall
include as liabilities (i) 30% of the aggregate settlement value, as marked to
market, of any outstanding futures contracts based on the Municipal Index which
are owned by the Fund plus (ii) 25% of the aggregate settlement value, as marked
to market, of any outstanding futures contracts based on Treasury Bonds which
contracts are owned by the Fund. For purposes of the APS Basic Maintenance
Amount in connection with Moody's rating of the APS, with respect to any
transactions by the Fund in securities options, the Fund shall include as
liabilities (i) 10% of the exercise price of a call option written by the Fund
and (ii) the exercise price of any written put option.
"APS Basic Maintenance Cure Date," with respect to the failure by the Fund
to satisfy the APS Basic Maintenance Amount (as required by paragraph (a) of
Section 9 of this Part I) as of a given Valuation Date, shall mean the third
Business Day following such Valuation Date.
"APS Basic Maintenance Report" shall mean a report signed by the President,
Treasurer or any Senior Vice President or Vice President of the Fund which sets
forth, as of the related Valuation Date, the assets of the Fund, the Market
Value and the Discounted Value thereof (seriatim and in aggregate), and the APS
Basic Maintenance Amount.
"Auction" shall mean each periodic implementation of the Auction
Procedures.
"Auction Agency Agreement" shall mean the agreement between the Fund and
the Auction Agent which provides, among other things, that the Auction Agent
will follow the Auction Procedures for purposes of determining the Applicable
Rate for each series of APS so long as the Applicable Rate for such series is to
be based on the results of an Auction.
"Auction Agent" shall mean the entity appointed as such by a resolution of
the Board of Trustees in accordance with Section 7 of this Part I.
"Auction Date," with respect to any Rate Period, shall mean the Business
Day next preceding the first day of such Rate Period; initially Tuesday, January
12, 1993 for APS Series A and Thursday, January 21, 1993 for APS Series B; and
thereafter each January 12 and July 12 for APS Series A and January 21 and July
21 for APS Series B, subject to change as set forth herein.
26
"Auction Procedures" shall mean the procedures for conducting Auctions set
forth in Part II hereof.
"Board of Trustees" shall mean the Board of Trustees of the Fund or any
duly authorized committee thereof.
"Business Day" shall mean a day on which the New York Stock Exchange is
open for trading and which is neither a Saturday, Sunday nor any other day on
which banks in the City of New York, New York, are authorized by law to close.
"Closing Transactions" means the termination of a futures contract or
option position by taking an equal position opposite thereto in the same
delivery month as such initial position being terminated.
"Commercial Paper Dealers" shall mean Goldman, Sachs Money Markets, L.P.,
Lehman Commercial Paper Incorporated, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Smith Barney, Harris Upham & Co. or, in lieu of any thereof,
their respective affiliates or successors, if such entity is a commercial paper
dealer.
"Common Shares" shall mean the common shares of beneficial interest, par
value $.01 per share, of the Fund.
"Cure Date" shall mean the APS Basic Maintenance Cure Date or the 1940 Act
Cure Date, as the case may be.
"Date of Original Issue," with respect to any series of APS, shall mean the
date on which the Fund initially issued shares of such series of APS.
"Deposit Securities" shall mean cash and municipal securities rated at
least A-1+ or SP-1+ by S&P, except that, for purposes of Section 3(a)(iii) of
this Part I, such municipal securities shall be considered "Deposit Securities"
only if they are also rated P-1, MIG-1 or VMIG-1 by Moody's.
"Discounted Value" shall mean (i) with respect to an S&P Eligible Asset,
the quotient of the Market Value thereof divided by the applicable S&P Discount
Factor and (ii) with respect to a Moody's Eligible Asset, the quotient of the
Market Value thereof divided by the applicable Moody's Discount Factor, provided
that with respect to a Moody's Eligible Asset, Discounted Value shall not exceed
the par value of such Asset at any time.
"Dividend Coverage Amount," as of any Valuation Date, shall mean, with
respect to each of the APS, (i) the aggregate amount of dividends that will
accumulate on such APS to (but not including) the first Dividend Payment Date
for such share that follows such Valuation Date plus any liabilities that will
become payable prior to or on such payment date, less (ii) the combined value of
Deposit Securities irrevocably deposited for the payment of dividends on such
APS and Receivables for Municipal Securities Sold which become due prior to the
Dividend Payment Date and interest with
27
respect to municipal securities which is payable to the Fund prior to the
Dividend Payment Date.
"Dividend Coverage Assets," as of any Valuation Date, shall mean, with
respect to each of the APS, Deposit Securities with maturity or tender dates not
later than the day preceding the first Dividend Payment Date for such share that
follows such Valuation Date and having a value not less than the Dividend
Coverage Amount with respect to such share.
"Dividend Payment Date," with respect to any series of APS, shall mean any
date on which dividends on shares of such series of APS are payable pursuant to
the provisions of paragraph (b) of Section 2 of this Part I.
"Dividend Period," with respect to any series of APS, shall mean the period
from and including the Date of Original Issue of such series to but excluding
the initial Dividend Payment Date for such series and any period thereafter from
and including one Dividend Payment Date for such series to but excluding the
next succeeding Dividend Payment Date for such series.
"Fund" shall mean Van Kampen Merritt Municipal Opportunity Trust, a
Massachusetts business trust, which is the issuer of the APS.
"Failure to Deposit," with respect to any series of APS, shall mean a
failure by the Fund to pay to the Auction Agent, not later than 12:00 noon, New
York City time, (A) on the Business Day next preceding any Dividend Payment Date
for such series, in funds available on such Dividend Payment Date in The City of
New York, New York, the full amount of any dividend (whether or not earned or
declared) to be paid on such Dividend Payment Date on any share of such series
or (B) on the Business Day next preceding any redemption date in funds available
on such redemption date for such series in The City of New York, New York, the
Redemption Price to be paid on such redemption date for any share of such series
after notice of redemption is given pursuant to paragraph (b) of Section 3 of
this Part I.
"Fund" shall mean Van Kampen Merritt Advantage Municipal Income Trust II, a
Massachusetts business trust, which is the issuer of the APS.
"Holder," with respect to any series of APS, shall mean the registered
holder of shares of such series of APS as the same appears on the share books of
the Fund.
"Independent Accountant" shall mean a nationally recognized accountant, or
firm of accountants, that is with respect to the Fund an independent public
accountant or firm of independent public accountants under the Securities Act of
1933, as amended from time to time.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.
28
"Initial Dividend Period," with respect to any series of APS, shall mean
the period from and including the Date of Original Issue thereof to but
excluding the initial Dividend Payment Date which occurs in a month which
contains the first scheduled Auction Date for such series of APS.
"Initial Margin" means the amount of cash or securities deposited with a
custodian for the benefit of a futures commission merchant as a good-faith
deposit at the time of the initiation of a purchase or sale position with
respect to a futures contract or a sale position with respect to an option
position thereon.
"Mandatory Redemption Price" means $50,000 per share of APS plus an amount
equal to accumulated but unpaid dividends thereon to the date fixed for
redemption (whether or not earned or declared).
"Marginal Tax Rate" means the marginal regular federal income tax rate
applicable to ordinary income or the maximum marginal regular federal corporate
income tax rate, whichever is greater.
"Market Value" of any asset of the Fund shall mean the market value thereof
determined by the Pricing Service designated from time to time by the Board of
Trustees. Market Value of any asset shall include any interest accrued thereon.
The Pricing Service values portfolio securities at the mean between the quoted
bid and asked price or the yield equivalent when quotations are readily
available. Securities for which quotations are not readily available are valued
at fair value as determined by the pricing service using methods which include
consideration of yields or prices of municipal bonds of comparable quality, type
of issue, coupon, maturity and rating; indications as to value from dealers; and
general market conditions. The pricing service may employ electronic data
processing techniques and/or a matrix system to determine valuations.
"Mandatory Redemption Price" means $50,000 per share of APS plus an amount
equal to accumulated but unpaid dividends thereon to the date fixed for
redemption (whether or not earned or declared).
"Master Purchaser's Letter" has the meaning specified in Section 1 of Part
II hereof.
"Maximum Potential Additional Dividends Liability," as of any Valuation
Date, shall mean the aggregate amount of Additional Dividends that would be due
if the Fund were to make Retroactive Taxable Allocations, with respect to any
fiscal year, estimated based upon dividends paid and the amount of undistributed
realized net capital gains and other taxable income earned by the Fund, as of
the end of the calendar month immediately preceding such Valuation Date, and
assuming such Additional Dividends are fully taxable.
"Minimum Dividend Period" shall mean with respect to APS Series A and APS
Series B, any Rate Period consisting of 28 Rate Period Days.
29
"Minimum Liquidity Level" shall have meaning set forth in Section 10 of
this Part I.
"Moody's" shall mean Moody's Investors Service, Inc., a Delaware
corporation, and its successors.
"Moody's Discount Factor" shall mean, for purposes of determining the
Discounted Value of any Moody's Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest Exposure Period set forth
opposite such rating that is the same length as or is longer than the Moody's
Exposure Period, in accordance with the table set forth below:
RATING CATEGORY
------------------------------------------------------------------------------
EXPOSURE PERIOD Aaa1 AA1 A1 BAA1 OTHER2 (V)MIG-11,3,4 SP-1+3,4
--------------- ---- --- -- ---- ------ ------------- --------
7 weeks 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but greater 154 164 173 205 235 137 149
than seven weeks
9 weeks or less but greater 158 169 179 209 242 138 150
than eight weeks
-----------------
1 Moody's rating.
2 New York municipal securities not rated by Moody's but rated BBB or BBB+ by S&P.
3 New York municipal securities rated MIG-1 or VMIG-1 or, if not rated by Moody's, rated SP-1+ by S&P which
do not mature or have a demand feature at par exercisable within the Moody's Exposure Period and which do not
have a long-term rating.
4 For the purposes of the definition of Moody's Eligible Assets, these securities will have an assumed
rating of "A" by Moody's.
Notwithstanding the foregoing, (i) No Moody's Discount Factor will be
applied to short-term municipal securities so long as such municipal securities
are rated at least MIG-1, VMIG-1 or P-1 by Moody's and mature or have a demand
feature at par exercisable within the Moody's Exposure Period and the Moody's
Discount Factor for such municipal securities will be 125% as long as such
municipal securities are rated at least A-1-/AA or SP-1+/AA by S&P and mature or
have a demand feature at par exercisable within the Moody's Exposure Period and
(ii) no Moody's Discount Factor will be applied to cash or to Receivables for
Municipal Securities Sold.
"Moody's Eligible Asset" shall mean cash, Receivables for Municipal
Securities Sold or a municipal security that (i) pays interest in cash, (ii) is
publicly rated Baa or higher by Moody's or, if not rated by Moody's but rated by
S&P, is rated at least BBB by S&P (provided that, for purposes of determining
the Moody's Discount Factor applicable to any such S&P-rated municipal security,
such municipal security (excluding any short-term municipal security) shall be
deemed to have a Moody's rating which is one full rating category lower than its
S&P rating), (iii) does not have its Moody's rating suspended by Moody's; and
(iv) is part of an issue of municipal securities of at least $10,000,000.
Municipal securities issued by any one issuer and rated BBB by S&P may
30
comprise no more than 4% of total Moody's Eligible Assets; such BBB-rated
municipal securities, if any, together with any municipal securities issued by
the same issuer and rated Baa by Moody's or A by S&P, may comprise no more than
6% of total Moody's Eligible Assets; such BBB, Baa and A-rated municipal
securities, if any, together with any municipal securities issued by the same
issuer and rated A by Moody's or AA by S&P, may comprise no more than 10% of
total Moody's Eligible Assets; and such BBB, Baa, A and AA-rated municipal
securities, if any, together with any municipal securities issued by the same
issuer and rated Aa by Moody's or AAA by S&P, may comprise no more than 20% of
total Moody's Eligible Assets. For purposes of the foregoing sentence, any
municipal security backed by the guaranty, letter of credit or insurance issued
by a third party shall be deemed to be issued by such third party if the
issuance of such third party credit is the sole determinant of the rating on
such municipal security. Municipal securities issued by issuers located within a
single state or territory and rated BBB by S&P may comprise no more than 12% of
total Moody's Eligible Assets; such BBB-rated municipal securities, if any,
together with any municipal securities issued by issuers located within the same
state or territory and rated Baa by Moody's or A by S&P may comprise no more
than 20% of total Moody's Eligible Assets; such BBB, Baa and A-rated municipal
securities, if any, together with any municipal securities issued by issuers
located within the same state or territory and rated A by Moody's or AA by S&P,
may comprise no more than 40% of total Moody's Eligible Assets; and such BBB,
Baa, A and AA-rated municipal securities, if any, together with any municipal
securities issued by issuers located within the same state or territory and
rated Aa by Moody's or AAA by S&P, may comprise no more than 60% of total
Moody's Eligible Assets. For purposes of applying the foregoing requirements, a
municipal security shall be deemed to be rated BBB by S&P if rated BBB, BBB- or
BBB+ by S&P. For purposes of Minimum Issue Size, Maximum Underlying Obligor and
Maximum State or Territory Concentration, Moody's Eligible Assets shall be
calculated without including cash and municipal securities rated MIG-1 or VMIG-1
or, if not rated by Moody's, rated SP-1+ by S&P, which either mature or have a
demand feature at par exercisable within the Moody's Exposure Period. Where the
Fund sells an asset and agrees to repurchase such asset in the future, the
Discounted Value of such asset will constitute a Moody's Eligible Asset and the
amount the Fund is required to pay upon repurchase of such asset will count as a
liability for the purposes of the APS Basic Maintenance Amount. Where the Fund
purchases an asset and agrees to sell it to a third party in the future, cash
receivable by the Fund thereby will constitute a Moody's Eligible Asset if the
long-term debt of such other party is rated at least A2 by Moody's and such
agreement has a term of 30 days or less; otherwise the Discounted Value of such
asset will constitute a Moody's Eligible Asset. For the purposes of calculation
of Moody's Eligible Assets, municipal securities which have been called for
redemption by the issuer thereof shall be valued at the lower of Market Value or
the call price of such municipal securities.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (i)(A) through (i)(G) under the definition of APS Basic Maintenance
Amount or it is subject to any material lien, mortgage, pledge, security
interest or security agreement of any kind (collectively, "Liens"), except for
(a) Liens which are being contested in good faith by appropriate proceedings and
which Moody's has indicated to the Fund will not
31
affect the status of such asset as a Moody's Eligible Asset, (b) Liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (c) Liens to secure payment for services rendered or cash advanced to
the Fund by Van Kampen Merritt Investment Advisory Corp., the Administrator,
State Street Bank and Trust Company or the Auction Agent and (d) Liens by virtue
of any repurchase agreement.
"Moody's Exposure Period" shall mean the period commencing on a given
Valuation Date and ending 46 days thereafter.
"Moody's Hedging Transactions" shall mean transactions in options on
securities, futures contracts based on the Municipal Index or Treasury Bonds and
options on such futures contracts.
"Municipal Index" shall mean The Bond Buyer Municipal Bond Index.
"1940 Act" shall mean the Investment Company Act of 1940, as amended from
time to time.
"1940 Act APS Asset Coverage" shall mean asset coverage, as defined in
Section 18(h) of the 1940 Act, of at least 200% with respect to all outstanding
senior securities of the Fund which are stock, including all outstanding APS (or
such other asset coverage as may in the future be specified in or under the 1940
Act as the minimum asset coverage for senior securities which are stock of a
closed-end investment company as a condition of declaring dividends on its
common stock).
"1940 Act Cure Date," with respect to the failure by the Fund to maintain
the 1940 Act APS Asset Coverage (as required by Section 8 of this Part I) as of
the last Business Day of each month, shall mean the last Business Day of the
following month.
"Non-Call Period" shall have the meaning set forth below under "Specific
Redemption Provisions."
"Notice of Redemption" shall mean any notice with respect to the redemption
of the APS pursuant to Section 3 of this Part I.
"Optional Redemption Price" shall mean (i) $50,000 per share of APS in the
case of a six-month Dividend Period or a Special Dividend Period of less than
365 days or (ii) with respect to a Special Dividend Period of 365 days or more
the Optional Redemption Price set forth in the Specific Redemption Provisions in
connection therewith; in each case plus an amount equal to accumulated but
unpaid dividends thereon to the date of redemption (whether or not earned or
declared).
"Preferred Shares" shall mean the authorized preferred shares of beneficial
interest, par value $.01 per share, of the Fund, and includes the APS.
"Premium Call Period" shall have the meaning set forth below under
"Specific Redemption Provisions."
32
"Pricing Service" means Van Kampen Merritt Investment Advisory Corp. acting
pursuant to a Fund Pricing Agreement between the Fund and Van Kampen Merritt
Investment Advisory Corp. and any successor pricing service approved in writing
by Moody's (if Moody's is then rating the APS) and S&P (if S&P is then rating
the APS).
"Projected Dividend Amount" means, with respect to the shares of any series
of APS, on any Valuation Date, in the event the then current Dividend Period
will end within 47 calendar days of such date, from and after the last day of
such Dividend Period until 47 calendar days less the number of days remaining in
the current Dividend Period at an Applicable Rate equal to the Maximum Rate for
such Dividend Period multiplied by the larger of the factors (currently 304%)
that the Fund has been informed by Moody's and S&P is applicable to the
Projected Dividend Amount and desgined to take into account increases in
dividend rates over such period.
"Quarterly Valuation Date" shall mean the last Business Day of each fiscal
quarter of the Fund in each fiscal year of the Fund, commencing July 31, 1992.
"Rate Period," with respect to any series of APS, shall mean the Initial
Dividend Period thereof and any Subsequent Dividend Period, including any
Special Dividend Period, for such series.
"Rate Period Days," for any Rate Period, if such Rate Period is less than
one year, shall mean the number of days (without giving effect to subparagraph
(b)(ii) of Section 2 of this Part I) in such Rate Period.
"Receivables for Municipal Securities Sold" shall mean (A) for purposes of
calculation of Moody's Eligible Assets as of any Valuation Date, no more than
the aggregate of the following: (i) the book value of receivables for municipal
securities sold as of or prior to such Valuation Date if such receivables are
due within five business days of such Valuation Date, and if the trades which
generated such receivables are (x) settled through clearing house firms with
respect to which the Fund has received prior written authorization from Moody's
or (y) with counterparties having a Moody's long-term debt rating of at least
Baa3; and (ii) the Moody's Discounted Value of municipal securities sold as of
or prior to such Valuation Date which generated receivables, if such receivables
are due within the Moody's Exposure Period but do not comply with either of the
conditions specified in (i) above, and (B) for purposes of calculation of S&P
Eligible Assets as of any Valuation Date, the book value of receivables for
municipal securities sold as of or prior to such Valuation Date if such
receivables are due within five business days of such Valuation Date.
"Redemption Price" shall mean the Optional Redemption Price or the
Mandatory Redemption Price, as applicable.
"Retroactive Taxable Allocation" shall have th meaning set forth in Section
12 hereof.
"Retroactive Taxable Allocation" shall have the meaning set forth in
Section 12 hereof.
33
"S&P" shall mean Standard & Poor's Fund, a New York corporation, and its
successors.
"S&P Discount Factor" shall mean, for purposes of determining the
Discounted Value of any S&P Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest Exposure Period set forth
opposite such rating that is the same length as or is longer than the S&P
Exposure Period, in accordance with the table set forth below:
RATING CATEGORY
-------------- --------------- ------------ -------------
EXPOSURE PERIOD AAA* AA* A* BBB*
--------------- ---- --- -- ----
40 Business Days.............................. 190% 195% 210% 250%
22 Business Days.............................. 170 175 190 230
10 Business Days.............................. 155 160 175 215
7 Business Days.............................. 150 155 170 210
3 Business Days.............................. 130 135 150 190
--------------------
* S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
municipal securities will be 115%, so long as such municipal securities are
rated A-1+ or SP-1+ by S&P and mature or have a demand feature exercisable
within 30 days or less, or 125% if such municipal securities are not rated by
S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's; provided, however, that any
such Moody's rated short-term municipal securities which have demand features
exercisable within 30 days or less must be backed by a letter of credit,
liquidity facility or guarantee from a bank or other financial institution with
a short-term rating of at least A-1+ from S&P; and further provided that such
Moody's-rated short-term municipal securities may comprise no more than 50% of
short-term municipal securities that qualify as S&P Eligible Assets and (ii) no
S&P Discount Factor will be applied to cash or to Receivables for Municipal
Securities Sold. For purposes of the foregoing, Anticipation Notes rated SP-1+
or, if not rated by S&P, rated MIG-1 or VMIG-1 by Moody's, which do not mature
or have a demand feature at par exercisable in 30 days and which do not have a
long-term rating, shall be considered to be short-term municipal securities.
"S&P Eligible Asset" shall mean cash (excluding any cash irrevocably
deposited by the Fund for the payment of any liabilities within the meaning of
APS Basic Maintenance Amount), Receivables for Municipal Securities Sold or a
municipal security owned by the Fund that (i) is interest bearing and pays
interest at least semi-annually; (ii) is payable with respect to principal and
interest in U.S. Dollars; (iii) is publicly rated BBB or higher by S&P or, if
not rated by S&P but rated by Moody's, is rated at least A by Moody's (provided
that such Moody's-rated municipal securities will be included in S&P Eligible
Assets only to the extent the Market Value of such municipal securities does not
exceed 50% of the aggregate Market Value of S&P Eligible Assets; and further
provided that, for purposes of determining the S&P Discount Factor applicable to
any
34
such Moody's-rated municipal security, such municipal security will be deemed to
have an S&P rating which is one full rating category lower than its Moody's
rating); (iv) is not part of a private placement of municipal securities; and
(v) is part of an issue of municipal securities with an original issue size of
at least $20 million or, if an issue with an original issue size below $20
million (but in no event below $10 million), is issued by an issuer with a total
of at least $50 million of securities outstanding. Solely for purposes of this
definition, the term "municipal securities" means any obligation the interest on
which is exempt from regular Federal income taxation and which is issued by any
of the fifty United States, the District of Columbia or any of the territories
of the United States, their subdivisions, counties, cities, towns, villages,
school districts and agencies (including authorities and special districts
created by the states), and federally sponsored agencies such as local housing
authorities. Notwithstanding the foregoing limitations:
1. Municipal securities of any one issuer or guarantor (excluding bond
insurers) shall be considered S&P Eligible Assets only to the extent the Market
Value of such municipal securities does not exceed 10% of the aggregate Market
Value of S&P Eligible Assets provided that 2% is added to the applicable S&P
Discount Factor for every 1% by which the Market Value of such municipal
securities exceeds 5% of the aggregate Market Value of S&P Eligible Assets;
2. Municipal securities guaranteed or insured by any one bond insurer shall
be considered S&P Eligible Assets only to the extent the Market Value of such
municipal securities does not exceed 25% of the aggregate Market Value of S&P
Eligible Assets; and
3. Long-term municipal securities issued by issuers in any one state or
territory shall be considered S&P Eligible Assets only to the extent the Market
Value of such municipal securities does not exceed 20% of the aggregate Market
Value of S&P Eligible Assets.
"S&P Exposure Period" shall mean the maximum period of time following a
Valuation Date that the Fund has under this Certificate of Vote to cure any
failure to maintain, as of such Valuation Date, the Discounted Value for its
portfolio at least equal to the APS Basic Maintenance Amount (as described in
paragraph (a) of Section 9 of this Part I).
"S&P Hedging Transactions" means futures contracts based on the Municipal
Index or Treasury Bonds, put and call options on such contracts purchased by the
Fund and covered call options and secured put options on portfolio securities
written by the Fund.
"Special Dividend Period," with respect to any series of APS, shall mean
any Subsequent Dividend Period commencing on the date designated by the Fund in
accordance with Section 4 of this Part I and ending on the last day of the last
Dividend Period thereof, with such number of consecutive days or whole years as
the Board of Trustees shall specify, including the terms of any Specific
Redemption Provisions, if any.
35
"Specific Redemption Provisions" means, with respect to any Special
Dividend Period of 365 or more days, either, or any combination of, (i) period
(a "Non-Call Period") determined by the Board of Trustees, after consultation
with the Broker-Dealers, during which the shares subject to such Special
Dividend Period are not subject to redemption at the option of the Fund and (ii)
a period (a "Premium Call Period"), consisting of a number of whole years and
determined by the Board of Trustees, after consultation with the Broker-Dealers,
during each year of which the shares subject to such Special Dividend Period
shall be redeemable at the Fund's option at a price per share equal to $50,000
plus accumulated but unpaid dividends plus a premium expressed as a percentage
of $50,000 as determined by the Board of Trustees after consultation with the
Broker-Dealers; provided that during any Special Dividend Period of 365 or more
days if on the date of determination of the Applicable Rate for such series,
such Applicable Rate equaled or exceeded the Treasury Rate, the Fund may redeem
APS without regard to any Non-Call Period or Premium Call Period at the
Mandatory Redemption Price.
"Subsequent Dividend Period," with respect to any series of APS, shall mean
the period from and including the first day following the Initial Dividend
Period thereof to but excluding the next Dividend Payment Date which follows a
scheduled Auction for such series and any period thereafter from and including
one Dividend Payment Date which follows a scheduled Auction for such series to
but excluding the next succeeding Dividend Payment Date which follows a
scheduled Auction for such series; provided, however, that if any Subsequent
Dividend Period is also a Special Dividend Period, such term shall mean the
period commencing on the first day of such Special Dividend Period and ending on
the last day of the last Dividend Period thereof.
"Substitute Commercial Paper Dealer" shall mean The First Boston Company or
Morgan Stanley & Co. Incorporated or their respective affiliates or successors,
if such entity is a Commercial Paper Dealer; provided that none of such entities
shall be a Commercial Paper Dealer.
"Substitute U.S. Government Securities Dealer" shall mean The First Boston
Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated or their
respective affiliates or successors, if such entity is a U.S. Government
securities dealer; provided that none of such entities shall be a U.S.
Government Securities Dealer.
"Treasury Bonds" shall mean United States Treasury Bonds backed by the full
faith and credit of the United States government with remaining maturities of 10
years or more.
"Treasury Rate," on any date for any Rate Period, shall mean (i) the yield
on the most recently auctioned non-callable direct obligations of the U.S.
Government (excluding "flower" bonds) with a remaining maturity within three
months of the duration of such Rate Period, as quoted in The Wall Street Journal
on such date for the Business Day next preceding such date; or (ii) in the event
that any such rate is not published by The Wall Street Journal, then the
arithmetic average of the yields (expressed as an interest equivalent in the
case of a Rate Period which is one year or less and expressed as a bond
equivalent in the case of any longer Rate Period) on the most recently auctioned
36
non-callable direct obligations of the U.S. Government (excluding "flower"
bonds) with a remaining maturity within three months of the duration of such
Rate Period as quoted on a discount basis or otherwise by the U.S. Government
Securities Dealers to the Auction Agent for the close of business on the
Business Day immediately preceding such date. If any U.S. Government Securities
Dealer does not quote a rate required to determine the Treasury Rate, the
Treasury Rate shall be determined on the basis of the quotation or quotations
furnished by the remaining U.S. Government Securities Dealer or U.S. Government
Securities Dealers and any Substitute U.S. Government Securities Dealers
selected by the Fund to provide such rate or rates not being supplied by any
U.S. Government Securities Dealer or U.S. Government Securities Dealers, as the
case may be, or, if the Fund does not select any such Substitute U.S. Government
Securities Dealer or Substitute U.S. Government Securities Dealers, by the
remaining U.S. Government Securities Dealer or U.S. Government Securities
Dealers.
"U.S. Government Securities Dealer" shall mean Goldman, Sachs & Co., Lehman
Government Securities Incorporated, Smith Barney, Harris Upham & Co. and Morgan
Guaranty Trust Company of New York or their respective affiliates or successors,
if such entity is a U.S. Government securities dealer.
"Valuation Date" shall mean, for purposes of determining whether the Fund
is maintaining the APS Basic Maintenance Amount and the Minimum Liquidity Level,
each Business Day.
"Variation Margin" shall mean, in connection with outstanding purchase or
sale positions in futures contracts and outstanding sales positions with respect
to options thereon, the amount of cash and securities paid to and received from
a futures commission merchant (subsequent to the Initial Margin payment) from
time to time as the value of such position fluctuates.
"Voting Period" shall have the meaning set forth in paragraph (b) of
Section 5 of this Part I.
PART II.
1. Certain Definitions. Capitalized terms not defined in Section 1 of this
Part II shall have the respective meaning specified in Part I hereof. As used in
this Part II, the following terms shall have the following meanings, unless the
context otherwise requires:
"Affiliate" shall mean any Person known to the Auction Agent to be
controlled by, in control of or under common control with the Fund; provided
that no Broker-Dealer controlled by, in control of or under common control with
the Fund shall be deemed to be an Affiliate nor shall any fund or any Person
controlled by, in control of or under common control with such fund, one of the
trustees or executive officers of which is also a trustee of the Fund be deemed
to be an Affiliate solely because such trustee or executive officer is also a
trustee of the Fund.
37
"Agent Member" shall mean a member of or participant in the Securities
Depository that will act on behalf of a Bidder and is identified as such in such
Bidder's Master Purchaser's Letter.
"Applicable Percentage" for any series of APS on any Auction Date shall
mean the percentage, determined as set forth below, based on the prevailing
rating of such series in effect at the close of business on the Business Day
next preceding such Auction Date.
Prevailing Rating Percentage
----------------- ----------
"aa3"/AA- or higher 110%
"a3"/A- 125%
"baa3"/BBB- 150%
"ba3"/BB- 200%
Below "ba3"/BB- 250%
provided, however, that in the event the Fund has notified the Auction Agent of
its intent to allocate income taxable for federal income tax purposes to the APS
prior to the Auction establishing the Applicable Rate for such shares the
applicable percentage in the foregoing table shall be divided by the quantity 1
minus the maximum marginal regular federal individual income tax rate applicable
to ordinary income or the maximum marginal regular federal corporate income tax
rate, whichever is greater, provided further, however, that the Applicable
Percentage shall be divided in the foregoing manner only to the extent of the
portion of the dividend on the APS for such Rate Period that represents the
allocation of taxable income to the APS.
For purposes of this definition, the "prevailing rating" of shares of a
series of APS shall be (i) "aa3"/AA- or higher if shares of such series of APS
have a rating of "aa3" or better by Moody's and AA- or better by S&P or the
equivalent of such ratings by such agencies or a substitute rating agency or
substitute rating agencies selected as provided below, (ii) if not "aa3"/AA- or
higher, then "a3"/A- if the shares of such series of APS have a rating of "a3"
or better by Moody's and A- or better by S&P or the equivalent of such ratings
by such agencies or a substitute rating agency or substitute rating agencies
selected as provided below, (iii) if not "aa3"/AA- or higher or "a3"/A-, then
"baa3"/BBB- if the shares of such series of APS have a rating of "baa3" or
better by Moody's and BBB- or better by S&P or the equivalent of such ratings by
such agencies or a substitute rating agency or substitute rating agencies
selected as provided below, (iv) if not "aa3"/AA- or higher, "a3"/A- or
"baa3"/BBB-, then "ba3"/BB- if the shares of such series of APS have a rating of
"ba3" or better by Moody's and BB- or better by S&P or the equivalent of such
ratings by such agencies or substitute rating agency or substitute rating
agencies selected as provided below, and (v) if not "aa3"/AA- or higher,
"a3"/A-, "baa3"/BBB- or "ba3"/BB-, then Below "ba3"/BB-, provided, however, that
if the APS are rated by only one rating agency, the prevailing rating will be
determined without reference to the rating of any other rating agency. The Fund
shall take all reasonable action necessary to enable either S&P or Moody's to
provide a rating for each series of APS. If neither S&P nor Moody's shall make
such a rating available, Goldman, Sachs &
38
Co. or Smith Barney, Harris Upham & Co. Incorporated or their successors as
Broker-Dealers shall select a nationally recognized statistical rating
organization (as that term is used in the rules and regulations of the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended from time to time) to act as a substitute rating agency in respect of
the APS and the Fund shall take all reasonable action to enable such rating
agency or agencies to provide a rating for shares of such series.
"Available APS" shall have the meaning specified in paragraph (a) of
Section 4 of this Part II.
"Bid" and "Bids" shall have the respective meanings specified in paragraph
(a) of Section 2 of this Part II.
"Bidder" and "Bidders" shall have the respective meanings specified in
paragraph (a) of Section 2 of this Part II.
"Broker-Dealer" shall mean any broker-dealer, commercial bank or other
entity permitted by law to perform the functions required of a Broker-Dealer in
this Part II, that is a member of, or a participant in, the Securities
Depository or is an affiliate of such member or participant, has been selected
by the Fund and has entered into a Broker-Dealer Agreement that remains
effective.
"Broker-Dealer Agreement" shall mean an agreement between the Auction Agent
and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the
procedures specified in this Part II.
"Existing Holder," when used with respect to shares of any series of APS,
shall mean a Person who has signed a Master Purchaser's Letter and is listed as
a beneficial owner of such APS in the records of the Auction Agent.
"Hold Order" and "Hold Orders" shall have the respective meanings specified
in paragraph (a) of Section 2 of this Part II.
"Master Purchaser's Letter" shall mean a letter, addressed to the Fund, the
Auction Agent, a Broker-Dealer and an Agent Member in which a Person agrees,
among other things, to offer to purchase, to purchase, to offer to sell and/or
to sell APS as set forth in this Part II.
"Maximum Rate," for any series of APS on any Auction Date, shall mean:
(i) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Dividend Period
designated by the Fund pursuant to Section 4 of Part I of the Certificate of
Vote, the product of (A) the "AA" Composite Commercial Paper Rate on such
Auction Date for the next Rate Period of such series and (B) the Applicable
Percentage on such Auction Date, unless such series has or had a Special
Dividend Period (other than a Special Dividend Period of 28 Rate Period Days or
less) and an Auction at which Sufficient Clearing Bids
39
existed has not yet occurred for a Minimum Dividend Period of such series after
such Special Dividend Period, in which case the higher of:
(A) the dividend rate on shares of such series for the
then-ending Rate Period, and
(B) the product of (1) the higher of (x) the "AA" Composite
Commercial Paper Rate on such Auction Date for the then-ending Rate
Period of such series, if such Rate Period is less than one year, or
the Treasury Rate on such Auction Date for such Rate Period, if such
Rate Period is one year or greater, and (y) the "AA" Composite
Commercial Paper Rate on such Auction Date for such Special Dividend
Period of such series, if such Special Dividend Period is less than one
year, or the Treasury Rate on such Auction Date for such Special
Dividend Period, if such Special Dividend Period is one year or greater
and (2) the Applicable Percentage on such Auction Date; or
(ii) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Dividend Period of
more than 28 Rate Period Days designated by the Fund pursuant to Section 4 of
Part I of the Certificate of Vote, the product of (A) the highest of (1) the
"AA" Composite Commercial Paper Rate on such Auction Date for the then-ending
Rate Period of such series, if such Rate Period is less than one year, or the
Treasury Rate on such Auction Date for such Rate Period, if such Rate Period is
one year or greater, (2) the "AA" Composite Commercial Paper Rate on such
Auction Date for the Special Dividend Period for which the Auction is being held
if such Special Dividend Period is less than one year or the Treasury Rate on
such Auction Date for the Special Dividend Period for which the Auction is being
held if such Special Dividend Period is one year or greater, and (3) the "AA"
Composite Commercial Paper Rate on such Auction Date for Minimum Dividend
Periods and (B) the Applicable Percentage on such Auction Date.
"Order" and "Orders" shall have the respective meanings specified in
paragraph (a) of Section 2 of this Part II.
"Outstanding" shall mean, as of any Auction Date with respect to shares of
any series of APS, the number of shares of such series theretofore issued by the
Fund except, without duplication, (i) any shares of such series of APS
theretofore cancelled or delivered to the Auction Agent for cancellation or
redeemed by the Fund or as to which a notice of redemption shall have been given
by the Fund, (ii) any shares of such series of APS as to which the Fund or any
Affiliate thereof shall be an Existing Holder and (iii) any shares of such
series of APS represented by any certificate in lieu of which a new certificate
has been executed and delivered by the Fund.
"Person" shall mean and include an individual, a partnership, a fund, a
trust, an unincorporated association, a joint venture or other entity or a
government or any agency or political subdivision thereof.
40
"Potential Holder," when used with respect to shares of any series of APS,
shall mean any Person, including any Existing Holder of shares of such series of
APS, (i) who shall have executed a Master Purchaser's Letter and (ii) who may be
interested in acquiring shares of such series of APS (or, in the case of an
Existing Holder of shares of such series of APS, additional shares of such
series of APS).
"Securities Depository" shall mean The Depository Trust Company and its
successors and assigns or any other securities depository selected by the Fund
which agrees to follow the procedures required to be followed by such securities
depository in connection with the APS.
"Sell Order" and "Sell Orders" shall have the respective meanings specified
in paragraph (a) of Section 2 of this Part II.
"Submission Deadline" shall mean 1:30 p.m., New York City time, on any
Auction Date or such other time on any Auction Date by which Brokers-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction Agent
from time to time.
"Submitted Bid" and "Submitted Bids" shall have the respective meanings
specified in paragraph (a) of Section 4 of this Part II.
"Submitted Hold Order" and "Submitted Hold Orders" shall have the
respective meanings specified in paragraph (a) of Section 4 of this Part II.
"Submitted Order" and "Submitted Orders" shall have the respective meanings
specified in paragraph (a) of Section 4 of this Part II.
"Submitted Sell Order" and "Submitted Sell Orders" shall have the
respective meanings specified in paragraph (a) of Section 4 of this Part II.
"Sufficient Clearing Bids" shall have the meaning specified in paragraph
(a) of Section 4 of this Part II.
"Winning Bid Rate" shall have the meaning specified in paragraph (a) of
Section 4 of this Part II.
2. Orders by Existing Holders and Potential Holders. (a) Prior to the
Submission Deadline on each Auction Date:
(i) each Existing Holder of shares of any series of APS subject to an
Auction on such Auction Date may submit to a Broker-Dealer by telephone or
otherwise information as to:
(A) the number of Outstanding shares, if any, of such series
of APS held by such Existing Holder which such Existing Holder desires
to continue to hold without regard to the Applicable Rate for such
series for the next succeeding Rate Period of such series;
41
(B) the number of Outstanding shares, if any, of such series
of APS which such Existing Holder offers to sell if the Applicable Rate
for such series for the next succeeding Rate Period of such series
shall be less than the rate per annum specified by such Existing
Holder; and/or
(C) the number of Outstanding shares, if any, of such series
of APS held by such Existing Holder which such Existing Holder offers
to sell without regard to the Applicable Rate for such series for the
next succeeding Rate Period of such series;
and
(ii) one or more Broker-Dealers, using lists of Potential Holders,
shall in good faith for the purpose of conducting a competitive Auction in a
commercially reasonable manner, contact Potential Holders (by telephone or
otherwise), including Persons that are not Existing Holders, on such lists to
determine the number of shares, if any, of such series of APS which each such
Potential Holder offers to purchase if the Applicable Rate for such series for
the next succeeding Rate Period of such series shall not be less than the rate
per annum specified by such Potential Holder.
For the purposes hereof, the communication to a Broker-Dealer of information
referred to in clause (i)(A), (i)(B), (i)(C) or (ii) of this paragraph (a) is
hereinafter referred to as an "Order" and collectively as "Orders" and each
Existing Holder and each Potential Holder placing an Order is hereinafter
referred to as a "Bidder" and collectively as "Bidders"; an Order containing the
information referred to in clause (i)(A) of this paragraph (a) is hereinafter
referred to as a "Hold Order" and collectively as "Hold Orders"; an Order
containing the information referred to in clause (i)(B) or (ii) of this
paragraph (a) is hereinafter referred to as a "Bid" and collectively as "Bids";
and an Order containing the information referred to in clause (i)(C) of this
paragraph (a) is hereinafter referred to as a "Sell Order" and collectively as
"Sell Orders."
(b) (i) A bid by an Existing Holder of shares of any series of APS
subject to an Auction on any Auction Date shall constitute an irrevocable offer
to sell:
(A) the number of Outstanding shares of such series
of APS specified in such Bid if the Applicable Rate for such
series determined on such Auction Date shall be less than the
rate specified therein:
(B) such number or a lesser number of Outstanding
shares of such series of APS to be determined as set forth in
clause (iv) of paragraph (a) of Section 5 of this Part II if
the Applicable Rate for such series determined on such Auction
Date shall be equal to the rate specified therein; or
(C) the number of Outstanding shares of such series
of APS specified in such Bid if the rate specified therein
shall be higher than the Maximum Rate for such series, or such
number or a lesser number of
42
Outstanding shares of such series of APS to be determined as
set forth in clause (iii) of paragraph (b) of Section 5 of this
Part II if the rate specified therein shall be higher than the
Maximum Rate for such series and Sufficient Clearing Bids for
such series do not exist.
(ii) A Sell Order by an Existing Holder of shares of any series of APS
subject to an Auction on any Auction Date shall constitute an irrevocable offer
to sell:
(A) the number of Outstanding shares of such series
of APS specified in such Sell Order; or
(B) such number or a lesser number of Outstanding
shares of such series of APS as set forth in clause (iii) of
paragraph (b) of Section 5 of this Part II if Sufficient
Clearing Bids for such series do not exist.
(iii) A Bid by a Potential Holder of shares of any series of APS
subject to an Auction on any Auction Date shall constitute an irrevocable offer
to purchase:
(A) the number of Outstanding shares of such series
of APS specified in such Bid if the Applicable Rate for such
series determined on such Auction Date shall be higher than
the rate specified therein; or
(B) such number or a lesser number of Outstanding
shares of such series of APS as set forth in clause (v) of
paragraph (a) of Section 5 of this Part II if the Applicable
Rate for such series determined on such Auction Date shall be
equal to the rate specified therein.
(c) No Order for any number of shares of any series of APS other than
whole shares shall be valid.
3. Submission of Orders by Broker-Dealers to Auction Agent. (a) Each
Broker-Dealer shall submit in writing to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders for shares of any series of
APS subject to an Auction on such Auction Date obtained by such Broker-Dealer
and shall specify with respect to each Order for such shares:
(i) the name of the Bidder placing such Order;
(ii) the aggregate number of shares of such series of APS that are the
subject of such Order;
(iii) to the extent that such Bidder is an Existing Holder of shares of
such series of APS:
43
(A) the number of shares, if any, of such series of
APS subject to any Hold Order placed by such Existing Holder;
(B) the number of shares, if any, of such series of
APS subject to any Bid placed by such Existing Holder and the
rate specified in such Bid; and
(C) the number of shares, if any, of such series of
APS subject to any Sell Order placed by such Existing Holder;
and
(iv) to the extent such Bidder is a Potential Holder of shares of such
series of APS, the rate and number of shares of such series of APS specified in
such Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent shall round such rate up to
the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding shares of any
series of APS held by any Existing Holder is not submitted to the Auction Agent
prior to the Submission Deadline, the Auction Agent shall deem a Hold Order to
have been submitted on behalf of such Existing Holder covering the number of
Outstanding shares of such series of APS held by such Existing Holder and not
subject to Orders submitted to the Auction Agent.
(d) If any Existing Holder submits through a Broker-Dealer to the Auction
Agent one or more Orders covering in the aggregate more than the number of
Outstanding shares of any series of APS subject to an Auction held by such
Existing Holder, such Orders shall be considered valid in the following order of
priority:
(i) all Hold Orders for shares of such series of APS shall be
considered valid, but only up to and including in the aggregate the number of
Outstanding shares of such series of APS held by such Existing Holder, and if
the number of shares of such series of APS subject to such Hold Orders exceeds
the number of Outstanding shares of such series of APS held by such Existing
Holder, the number of shares subject to each such Hold Order shall be reduced
pro rata to cover the number of Outstanding shares of such series of APS held
by such Existing Holder;
(ii) (A) any Bid for shares of such series of APS shall be considered
valid up to and including the excess of the number of Outstanding shares of such
series of APS held by such Existing Holder over the number of shares of such
series of APS subject to any Hold Orders referred to in clause (i) above;
(B) subject to subclause (A), if more than one Bid
for shares of such series of APS with the same rate is
submitted on behalf of such Existing Holder and the number of
Outstanding shares of such series of APS subject to such Bids
is greater than such excess, such Bids shall be considered
valid up to and including the amount of such excess, and the
number of shares of
44
such series of APS subject to each Bid with the same rate shall
be reduced pro rata to cover the number of shares of such series
of APS equal to such excess;
(C) subject to subclauses (A) and (B), if more than
one Bid for shares of such series of APS with different rates
is submitted on behalf of such Existing Holder, such Bids
shall be considered valid in the ascending order of their
respective rates up to and including the amount of such
excess; and
(D) in any such event, the number, if any, of such
Outstanding shares of such series of APS subject to any
portion of Bids considered not valid in whole or in part under
the clause (ii) shall be treated as the subject of a Bid for
shares of such series of APS by a Potential Holder at the rate
therein specified; and
(iii) all Sell Orders for shares of such series of APS shall be
considered valid up to and including the excess of the number of Outstanding
shares of such series of APS held by such Existing Holder over the sum of the
APS subject to valid Hold Orders referred to in clause (i) above and valid Bids
by such Existing Holder referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of any series of APS is
submitted on behalf of any Potential Holder, each such Bid submitted shall be a
separate Bid with the rate and number of shares therein specified.
(f) An Order submitted by a Broker-Dealer to the Auction Agent prior to
the Submission Deadline on any Auction Date shall be irrevocable.
4. Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate. (a) Not earlier than the Submission Deadline on each Auction
Date, the Auction Agent shall assemble all valid Orders submitted or deemed
submitted to it by the Broker-Dealers (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order" and collectively as "Submitted Hold
Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders" and shall for each series of APS for which an Auction is
being held determine:
(i) the excess of the number of Outstanding shares of such series of
APS over the number of Outstanding shares of such series of APS subject to
Submitted Hold Orders (such excess being hereinafter referred to as the
"Available APS" of such series);
(ii) from the Submitted Orders for such series whether:
45
(A) the number of Outstanding shares of such series
of APS subject to Submitted Bids by Potential Holders
specifying one or more rates equal to or lower than the
Maximum Rate for such series
exceeds or is equal to the sum of
(B) the number of Outstanding shares of such series
of APS subject to Submitted Bids by Existing Holders
specifying one or more rates higher than the Maximum Rate for
such series; and
(C) the number of Outstanding shares of such series
of APS subject to Submitted Sell Orders
(in the event such excess or such equality exists (other than because the number
of shares of such series of APS in subclauses (B) and (C) above is zero because
all of the Outstanding shares of such series of APS are subject to Submitted
Hold Orders), such Submitted Bids in subclause (A) above being hereinafter
referred to collectively as "Sufficient Clearing Bids" for such series); and
(iii) if Sufficient Clearing Bids for such series exist, the lowest
rate specified in such Submitted Bids (the "Winning Bid Rate" for such series)
which if:
(A) (I) each such Submitted Bid from Existing Holders
specifying such lowest rate and (II) all other such Submitted
Bids from Existing Holders specifying lower rates were
rejected, thus entitling such Existing Holders to continue to
hold the shares of such series of APS that are subject to such
Submitted Bids; and
(B) (I) each such Submitted Bid from Potential
Holders specifying such lowest rate and (II) all other such
Submitted Bids from Potential Holders specifying lower rates
were accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding shares of such series of
APS which, when added to the number of Outstanding shares of such series of APS
to be purchased by such Potential Holders described in subclause (B) above,
would equal not less than the Available APS of such series.
(b) Promptly after the Auction Agent has made the determinations pursuant
to paragraph (a) of this Section 4, the Auction Agent shall advise the Fund of
the Maximum Rate for each series of APS for which an Auction is being held on
the Auction Date and, based on such determination, the Applicable Rate for each
such series for the next succeeding Rate Period thereof as follows:
(i) if Sufficient Clearing Bids for such series exist, that the
Applicable Rate for such series for the next succeeding Rate Period thereof
shall be equal to the Winning Bid Rate for such series to determined;
46
(ii) if Sufficient Clearing Bids for such series do not exist (other
than because all of the Outstanding shares of such series of APS are subject to
Submitted Hold Orders), that the Applicable Rate for such series for the next
succeeding Rate Period, which shall be a Minimum Dividend Period, thereof shall
be equal to the Maximum Rate for such series; or
(iii) if all of the Outstanding shares of such series of APS are
subject to Submitted Hold Orders, that the Applicable Rate for such series for
the next succeeding Rate Period thereof shall be equal to the product of (A) (I)
the "AA" Composite Commercial Paper Rate on such Auction Date for such Rate
Period, if such Rate Period is less than one year or (II) the Treasury Rate on
such Auction Date for such Rate Period, if such Rate Period is one year or
greater and (B) 1 minus the maximum marginal regular federal individual income
tax rate applicable to ordinary income or the maximum marginal regular federal
corporate income tax rate, whichever is greater; provided, however, that if the
Fund has notified the Auction Agent of its intent to allocate to the APS in such
Rate Period any net capital gains or other income taxable for Federal income tax
purposes, the Applicable Rate in respect of that portion of the dividend on the
APS for such Rate Period that represents the allocation of net capital gains or
other income taxable for Federal income tax purposes shall be the rate described
in the preceding clause (A)(I) or (II), as applicable, without being multiplied
by the factor set forth in the preceding clause (B).
5. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares. Existing Holders shall continue to hold the APS that are
subject to Submitted Hold Orders, and, based on the determinations made pursuant
to paragraph (a) of Section 4 of this Part II, the Submitted Bids and Submitted
Sell Orders shall be accepted or rejected and the Auction Agent shall take such
other action as set forth below:
(a) If Sufficient Clearing Bids for any series of APS have been made, all
Submitted Sell Orders shall be accepted and, subject to the provisions of
paragraphs (d) and (e) of this Section 5, Submitted Bids shall be accepted or
rejected as follows in the following order of priority and all other Submitted
Bids for such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series of APS
specifying any rate that is higher than the Winning Bid Rate for such series
shall be accepted, thus requiring each such Existing Holder to sell the APS
subject to such Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of such series of APS
specifying any rate that is lower than the Winning Bid Rate for such series
shall be rejected, thus entitling each such Existing Holder to continue to hold
the APS subject to such Submitted Bids;
47
(iii) Potential Holders' Submitted Bids for shares of such series of
APS specifying any rate that is lower than the Winning Bid Rate shall be
accepted;
(iv) each Existing Holder's Submitted Bid for shares of such series of
APS specifying a rate that is equal to the Winning Bid Rate for such series
shall be rejected, thus entitling such Existing Holder to continue to hold the
APS subject to such Submitted Bid, unless the number of Outstanding shares of
such series of APS subject to all such Submitted Bids shall be greater than the
number of shares of such series of APS ("remaining shares") in the excess of the
Available APS of such series over the number of the APS subject to Submitted
Bids described in clauses (ii) and (iii) of this paragraph (a), in which event
such Submitted Bid of such Existing Holder shall be rejected in part, and such
Existing Holder shall be entitled to continue to hold the APS subject to such
Submitted Bid, but only in an amount equal to the number of shares of such
series of APS obtained by multiplying the number of remaining shares by a
fraction, the numerator of which shall be the number of Outstanding shares of
such series of APS held by such Existing Holder subject to such Submitted Bid
and the denominator of which shall be the aggregate number of Outstanding shares
of such series of APS subject to such Submitted Bids made by all such Existing
Holders that specified a rate equal to the Winning Bid Rate for such series; and
(v) each Potential Holder's Submitted Bid for shares of such series
of APS specifying a rate that is equal to the Winning Bid Rate for such series
shall be accepted but only in an amount equal to the number of shares of such
series of APS obtained by multiplying the number of shares in the excess of the
Available APS of such series over the number of the APS subject to Submitted
Bids described in clauses (ii) through (iv) of this paragraph (a) by a fraction,
the numerator of which shall be the number of Outstanding shares of such series
of APS subject to such Submitted Bid and the denominator of which shall be the
aggregate number of Outstanding shares of such series of APS subject to such
Submitted Bids made by all such Potential Holders that specified a rate equal to
the Winning Bid Rate for such series; and
(b) If Sufficient Clearing Bids for any series of APS have not been made
(other than because all of the Outstanding shares of such series of APS are
subject to Submitted Hold Orders), subject to the provisions of paragraph (d) of
this Section 5, Submitted Orders for such series shall be accepted or rejected
as follows in the following order of priority and all other Submitted Bids for
such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series of APS
specifying any rate that is equal to or lower than the Maximum Rate for such
series shall be rejected, thus entitling such Existing Holders to continue to
hold the APS subject to such Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of such series of
APS specifying any rate that is equal to or lower than the Maximum Rate for such
series shall be accepted; and
48
(iii) Each Existing Holder's Submitted Bid for shares of such series of
APS specifying any rate that is higher than the Maximum Rate of such series and
the Submitted Sell Orders for shares of such series of APS of each Existing
Holder shall be accepted, thus entitling each Existing Holder that submitted any
such Submitted Bid or Submitted Sell Order to sell the shares of such series of
APS subject to such Submitted Bid or Submitted Sell Order, but in both cases
only in an amount equal to the number of shares of such series of APS obtained
by multiplying the number of shares of such series of APS subject to Submitted
Bids described in clause (ii) of this paragraph (b) by a fraction, the numerator
of which shall be the number of Outstanding shares of such series of APS held by
such Existing Holder subject to such Submitted Bid or Submitted Sell Order and
the denominator of which shall be the aggregate number of Outstanding shares of
such series of APS subject to all such Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding shares of any series of APS are subject to
Submitted Hold Orders, all Submitted Bids for such series shall be rejected.
(d) If, as a result of the procedures described in clause (iv) or (v) of
paragraph (a) or clause (iii) of paragraph (b) of this Section 5, any Existing
Holder would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of a share of APS of any series on
any Auction Date, the Auction Agent shall, in such manner as it shall determine
in its sole discretion, round up or down the number of shares of such series of
APS to be purchased or sold by any Existing Holder or Potential Holder on such
Auction Date as a result of such procedures so that the number of shares of such
series so purchased or sold by each Existing Holder or Potential Holder on such
Auction Date shall be whole shares of APS.
(e) If, as a result of the procedures described in clause (v) of
paragraph (a) of this Section 5, any Potential Holder would be entitled or
required to purchase less than a whole share of any series of APS on any Auction
Date, the Auction Agent shall, in such manner as it shall determine in its sole
discretion, allocate shares of such series of APS for purchase among Potential
Holders so that only whole shares of such series of APS are purchased on such
Auction Date as a result of such procedures by any Potential Holder, even if
such allocation results in one or more Potential Holders not purchasing the APS
on such Auction Date.
(f) Based on the results of each Auction for a series of APS, the Auction
Agent shall determine the aggregate number of shares of such series of APS to be
purchased and the aggregate number of shares of such series of APS to be sold by
Potential Holders and Existing Holders on whose behalf each Broker-Dealer
submitted Bids or Sell Orders and, with respect to each Broker-Dealer, to the
extent that such aggregate number of shares to be purchased and such aggregate
number of shares to be sold differ, determine to which other Broker-Dealer or
Broker-Dealers acting for one or more purchasers of shares of such series of APS
such Broker-Dealer shall deliver, or from which other Broker-Dealer or
Broker-Dealers acting for one or more sellers of shares of such series of APS
such Broker-Dealer shall receive, as the case may be, shares of such series of
APS.
49
6. Notification of Allocations. In normal circumstances, whenever the Fund
intends to include any net capital gains or other income taxable for Federal
income tax purposes in any dividend on the APS, the Fund will notify the Auction
Agent of the amount to be so included 15 days prior to the Auction Date on which
the Applicable Rate for such dividend is to be established. Whenever the Auction
Agent receives such notice from the Fund, it will in turn notify each
Broker-Dealer, who, on or prior to such Auction Date, in accordance with its
Broker-Dealer Agreement, will notify its Existing Holders and Potential Holders
believed by it to be interested in submitting an Order in the Auction to be held
on such Auction Date.
7. Miscellaneous. (a) To the extent permitted by applicable law, the Board
of Trustees may interpret or adjust the provisions of this Certificate of Vote
to resolve any inconsistency or ambiguity or to remedy any formal defect, and
may amend this Certificate of Vote with respect to any series of APS prior to
the issuance of such series.
(a) An Existing Holder may sell, transfer or otherwise dispose of the APS
only in whole shares and only pursuant to a Bid or Sell Order in accordance with
the procedures described in this Part II or to or through a Broker-Dealer or to
a Person that has delivered a signed copy of a Master Purchaser's Letter to the
Auction Agent; provided that, in the case of all transfers other than pursuant
to Auctions, such Existing Holder, its Broker-Dealer or its Agent Member advises
the Auction Agent of such transfer.
(b) All of the shares of each series of APS outstanding from time to time
shall be represented by one global certificate registered in the name of the
Securities Depository or its nominee.
(c) Neither the Fund nor any affiliate thereof may submit an Order in any
Auction, except that any Broker-Dealer that is an affiliate of the Fund may
submit Orders in an Auction, but only if such Orders are not for its own
account.
50
IN WITNESS WHEREOF, the undersigned has caused this Certificate of Vote to
be executed as of ____________, 1992.
------------------------
Ronald A. Nyberg
Secretary
State of )
) ss
County of )
Then personally appeared before me Ronald A. Nyberg, who acknowledged the
foregoing instrument to be his free act and deed and the free act and deed in
his capacity as Secretary of Van Kampen Merritt Municipal Opportunity Trust II.
Before me,
------------------------
Notary public
My commission Expires:
-----------------------------
51
APPENDIX C
ANNUAL REPORT OF THE ACQUIRING FUND
[To be filed by Amendment]
C-1
APPENDIX D
ANNUAL REPORT OF THE TARGET FUND
[To be filed by Amendment]
D-1
APPENDIX E
SEMIANNUAL REPORT OF THE ACQUIRING FUND
[To be filed by amendment]
E-1
APPENDIX F
SEMIANNUAL REPORT OF THE TARGET FUND
[To be filed by amendment]
F-1
APPENDIX G
MORGAN STANLEY INVESTMENT MANAGEMENT
PROXY VOTING POLICY AND PROCEDURES
IV. POLICY STATEMENT
Introduction -- Morgan Stanley Investment Management's ("MSIM") policy
and procedures for voting proxies ("Proxy Voting Policy and Procedures") with
respect to securities held in the accounts of clients apply to those MSIM
entities that provide discretionary investment management services and for which
a MSIM entity has authority to vote proxies. The policies and procedures and
general guidelines in this section will be reviewed and updated, as necessary,
to address new or revised proxy voting issues. The MSIM entities covered by
these policies and procedures currently include the following: Morgan Stanley
Investment Advisors Inc., Morgan Stanley AIP GP LP, Morgan Stanley Investment
Management Inc., Morgan Stanley Investment Management Limited, Morgan Stanley
Investment Management Company, Morgan Stanley Asset & Investment Trust
Management Co., Limited, Morgan Stanley Investment Management Private Limited,
Morgan Stanley Hedge Fund Partners GP LP, Morgan Stanley Hedge Fund Partners LP,
Van Kampen Asset Management, and Van Kampen Advisors Inc. (each a "MSIM
Affiliate" and collectively referred to as the "MSIM Affiliates").
Each MSIM Affiliate will use its best efforts to vote proxies as part
of its authority to manage, acquire and dispose of account assets. With respect
to the MSIM registered management investment companies (Van Kampen,
Institutional and Advisor Funds) (collectively referred to as the "MSIM Funds"),
each MSIM Affiliate will vote proxies pursuant to authority granted under its
applicable investment advisory agreement or, in the absence of such authority,
as authorized by the Boards of Directors or Trustees of the MSIM Funds. A MSIM
Affiliate will not vote proxies if the "named fiduciary" for an ERISA account
has reserved the authority for itself, or in the case of an account not governed
by ERISA, the Investment Management or Investment Advisory Agreement does not
authorize the MSIM Affiliate to vote proxies. MSIM Affiliates will, in a prudent
and diligent manner, vote proxies in the best interests of clients, including
beneficiaries of and participants in a client's benefit plan(s) for which the
MSIM Affiliates manage assets, consistent with the objective of maximizing
long-term investment returns ("Client Proxy Standard"). In certain situations, a
client or its fiduciary may provide a MSIM Affiliate with a proxy voting policy.
In these situations, the MSIM Affiliate will comply with the client's policy
unless to do so would be inconsistent with applicable laws or regulations or the
MSIM Affiliate's fiduciary responsibility.
Proxy Research Services -- To assist the MSIM Affiliates in their
responsibility for voting proxies and the overall global proxy voting process,
Institutional Shareholder Services ("ISS") and the Investor Responsibility
Research Center ("IRRC") have been retained as experts in the proxy voting and
corporate governance area. ISS and IRRC are independent advisers that specialize
in providing a variety of fiduciary-level proxy-related services to
institutional investment managers, plan sponsors, custodians, consultants, and
other institutional investors. The services provided to MSIM Affiliates include
in-depth research, global issuer analysis, and voting recommendations. While the
MSIM Affiliates may review and utilize the ISS and IRRC recommendations in
making proxy voting decisions, they are in no way obligated to follow the ISS
and IRRC recommendations. In addition to research, ISS provides vote execution,
reporting, and recordkeeping. MSIM's Proxy Review Committee (see Section IV.A.
below) will carefully monitor and supervise the services provided by the proxy
research services.
G-1
Voting Proxies for Certain Non-US Companies -- While the proxy voting
process is well established in the United States and other developed markets
with a number of tools and services available to assist an investment manager,
voting proxies of non-US companies located in certain jurisdictions,
particularly emerging markets, may involve a number of problems that may
restrict or prevent a MSIM Affiliate's ability to vote such proxies. These
problems include, but are not limited to: (i) proxy statements and ballots being
written in a language other than English; (ii) untimely and/or inadequate notice
of shareholder meetings; (iii) restrictions on the ability of holders outside
the issuer's jurisdiction of organization to exercise votes; (iv) requirements
to vote proxies in person, (v) the imposition of restrictions on the sale of the
securities for a period of time in proximity to the shareholder meeting; and
(vi) requirements to provide local agents with power of attorney to facilitate
the MSIM Affiliate's voting instructions. As a result, clients' non-U.S. proxies
will be voted on a best efforts basis only, after weighing the costs and
benefits of voting such proxies, consistent with the Client Proxy Standard. ISS
has been retained to provide assistance to the MSIM Affiliates in connection
with voting their clients' non-US proxies.
III. GENERAL PROXY VOTING GUIDELINES
To ensure consistency in voting proxies on behalf of its clients, MSIM
Affiliates will follow (subject to any exception set forth herein) these Proxy
Voting Policies and Procedures, including the guidelines set forth below. These
guidelines address a broad range of issues, including board size and
composition, executive compensation, anti-takeover proposals, capital structure
proposals and social responsibility issues and are meant to be general voting
parameters on issues that arise most frequently. The MSIM Affiliates, however,
may, pursuant to the procedures set forth in Section IV. below, vote in a manner
that is not in accordance with the following general guidelines, provided the
vote is approved by the Proxy Review Committee and is consistent with the Client
Proxy Standard.
VI. GUIDELINES
A. MANAGEMENT PROPOSALS
1. When voting on routine ballot items, unless otherwise
determined by the Proxy Review Committee, the following
proposals will be voted in support of management.
o Selection or ratification of auditors.
o Approval of financial statements, director and auditor
reports.
o General updating/corrective amendments to the chatter.
o Approval of the payment of a dividend.
o Proposals to limit Directors' liability and/or broaden
indemnification of Directors.
o Proposals requiring that a certain percentage (up to
66%) of the company's Board members be independent
Directors.
o Proposals requiring that members of the company's
compensation, nominating and audit committees be
comprised of independent or unaffiliated Directors.
G-2
o Proposals recommending set retirement ages or requiring
specific levels of stock ownership by Directors.
o Proposals to eliminate cumulative voting.
o Proposals to eliminate preemptive rights.
o Proposals for confidential voting and independent
tabulation of voting results.
o Proposals related to the conduct of the annual meeting
except those proposals that relate to the "transaction
of such other business which may come before the
meeting."
2. Election of Directors. In situations where no conflict exists,
and where no specific governance deficiency has been noted,
unless otherwise determined by the Proxy Review Committee,
will be voted in support of nominees of management.
Unless otherwise determined by the Proxy Review
Committee, a withhold vote will be made where:
(i) A nominee has, or any time during the previous
three years had, a relationship with the issuer
(e.g., investment banker, counsel or other
professional service provider, or familial
relationship with a senior officer of the
issuer) that may impair his or her independence;
(ii) A direct conflict exists between the interests
of the nominee and the public shareholders; or
(iii) Where the nominees standing for election have
not taken action to implement generally accepted
governance practices for which there is a
"bright line" test. These would include
elimination of dead hand or slow hand poison
pills, requiring Audit, Compensation or
Nominating Committees to be composed of
independent directors and requiring a majority
independent board.
3. The following non-routine proposals, which potentially may
have a substantive financial or best interest impact on a
shareholder, unless otherwise determined by the Proxy Review
Committee, will be voted in support of management.
CAPITALIZATION CHANGES
o Proposals relating to capitalization changes that
eliminate other classes of stock and voting rights.
o Proposals to increase the authorization of existing
classes of common stock (or securities convertible into
common stock) if. (i) a clear and legitimate business
purpose is stated; (ii) the number of shares requested
G-3
is reasonable in relation to the purpose for which
authorization is requested; and (iii) the authorization
does not exceed 100% of shares currently authorized and
at least 30% of the new authorization will be
outstanding.
o Proposals to create a new class of preferred stock or
for issuances of preferred stock up to 50% of issued
capital.
o Proposals for share repurchase plans.
o Proposals to reduce the number of authorized shares of
common or preferred stock, or to eliminate classes of
preferred stock.
o Proposals to effect stock splits.
o Proposals to effect reverse stock splits if management
proportionately reduces the authorized share amount set
forth in the corporate charter. Reverse stock splits
that do not adjust proportionately to the authorized
share amount will generally be approved if the resulting
increase in authorized shares coincides with the proxy
guidelines set forth above for common stock increases.
COMPENSATION
o Proposals relating to Director fees, provided the
amounts are not excessive relative to outer companies in
the country or industry.
o Proposals for employee stock purchase plans that permit
discounts up to 15%, but only for grants that are part
of a broad based employee plan, including all
non-executive employees.
o Proposals for the establishment of Employee Stock Option
Plans and other employee ownership plans.
ANTI-TAKEOVER MATTERS
o Proposals to modify or rescind existing supermajority
vote requirements to amend the charters or bylaws.
o Proposals relating to the adoption of anti-greenmail
provisions provided that the proposal: (i) defines
greenmail; (ii) prohibits buyback offers to large block
holders not made to all shareholders or not approved by
disinterested shareholders; and (iii) contains no
anti-takeover measures or other provisions restricting
the rights of shareholders.
4. The following non-routine proposals, which potentially may
have a substantive financial or best interest impact on the
shareholder, unless otherwise determined by the Proxy Review
Committee, will be voted against (notwithstanding management
support).
G-4
o Proposals to establish cumulative voting rights in the
election of directors.
o Proposals relating to capitalization changes that add
classes of stock which substantially dilute the voting
interests of existing shareholders.
o Proposals to increase the authorized number of shares of
existing classes of stock that carry preemptive rights
or super-voting rights.
o Proposals to create "blank check" preferred stock.
o Proposals relating to changes in capitalization by 100%
or more.
o Compensation proposals that allow for discounted stock
options that have not been offered to employees in
general.
o Proposals to amend bylaws to require a supermajority
shareholder vote to pass or repeal certain provisions.
o Proposals to indemnify auditors.
5. The following types of non-routine proposals, which
potentially may have a substantive financial or best interest
impact on an issuer, will be voted as determined by the Proxy
Review Committee.
CORPORATE TRANSACTIONS
o Proposals relating to mergers, acquisitions and other
special corporate transactions (i.e., takeovers,
spin-offs, sales of assets, reorganizations,
restructurings and recapitalizations) will be examined
on a case-by-case basis. In all cases, ISS and IRRC
research and analysis will be used along with MSIM
Affiliates' research and analysis, including, among
other things, MSM internal company-specific knowledge.
o Proposals relating to change-in-control provisions in
non-salary compensation plans, employment contracts, and
severance agreements that benefit management and would
be costly to shareholders if triggered.
o Proposals relating to shareholders rights plans that
allow appropriate offers to shareholders to be blocked
by the board or trigger provisions that prevent
legitimate offers from proceeding.
o Proposals relating to Executive/ Director stock option
plans. Generally, stock option plans should meet the
following criteria:
(i) Whether the stock option plan is incentive
based;
(ii) For mature companies, should be no more than 5%
of the issued capital at the time of approval;
G-5
(iii) For growth companies, should be no more than 10%
of the issued capital at the time of approval.
ANTI-TAKEOVER PROVISIONS
o Proposals requiring shareholder ratification of poison
pills.
o Proposals relating to anti-takeover and related
provisions that serve to prevent the majority of
shareholders from exercising their rights or effectively
deter the appropriate tender offers and other offers.
B. SHAREHOLDER PROPOSALS
1. The following shareholder proposals will be supported, unless
otherwise determined by the Proxy Review Committee:
o Proposals requiring auditors to attend the annual
meeting of shareholders.
o Proposals requiring non-U.S. companies to have a
separate Chairman and CEO.
o Proposals requiring that members of the company's
compensation, nominating and audit committees be
comprised of independent or unaffiliated Directors.
o Proposals requiring that a certain percentage of the
company's members be comprised of independent and
unaffiliated Directors.
o Proposals requiring confidential voting.
o Proposals to reduce or eliminate of supermajority voting
requirements.
o Proposals requiring shareholder approval for shareholder
rights plan or poison pill.
o Proposals to require the company to expense stock
options.
2. The following shareholder proposals will be voted as
determined by the Proxy Review Committee.
o Proposals that limit tenure of directors.
o Proposals to limit golden parachutes.
o Proposals requiring directors to own large amounts of
stock to be eligible for election.
o Proposals that request or require disclosure of
executive compensation in addition to the disclosure
required by the Securities and Exchange Commission
("SEC") regulations.
G-6
o Proposals that limit retirement benefits or executive
compensation.
o Proposals requiring shareholder approval for bylaw or
charter amendments.
o Proposals requiring shareholder approval of executive
compensation.
o Proposals requiring shareholder approval of golden
parachutes.
o Proposals to eliminate certain anti-takeover related
provisions.
o Proposals to prohibit payment of greenmail.
3. The following shareholder proposals will not be supported,
unless otherwise determined by the Proxy Review Committee.
o Proposals to declassify the Board of Directors (if
management supports a classified board).
o Proposals requiring a U.S. company to have a separate
Chairman and CEO.
o Proposals requiring that the company prepare reports
that are costly to provide or that would require
duplicative efforts or expenditures that are of a
non-business nature or would provide no pertinent
information from the perspective of institutional
shareholders.
o Proposals to add restrictions related to social,
political or special interest issues that impact the
ability of the company to do business or be competitive
and that have a significant financial or best interest
impact to the shareholders.
o Proposals that require inappropriate endorsements or
corporate actions.
VII. ADMINISTRATION OF PROXY POLICIES AND PROCEDURES
A. PROXY REVIEW COMMITTEE
1. The MSIM Proxy Review Committee ("Committee") is responsible
for creating and implementing MSIM's Proxy Voting Policy and
Procedures and, in this regard, has expressly adopted them.
(a) The Committee, which is appointed by MSIM's Chief
Investment Officer ("CIO"), consists of senior
investment professionals who represent the different
investment disciplines and geographic locations of the
firm. The Committee is responsible for establishing
MSIM's proxy voting policy and guidelines and
determining how MSIM will vote proxies on an ongoing
basis.
G-7
(b) The Committee will periodically review and have the
authority to amend, as necessary, these Proxy Voting
Policy and Procedures and establish and direct voting
positions consistent with the Client Proxy Standard.
(c) The Committee will meet at least monthly to (among other
matters): (1) address any outstanding issues relating to
MSIM's Proxy Voting Policy and Procedures; and (2)
review proposals at upcoming shareholder meetings of
MSIM portfolio companies in accordance with this Policy
including, as appropriate, the voting results of prior
shareholder meetings of the same issuer where a similar
proposal was presented to shareholders. The Committee,
or its designee, will timely communicate to ISS MSIM's
Proxy Voting Policy and Procedures (and any amendments
to them and/or any additional guidelines or procedures
it may adopt).
(d) The Committee will meet on an ad hoc basis to (among
other matters): (1) authorize "split voting" (i.e.,
allowing certain shares of the same issuer that are the
subject of the same proxy solicitation and held by one
or more MSIM portfolios to be voted differently than
other shares) and/or "override voting" (i.e., voting all
MSIM portfolio shares in a manner contrary to the Proxy
Voting Policy and Procedures); (2) review and approve
upcoming votes, as appropriate, for matters for which
specific direction has been provided in these Policy and
Procedures; and (3) determine how to vote matters for
which specific direction has not been provided in these
Policy and Procedures. Split votes will generally not be
approved within a single Global Investor Group team. The
Committee may take into account ISS and IRRC
recommendations and the research as well as any other
relevant information they may request or receive.
(e) In addition to the procedures discussed above, if the
Committee determines that an issue raises a potential
material conflict of interest, or gives rise to the
appearance of a potential material conflict of interest,
the Committee will request a special committee to
review, and recommend a course of action with respect
to, the conflict(s) in question ("Special Committee").
The Special Committee shall be comprised of the Chairman
of the Proxy Review Committee, the Compliance Director
for the area of the firm involved or his/her designee, a
senior portfolio manager (if practicable, one who is a
member of the Proxy Review Committee) designated by the
Proxy Review Committee and MSIM's Chief Investment
Officer or his/her designee. The Special Committee may
request the assistance of MSIM's General Counsel or
his/her designee and will have sole discretion to cast a
vote. In addition to the research provided by ISS and
IRRC, the Special Committee may request analysis from
MSIM Affiliate investment professionals and outside
sources to the extent it deems appropriate.
(f) The Committee and the Special Committee, or their
designee(s), will document in writing all of their
decisions and actions, which documentation will be
maintained by the Committee and the Special Committee,
or their designee(s), for a period of at least 6 years.
To the
G-8
extent these decisions relate to a security held by a
MSIM U.S. registered investment company, the Committee
and Special Committee, or their designee(s), will report
their decisions to each applicable Board of Trustees/
Directors of those investment companies at each Board's
next regularly scheduled Board meeting. The report will
contain information concerning decisions made by the
Committee and Special Committee during the most recently
ended calendar quarter immediately preceding the Board
meeting.
(g) The Committee and Special Committee, or their
designee(s), will timely communicate to applicable
portfolio managers, the Compliance Departments and, as
necessary, ISS, decisions of the Committee and Special
Committee so that, among other things, ISS will vote
proxies consistent with their decisions.
B. IDENTIFICATION OF MATERIAL CONFLICTS OF INTEREST
1. If there is a possibility that a vote may involve a material
conflict of interest, the vote must be decided by the Special
Committee in consultation with MSIM's General Counsel or
his/her designee.
2. A material conflict of interest could exist in the following
situations, among others:
(a) The issuer soliciting the vote is a client of MSIM or an
affiliate of MSIM and the vote is on a material matter
affecting the issuer;
(b) The proxy relates to Morgan Stanley common stock or any
other security issued by Morgan Stanley or its
affiliates; or
(c) Morgan Stanley has a material pecuniary interest in the
matter submitted for a vote (e.g., acting as a financial
advisor to a merger or acquisition for which Morgan
Stanley will be paid a success fee if completed).
C. PROXY VOTING REPORTS
1. MSIM will promptly provide a copy of these Policy and
Procedures to any client requesting it. MSIM will also, upon
client request, promptly provide a report indicating how each
proxy was voted with respect to securities held in that
client's account.
2. MSIM's legal department is responsible for filing an annual
Form N-PX on behalf of each registered management investment
company for which such filing is required, indicating how all
proxies were voted with respect to such investment company's
holdings.
G-9
APPENDIX H
PRO FORMA FINANCIAL STATEMENTS
H-1
PRO FORMA FINANCIAL STATEMENTS
The following presents the pro forma financial statements for the combination of
the Van Kampen Advantage Municipal Income Trust and the Municipal Opportunity
Trust. The statements are presented as of January 31, 2005, the most recent
period for which financial information is currently available.
The unaudited Pro Forma Portfolio of Investments and Pro Forma Statement of
Assets and Liabilities reflect the financial position as if the transaction
occurred on January 31, 2005. The Pro Forma Statement of Operations reflects the
expenses for the twelve months ended January 31, 2005. The pro forma statements
give effect to the proposed exchange of Van Kampen Municipal Opportunity Trust
shares for the assets and liabilities of the Van Kampen Advantage Municipal
Income Trust, with Van Kampen Municipal Opportunity Trust being the surviving
entity. The proposed transaction will be accounted for as a tax-free
reorganization in accordance with accounting principles generally accepted in
the United States of America. The historical cost basis of the investments is
carried over to the surviving entity. There is no guarantee that the portfolio
of investments of the surviving entity on the closing date of the transaction
will match the Pro Forma Portfolio of Investments presented herein. All or a
portion of the securities acquired in the transaction could be sold by the
surviving entity; however, there is no plan or intention to sell securities
acquired in the transaction other than in the ordinary course of business.
H-2
VAN KAMPEN MUNICIPAL OPPORTUNITY TRUST (VMO)
VAN KAMPEN ADVANTAGE MUNICIPAL INCOME TRUST (VKA)
PROFORMA PORTFOLIO OF INVESTMENTS
JANUARY 31, 2005
(UNAUDITED)
VMO
VKA VMO PROFORMA VMO
PAR AMOUNT PAR AMOUNT PAR AMOUNT VKA MARKET VMO MARKET PROFORMA MARKET
(000) (000) (000) DESCRIPTION COUPON MATURITY VALUE VALUE VALUE
------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS 156.1%
ALABAMA 2.2%
$ 1,000 $ 1,000 Alabama Bldg Renovation
Fin Auth Rev Rfdg (AMBAC
Insd) 5.625% 09/01/24 $ 1,125,050 $ 1,125,050
1,550 1,550 Birmingham, AL Arpt Auth
Arpt Rev Rfdg (AMT) (AMBAC
Insd) (a) 5.500 07/01/14 1,663,072 1,663,072
2,250 2,000 4,250 Jefferson Cnty, AL Ltd
Oblig Sch Wt Ser A 5.250 01/01/23 2,418,930 2,150,160 4,569,090
1,000 1,000 Jefferson Cnty, AL Ltd
Oblig Sch Wt Ser A 5.000 01/01/24 1,046,830 1,046,830
2,375 2,375 Marshall Cnty, AL Hlthcare
Ser C 6.000 01/01/32 2,544,290 2,544,290
5 5 Mobile, AL Indl Dev Brd
Solid Waste Disp Rev
Mobile Energy Svc Co Proj
Rfdg 6.950 01/01/20 29 29
2,000 2,000 Montgomery, AL Wt (AMBAC
Insd) 5.250 05/01/20 2,213,460 2,213,460
------------------------- --------------
8,467,342 4,694,479 13,161,821
------------------------- --------------
ALASKA 2.2%
1,000 1,000 Alaska St Hsg Fin Corp Gen
Hsg Ser A (FGIC Insd) 5.250 12/01/41 1,065,960 1,065,960
------------------------- --------------
1,065,960 - 1,065,960
------------------------- --------------
ARIZONA 2.2%
1,425 1,425 Arizona Cap Fac Fin Corp
Student Hsg Rev AZ St Univ
Proj 6.250 09/01/32 1,524,037 1,524,037
2,500 2,500 Arizona Sch Fac Brd Rev St
Sch Impt 5.500 07/01/17 2,823,350 2,823,350
2,900 2,900 Arizona Tourism & Sports
Auth Multi Purp Stad Fac
Ser A (MBIA Insd) 5.375 07/01/22 3,253,365 3,253,365
1,500 1,500 Maricopa Cnty, AZ Stadium
Dist Rfdg (AMBAC Insd) 5.375 06/01/19 1,678,395 1,678,395
2,875 2,875 Phoenix, AZ Civic Impt
Corp Arpt Rev Jr Lien
(AMT) (FGIC Insd) 5.375 07/01/29 2,932,155 2,932,155
720 720 Pima Cnty, AZ Indl Dev
Auth Indl Rev Lease Oblig
Irvington Proj Tucson Ser
A Rfdg (FSA Insd) 7.250 07/15/10 752,688 752,688
------------------------- --------------
11,285,595 1,678,395 12,963,990
------------------------- --------------
ARKANSAS 0.6%
3,035 3,035 Fort Smith, AR Wtr & Swr
Rev Ser A Rfdg (FSA Insd) 5.250 10/01/16 3,373,008 3,373,008
------------------------- --------------
- 3,373,008 3,373,008
------------------------- --------------
CALIFORNIA 10.4%
2,630 2,630 Anaheim, CA Pub Fin Auth
Lease Rev Cap Apprec Sub
Pub Impt Proj C (FSA Insd) * 09/01/20 1,287,806 1,287,806
2,400 2,400 Bay Area Govt Assn CA Rev
Tax Alloc CA Redev Pool
Ser A (XLCA Insd) 5.250 09/01/29 2,572,584 2,572,584
30 30 California Rural Home Mtg
Fin Auth Single Family Mtg
Rev Ser C (AMT) (GNMA
Collateralized) 7.800 02/01/28 30,667 30,667
5,500 5,500 11,000 California St Dept Wtr Res
Pwr Ser A (AMBAC Insd) 5.500 05/01/16 6,241,455 6,241,455 12,482,910
2,000 2,000 4,000 California St Dept Wtr Res
Pwr Ser A 5.750 05/01/17 2,264,980 2,264,980 4,529,960
4,500 4,500 9,000 California St (AMBAC Insd) 5.125 10/01/27 4,758,525 4,758,525 9,517,050
3,500 3,500 California St Pub Wks Brd
Lease Rev Dept Corrections
Ser C 5.250 06/01/28 3,695,895 3,695,895
2,500 2,500 California St Pub Wks Brd
Lease Rev Dept Corrections
Ser E Rfdg (XLCA Insd) 5.000 06/01/18 2,714,300 2,714,300
2,000 2,000 California St Pub Wks Brd
Lease Rev Dept Mental Hlth
Coalinga A 5.000 06/01/25 2,082,380 2,082,380
5,000 5,000 Contra Costa, CA Home Mtg
Fin Auth Home Mtg Rev
(Escrowed to Maturity)
(MBIA Insd) * 09/01/17 2,712,000 2,712,000
5,000 5,000 Foothill/Eastern Corridor
Agy CA Toll Rd Rev Cap
Apprec Rfdg * 01/15/25 1,577,600 1,577,600
4,000 4,000 Foothill/Eastern Corridor
Agy CA Toll Rd Rev Conv
Cap Apprec Sr Lien Ser A
(Escrowed to Maturity) 7.050 01/01/10 4,784,800 4,784,800
3,185 3,185 Imperial Irr Dist CA Rev
Elec Sys Proj (FSA Insd)
(a) 5.250 11/01/18 3,542,166 3,542,166
1,500 1,500 Los Angeles Cnty, CA Met
Tran Auth Sales Tax Rev
Prop C Second Tier Sr Ser
A Rfdg (AMBAC Insd) 5.000 07/01/23 1,554,285 1,554,285
3,000 3,000 Los Angeles, CA Uni Sch
Dist Ser A (FSA Insd) 5.250 07/01/19 3,335,640 3,335,640
2,745 2,745 San Mateo, CA Uni High Sch
Dist Rfdg (FSA Insd) 5.000 09/01/21 2,978,709 2,978,709
1,600 1,600 Turlock, CA Hlth Fac Rev
Ctf Partn Emanuel Med Ctr
Inc. 5.375 10/15/34 1,612,016 1,612,016
------------------------- --------------
30,171,481 30,839,287 61,010,768
------------------------- --------------
COLORADO 3.4%
8,500 8,500 Arapahoe Cnty, CO Cap Impt
Tr Fd Hwy Rev E-470 Proj
Ser C (Prerefunded @
08/31/05) * 08/31/26 1,752,360 1,752,360
1,505 1,505 Arapahoe Cnty, CO Ctfs
Partn Rfdg (FSA Insd) (a) 5.250 12/01/15 1,702,381 1,702,381
3,000 3,000 Colorado Hlth Fac Auth Rev
Catholic Hlth Initiatives
Ser A (Escrowed to
Maturity) 5.500 03/01/32 3,391,860 3,391,860
1,000 1,000 Colorado Hlth Fac Auth Rev
Hosp Portercare Adventist
Hlth 6.500 11/15/31 1,111,170 1,111,170
1,000 1,000 Colorado Hsg Fin Auth
Multi-Family Hsg Ins Mtg
Ser B2 (AMT) (FHA Gtd) 5.800 10/01/28 1,031,320 1,031,320
171 171 Colorado Hsg Fin Auth
Single Family Pgm Sr Ser
A2 (AMT) 7.250 05/01/27 172,746 172,746
20 20 Colorado Hsg Fin Auth
Single Family Pgm Sr Ser
B1 (AMT) 7.900 12/01/25 20,102 20,102
135 135 Colorado Hsg Fin Auth
Single Family Pgm Sr Ser
C1 (AMT) 7.550 11/01/27 136,430 136,430
1,000 1,000 Denver, CO City & Cnty
Arpt Rev Ser B (AMT) (MBIA
Insd) 6.250 11/15/07 1,077,760 1,077,760
1,005 1,005 Greeley, CO Multi-Family
Rev Hsg Mtg Creek Stone
(AMT) (FHA Gtd) 5.950 07/01/28 1,039,512 1,039,512
1,000 1,000 Highlands Ranch Metro Dist
No 2 CO Rfdg (FSA Insd) 6.500 06/15/11 1,190,790 1,190,790
2,000 2,000 La Plata Cnty, CO Sch Dist
9 (MBIA Insd) (a) 5.250 11/01/19 2,222,620 2,222,620
3,000 3,000 Mesa Cnty, CO Vly Sch Dist
No 51 Ser A (MBIA Insd) 5.000 12/01/21 3,271,080 3,271,080
1,740 1,740 Weld & Adams Cntys, CO Sch
Dist No. 003 (FSA Insd) (a) 5.000 12/15/23 1,881,427 1,881,427
------------------------- --------------
9,268,369 10,733,189 20,001,558
------------------------- --------------
CONNECTICUT 2.1%
2,040 2,040 Bridgeport, CT Ser A (MBIA
Insd) (a) 5.250 08/15/21 2,268,766 2,268,766
3,250 3,250 6,500 Connecticut St Spl Oblig
Pkg Rev Bradley Intl Arpt
Ser A (AMT) (ACA Insd) 6.600 07/01/24 3,538,795 3,538,795 7,077,590
1,000 1,000 Hartford, CT Pkg Sys Rev
Ser A 6.400 07/01/20 1,049,910 1,049,910
1,000 1,000 Mashantucket Western Pequot
Tribe CT Spl Rev Ser A,
144A - Private Placement (b) 6.400 09/01/11 1,062,300 1,062,300
840 840 Mashantucket Western
Pequot Tribe CT Spl Rev
Ser A, 144A - Private
Placement (Escrowed to
Maturity) (b) 6.500 09/01/06 894,054 894,054
------------------------- --------------
6,857,471 5,495,149 12,352,620
------------------------- --------------
DISTRICT OF COLUMBIA 2.0%
2,500 2,500 District Columbia Rev
Gonzaga College (FSA Insd) 5.250 07/01/32 2,655,325 2,655,325
3,850 5,000 8,850 Metropolitan Washington DC
Arpt Auth Sys Ser A (AMT)
(FGIC Insd) 5.250 10/01/32 4,019,515 5,220,150 9,239,665
------------------------- --------------
6,674,840 5,220,150 11,894,990
------------------------- --------------
FLORIDA 2.1%
2,000 2,000 Escambia Cnty, FL Hlth Fac
Auth Rev (AMBAC Insd) 5.950 07/01/20 2,035,080 2,035,080
H-3
2,000 2,000 Escambia Cnty, FL Hlth Fac
Auth Rev FL Hlthcare Fac
Ln VHA Pgm (AMBAC Insd) 5.950 07/01/20 2,035,080 2,035,080
1,000 1,000 Lakeland, FL Hosp Sys Rev
Lakeland Regl Hlth Sys 5.500 11/15/32 1,048,610 1,048,610
2,100 2,100 Miami-Dade Cnty, FL
Aviation Miami Intl Arpt
(AMT) (FGIC Insd) 5.375 10/01/27 2,222,640 2,222,640
2,500 2,500 Miami-Dade Cnty, FL
Aviation Rev Miami Intl
Arpt (AMT) (FGIC Insd) 5.375 10/01/32 2,636,550 2,636,550
2,375 2,375 North Broward, FL Hosp
Dist Rev Impt 6.000 01/15/31 2,542,129 2,542,129
------------------------- --------------
4,671,630 7,848,459 12,520,089
------------------------- --------------
GEORGIA 6.1%
1,000 1,000 Atlanta, GA Arpt Rev Ser B
(AMT) (FGIC Insd) 5.625 01/01/30 1,061,350 1,061,350
5,160 5,160 Atlanta, GA Wtr & Wastewtr
Rev (FSA Insd) 5.000 11/01/20 5,627,341 5,627,341
1,937 1,937 Fulton Cnty, GA Lease Rev
(Acquired 12/23/94, Cost
$1,936,856) (c) 7.250 06/15/10 2,019,211 2,019,211
7,000 7,000 Georgia Muni Elec Auth Pwr
Rev Ser A (MBIA Insd) 6.500 01/01/20 8,983,450 8,983,450
3,770 3,770 Monroe Cnty, GA Dev Auth
Pollutn Ctl Rev Oglethorpe
Pwr Corp Scherer Ser A 6.800 01/01/12 4,491,239 4,491,239
6,245 6,245 Municipal Elec Auth GA
Combustion Turbine Proj
Ser A (MBIA Insd) 5.250 11/01/16 6,962,925 6,962,925
2,895 2,895 Municipal Elec Auth GA
Combustion Turbine Proj
Ser A (MBIA Insd) 5.250 11/01/19 3,067,137 3,067,137
105 105 Municipal Elec Auth GA
Combustion Turbine Proj
Ser A (MBIA Insd)
(Prerefunded @11/01/07) 5.250 11/01/19 112,647 112,647
2,500 2,500 Municipal Elec Auth GA
Combustion Turbine Proj
Ser A (MBIA Insd) 5.250 11/01/21 2,765,975 2,765,975
1,000 1,000 Oconee Cnty, GA Indl Dev
Auth Rev Oiit Proj (XLCA
Insd) 5.250 07/01/25 1,077,800 1,077,800
------------------------- --------------
18,203,489 17,965,586 36,169,075
------------------------- --------------
ILLINOIS 12.2%
3,750 3,750 Bolingbrook, IL Cap Apprec
Ser B (MBIA Insd) * 01/01/30 970,912 970,912
2,000 2,000 Chicago, IL Brd of Ed
(Prerefunded @ 12/01/10)
(FGIC Insd) 5.500 12/01/31 2,262,460 2,262,460
5,000 5,000 Chicago, IL Brd of Ed Cap
Apprec Sch Reform Ser A
(FGIC Insd) * 12/01/28 1,544,550 1,544,550
3,150 3,150 Chicago, IL O'Hare Intl
Arpt Rev Gen Arpt Third
Lien Ser A Rfdg (AMT)
(MBIA Insd) 5.375 01/01/32 3,301,452 3,301,452
1,895 1,895 Chicago, IL Pk Dist Hbr
Fac Rev (Prerefunded @
01/01/11) 5.875 01/01/16 2,178,871 2,178,871
2,500 2,500 Chicago, IL Pk Dist Ser C
(FGIC Insd) 5.500 01/01/19 2,811,025 2,811,025
60 60 Chicago, IL Single Family
Mtg Rev Ser A (AMT) (GNMA
Collateralized) 7.000 09/01/27 60,274 60,274
45 45 Chicago, IL Single Family
Mtg Rev Ser B (AMT) (GNMA
Collateralized) 7.625 09/01/27 45,192 45,192
1,000 1,000 Chicago, IL Wastewtr
Transmission Rev Second
Lien (Prerefunded @
01/01/10) (MBIA Insd) 5.750 01/01/25 1,137,630 1,137,630
4,500 4,500 Cook Cnty, IL Cap Impt Ser
A (FGIC Insd) 5.000 11/15/23 4,840,560 4,840,560
2,000 2,000 Cook Cnty, IL Cmnty Cap
Apprec (FSA Insd) * 12/01/10 1,637,280 1,637,280
1,620 1,620 Cook Cnty, IL Cmnty High
Sch Dist No. 219 Niles Twp
(FSA Insd) * 12/01/11 1,267,699 1,267,699
2,260 2,260 Cook Cnty, IL Cmnty High
Sch Dist No. 219 Niles Twp
(FSA Insd) * 12/01/12 1,680,649 1,680,649
2,235 2,235 Cook Cnty, IL Cmnty High
Sch Dist No. 219 Niles Twp
(FSA Insd) * 12/01/13 1,580,681 1,580,681
3,110 2,500 5,610 Du Page Cnty, IL Trans Rev
(FSA Insd) 5.750 01/01/17 3,553,082 2,856,175 6,409,257
3,000 3,000 6,000 Illinois Fin Auth Rev
Northwestern Mem Hosp Ser A 5.500 08/15/43 3,212,970 3,212,970 6,425,940
3,630 3,630 Kendall, Kane & Will Cntys,
IL Cmnty Sch Dist No. 308
Ser B (FGIC Insd) (a) 5.250 10/01/20 4,016,196 4,016,196
1,925 1,925 Kendall, Kane & Will Cntys,
IL Cmnty Sch Dist No. 308
Ser B (FGIC Insd) 5.250 10/01/21 2,124,257 2,124,257
2,135 2,135 Mc Henry Cnty, IL Cmnty
High Sch Dist No. 154 Cap
Apprec (FGIC Insd) (a) * 01/01/14 1,488,031 1,488,031
1,440 1,440 Mc Henry Cnty, IL Cmnty
High Sch Dist No. 154 Cap
Apprec (FGIC Insd) * 01/01/17 854,280 854,280
1,250 1,250 Metropolitan Pier & Expo
Auth IL Dedicated St Tax
Rev McCormick Pl Expn Proj
(FGIC Insd) 5.375 12/15/18 1,390,312 1,390,312
1,000 1,000 2,000 Metropolitan Pier & Expo
Auth IL Dedicated St Tax
Rev McCormick Pl Expn Proj
Rfdg (FGIC Insd) 5.500 12/15/24 1,114,020 1,114,020 2,228,040
6,000 6,000 Metropolitan Pier & Expo
Auth IL Dedicated St Tax
Rev McCormick Pl Expn Ser
A (MBIA Insd) 5.250 06/15/42 6,399,060 6,399,060
5,000 5,000 Regional Tran Auth IL Ser
B (AMBAC Insd) 8.000 06/01/17 6,994,600 6,994,600
1,865 1,865 Sangamon Cnty, IL Cmnty
Unit Sch Dist No 5 (FGIC
Insd) (a) 6.500 12/01/05 1,930,331 1,930,331
5,000 5,000 University IL Univ Rev
Auxiliary Fas Ser A Rfdg
(AMBAC Insd) 5.000 04/01/30 5,156,100 5,156,100
1,150 1,150 Will Cnty, IL Cmnty Sch
Dist 365U Vly View Ser B
(FSA Insd) * 11/01/15 733,435 733,435
------------------------- --------------
56,596,636 14,872,438 71,469,074
------------------------- --------------
INDIANA 2.0%
1,000 1,000 Allen Cnty, IN Juvenile
Justice Ctr First Mtg
(AMBAC Insd) 5.500 01/01/18 1,121,240 1,121,240
3,270 3,270 Allen Cnty, IN War Mem
Coliseum Ser A (AMBAC
Insd) (a) 5.500 11/01/16 3,679,110 3,679,110
2,000 2,000 Indiana Hlth Fac Fin Auth
Hosp Rev Columbus Regl
Hosp Rfdg (FSA Insd) 7.000 08/15/15 2,458,100 2,458,100
1,500 1,000 2,500 Indiana St Dev Fin Auth
Rev Exempt Fac Conv Rfdg
(AMT) 5.950 08/01/30 1,542,270 1,028,180 2,570,450
1,210 1,210 North Adams, IN Cmnty Sch
Cap Apprec First Mtg (FSA
Insd) (a) * 01/15/16 755,149 755,149
1,220 1,220 North Adams, IN Cmnty Sch
Cap Apprec First Mtg (FSA
Insd) (a) * 07/15/16 744,761 744,761
1,230 1,230 North Adams, IN Cmnty Sch
Cap Apprec First Mtg (FSA
Insd) (a) * 01/15/17 727,939 727,939
------------------------- --------------
6,594,310 5,462,439 12,056,749
------------------------- --------------
IOWA 0.4%
1,890 1,890 Des Moines, IA Pub Pkg Sys
Rev Ser A (FGIC Insd) (a) 5.750 06/01/17 2,124,984 2,124,984
------------------------- --------------
- 2,124,984 2,124,984
------------------------- --------------
KENTUCKY 1.1%
1,475 1,475 Kenton Cnty, KY Arpt Brd
Rev Cincinnati/Northn KY
Intl Arpt Ser A Rfdg (AMT)
(MBIA Insd) 6.200 03/01/08 1,614,299 1,614,299
1,995 1,995 Kentucky Hsg Corp Hsg Rev
Ser F (AMT) (FNMA
Collateralized) 5.450 01/01/32 2,058,142 2,058,142
2,345 2,345 Kentucky St Tpk Auth Econ
Dev Revitalization Proj
Rfdg (Prerefunded @
01/01/11) (FSA Insd) 5.625 07/01/14 2,666,171 2,666,171
------------------------- --------------
- 6,338,612 6,338,612
------------------------- --------------
LOUISIANA 2.5%
2,500 2,500 5,000 Lafayette, LA Utils Rev
(MBIA Insd) 5.250 11/01/23 2,776,750 2,776,750 5,553,500
300 300 Louisiana Hsg Fin Agy Mtg
Rev Single Family Access
Pgm Ser B (AMT) (GNMA
Collateralized) 8.000 03/01/25 301,791 301,791
2,000 2,000 Louisiana Hsg Fin Agy Rev
Azalea Estates Ser A Rfdg
(AMT) (GNMA Collateralized) 5.375 10/20/39 2,038,640 2,038,640
3,000 3,000 Louisiana St Energy & Pwr
Auth Pwr Proj Rev Rfdg
(FSA Insd) 5.750 01/01/12 3,458,130 3,458,130
3,000 3,000 Saint Charles Parish, LA
Environmental Impt Rev LA
Pwr & Lt Co Ser A (AMT)
(AMBAC Insd) 6.875 07/01/24 3,063,060 3,063,060
------------------------- --------------
9,599,731 4,815,390 14,415,121
------------------------- --------------
MARYLAND 1.6%
1,000 1,050 2,050 Maryland St Econ Dev Corp
Univ MD College Pk Proj 5.625 06/01/35 1,038,570 1,090,498 2,129,068
1,000 1,000 2,000 Maryland St Hlth & Higher
Ed Fac Auth Rev Medstar
Hlth Rfdg 5.375 08/15/24 1,038,450 1,038,450 2,076,900
2,360 2,350 4,710 Northeast, MD Waste Disp
Auth Rfdg (AMT) (AMBAC
Insd) 5.500 04/01/16 2,603,552 2,592,520 5,196,072
------------------------- --------------
4,680,572 4,721,468 9,402,040
------------------------- --------------
MASSACHUSETTS 4.4%
3,955 3,955 Massachusetts Bay Trans
Auth Gen Trans Sys Ser A
Rfdg 5.500 03/01/12 4,422,323 4,422,323
4,815 4,815 Massachusetts Muni Whsl
Elec Co Proj 6-A (MBIA
Insd) 5.000 07/01/11 5,303,771 5,303,771
2,400 2,400 4,800 Massachusetts St Dev Fin
Agy Rev Clg Pharmacy &
Allied Hlth Ser D (d) 5.000 07/01/35 2,486,688 2,486,688 4,973,376
3,000 3,000 Massachusetts St Dev Fin
Agy Semass Sys Ser A
(MBIA Insd) 5.625 01/01/16 3,354,270 3,354,270
1,500 1,000 2,500 Massachusetts St Fed Hwy
Gnt Antic Nt Ser A 5.750 06/15/15 1,690,830 1,127,220 2,818,050
1,000 1,000 Massachusetts St Hlth & Ed
Fac Auth Rev Partn Hlthcare
Sys Ser C 5.750 07/01/32 1,099,050 1,099,050
1,000 1,000 Massachusetts St Hlth & Ed
Fac Auth Rev Saint Mem Med
Ctr Ser A 6.000 10/01/23 1,006,840 1,006,840
3,000 3,000 Massachusetts St Wtr Res
Auth Gen Ser J (FSA Insd) 5.000 08/01/32 3,120,720 3,120,720
------------------------- --------------
14,910,452 11,187,948 26,098,400
------------------------- --------------
H-4
MICHIGAN 1.3%
3,505 3,505 Detroit, MI Wtr Supply Sys
Ser B (MBIA Insd) (a) 5.250 07/01/18 3,903,834 3,903,834
2,000 2,000 Michigan St Ctf Part
(AMBAC Insd) 5.500 06/01/27 2,186,860 2,186,860
1,215 1,215 Zeeland, MI Pub Schs Sch
Bldg & Site (MBIA Insd) (a) 5.250 05/01/19 1,357,787 1,357,787
------------------------- --------------
- 7,448,481 7,448,481
------------------------- --------------
MINNESOTA 0.9%
1,000 1,000 Chaska, MN Elec Rev Ser A 6.100 10/01/30 1,123,740 1,123,740
3,875 3,875 Saint Paul, MN Port Auth
Lease Rev Office Bldg at
Cedar Str (a) 5.250 12/01/19 4,326,631 4,326,631
------------------------- --------------
4,326,631 1,123,740 5,450,371
------------------------- --------------
MISSISSIPPI 0.9%
2,000 2,000 Mississippi Bus Fin Corp
MS Pollutn Ctl Rev Sys
Energy Res Inc Proj 5.875 04/01/22 2,006,220 2,006,220
1,000 1,000 Mississippi Bus Fin Corp
MS Pollutn Ctl Rev Sys
Energy Res Inc Proj Rfdg 5.900 05/01/22 1,010,080 1,010,080
730 730 Mississippi Home Corp
Single Family Rev Mtg
Access Pgm Ser B (AMT)
(GNMA Collateralized) 7.900 03/01/25 733,197 733,197
1,040 1,040 Mississippi Home Corp
Single Family Rev Mtg Ser
C (AMT) (GNMA
Collateralized) 7.600 06/01/29 1,080,154 1,080,154
430 430 Mississippi Home Corp
Single Family Rev Mtg Ser
F (AMT) (GNMA
Collateralized) 7.550 12/01/27 438,321 438,321
------------------------- --------------
3,749,497 1,518,475 5,267,972
------------------------- --------------
MISSOURI 1.5%
2,150 2,150 Cape Girardeau Cnty, MO
Indl Southeast MO Hosp
Assoc 5.500 06/01/22 2,231,872 2,231,872
1,345 1,345 Kansas City, MO Met Cmnty
Colleges Bldg Corp Rev
Leasehold Jr College Impt
& Rfdg (FGIC Insd) 5.500 07/01/17 1,513,986 1,513,986
70 70 Saint Louis Cnty, MO
Single Family Mtg Rev
(MBIA Insd) 6.900 04/01/16 71,261 71,261
1,210 1,210 Saint Louis, MO Arpt Rev
Cap Impt Pgm Ser A (MBIA
Insd) 5.375 07/01/18 1,347,008 1,347,008
3,000 3,000 Sikeston, MO Elec Rev Rfdg
(MBIA Insd) (e) 6.200 06/01/10 3,400,620 3,400,620
------------------------- --------------
2,860,994 5,703,753 8,564,747
------------------------- --------------
NEVADA 4.0%
7,500 7,500 15,000 Clark Cnty, NV Arpt Rev
Sub Lien Ser A-2 (FGIC
Insd) 5.000 07/01/36 7,776,225 7,776,225 15,552,450
3,000 3,000 6,000 Clark Cnty, NV Indl Dev
Rev Southwest Gas Corp
Proj Ser A (AMT) (AMBAC
Insd) 5.250 07/01/34 3,147,540 3,147,540 6,295,080
1,500 1,500 Reno, NV Sr Lien Retrac
Reno Trans Proj (AMBAC
Insd) 5.125 06/01/32 1,564,485 1,564,485
------------------------- --------------
10,923,765 12,488,250 23,412,015
------------------------- --------------
NEW HAMPSHIRE 0.9%
1,155 1,155 New Hampshire Hlth & Ed
Fac Auth Rev Derryfield Sch 7.000 07/01/30 1,201,546 1,201,546
2,500 2,500 New Hampshire Hlth & Ed
Fac Univ Sys of NH (AMBAC
Insd) 5.500 07/01/15 2,821,975 2,821,975
1,000 1,000 New Hampshire St Bus Fin
Auth Wtr Fac Rev Pennichuck
Wtrwks Inc (AMT) (AMBAC
Insd) 6.300 05/01/22 1,093,500 1,093,500
------------------------- --------------
2,295,046 2,821,975 5,117,021
------------------------- --------------
NEW JERSEY 16.1%
2,000 2,000 Garden St Preservation Tr
NJ Ser A (FSA Insd) 5.250 11/01/18 2,227,280 2,227,280
2,700 2,700 New Jersey Econ Dev Auth
Rev Cigarette Tax 5.750 06/15/29 2,869,614 2,869,614
2,000 2,000 New Jersey Econ Dev Auth
Rev Cigarette Tax 5.750 06/15/34 2,111,780 2,111,780
5,000 5,000 New Jersey Econ Dev Auth
Rev Mtr Veh Sur Rev Ser A
(MBIA Insd) 5.000 07/01/22 5,395,050 5,395,050
3,000 3,000 New Jersey Econ Dev Auth
Rev Mtr Veh Sur Rev Ser A
(MBIA Insd) 5.000 07/01/23 3,227,280 3,227,280
5,000 5,000 10,000 New Jersey Econ Dev Auth
Rev Sch Fac Constr Ser F
(Prerefunded @ 06/15/13)
(FGIC Insd) 5.250 06/15/20 5,668,450 5,668,450 11,336,900
4,000 4,000 New Jersey Econ Dev Auth
Rev Sch Fac Constr Ser I 5.000 09/01/22 4,266,440 4,266,440
3,705 3,705 New Jersey Econ Dev Auth
Sch Fac Constr Ser I
(Prerefunded @ 09/01/14)
(FGIC Insd) 5.000 09/01/20 4,157,899 4,157,899
10,000 20,000 30,000 New Jersey Econ Dev Auth
St Contract Econ Recovery
(MBIA Insd) 5.900 03/15/21 12,221,000 24,442,000 36,663,000
8,000 8,000 New Jersey Econ Dev Auth
Wtr Fac Rev NJ American
Wtr Co Inc Proj Ser A (AMT)
(FGIC Insd) 6.875 11/01/34 8,186,160 8,186,160
5,000 5,000 10,000 New Jersey St Ed Fac Auth
Higher Ed Cap Impt Ser A
(AMBAC Insd) 5.250 09/01/21 5,528,400 5,528,400 11,056,800
3,110 3,110 Newark, NJ Hsg Auth Port
Auth Newark Marine Terminal
(MBIA Insd) 5.250 01/01/20 3,439,598 3,439,598
------------------------- --------------
45,406,942 49,530,859 94,937,801
------------------------- --------------
NEW MEXICO 0.7%
860 860 New Mexico Mtg Fin Auth
Single Family Mtg Pgm Ser
G (AMT) (GNMA
Collateralized) 7.250 07/01/26 878,705 878,705
2,020 2,020 University NM Univ Rev Sub
Lien Ser A Rfdg (a) 5.250 06/01/20 2,236,463 2,236,463
1,125 1,125 University NM Univ Rev Sub
Lien Ser A Rfdg 5.250 06/01/21 1,242,585 1,242,585
------------------------- --------------
3,479,048 878,705 4,357,753
------------------------- --------------
NEW YORK 14.4%
170 170 Broome Cnty, NY Ctf Partn
(MBIA Insd) 5.250 04/01/15 173,748 173,748
1,300 1,300 New York City Indl Dev
Civic YMCA Gtr NY Proj 5.800 08/01/16 1,387,659 1,387,659
9,600 9,600 New York City Ser A 7.000 08/01/07 10,331,808 10,331,808
400 400 New York City Ser A
(Prerefunded @ 08/01/06) 7.000 08/01/07 433,392 433,392
3,500 3,500 New York City Ser E 5.000 11/01/20 3,819,970 3,819,970
2,225 2,225 New York City Ser F 6.000 08/01/11 2,362,327 2,362,327
2,500 2,500 New York City Ser H 5.750 03/15/12 2,823,100 2,823,100
5,000 5,000 New York City Transitional
Fin Auth Rev Future Tax
Secd Ser A Rfdg (f) 5.500/14.000 11/01/26 5,613,300 5,613,300
2,500 2,500 New York St Dorm Auth
Lease Muni Hlth Facs Impt
Ser 1 (FSA Insd) 5.500 01/15/12 2,799,050 2,799,050
2,525 2,525 New York St Dorm Auth
Lease Rev Muni Hlth Fac
Impt Pgm Ser A (FSA Insd) 5.500 05/15/25 2,713,011 2,713,011
1,625 1,625 New York St Dorm Auth
Lease Rev St Univ Dorm Fac
Ser A 6.000 07/01/14 1,858,480 1,858,480
1,450 1,450 New York St Dorm Auth
Lease Rev St Univ Dorm Fac
Ser C (Prerefunded @
07/01/09) (MBIA Insd) 5.500 07/01/29 1,627,262 1,627,262
3,915 3,915 New York St Dorm Auth Rev
City Univ Secd Ser B 5.375 07/01/07 4,158,787 4,158,787
1,135 1,135 New York St Dorm Auth Rev
City Univ Secd Ser B
(Escrowed to Maturity) 5.375 07/01/07 1,213,939 1,213,939
3,100 3,100 New York St Dorm Auth Rev
City Univ Sys Cons Ser A 5.625 07/01/16 3,602,789 3,602,789
2,600 2,600 New York St Dorm Auth Rev
Cons City Univ Sys Second
Gen Ser A 5.750 07/01/13 2,955,394 2,955,394
2,535 2,535 New York St Dorm Auth Rev
Mental Hlth Ser B 5.750 08/15/11 2,723,503 2,723,503
15 15 New York St Dorm Auth Rev
Mental Hlth Ser B
(Prerefunded @ 02/15/07) 5.750 08/15/11 16,284 16,284
2,545 2,545 New York St Dorm Auth Rev
Mental Hlth Svc Fac Impt
Ser D (FSA Insd) (a) 5.875 02/15/14 2,838,769 2,838,769
1,495 1,495 New York St Dorm Auth Rev
Mental Hlth Svcs Fac Ser A 5.750 08/15/12 1,606,168 1,606,168
5 5 New York St Dorm Auth Rev
Mental Hlth Svcs Fac Ser A
(Prerefunded @ 02/15/07) 5.750 08/15/12 5,428 5,428
1,445 1,445 New York St Dorm Auth Rev
Secd Hosp North Gen Hosp
Rfdg (MBIA Insd) 5.750 02/15/17 1,646,635 1,646,635
2,040 2,040 New York St Dorm Auth Rev
Secd Hosp North Gen Hosp
Rfdg 5.750 02/15/18 2,300,508 2,300,508
1,350 1,350 New York St Dorm Auth Rev
Ser B 7.500 05/15/11 1,554,957 1,554,957
650 650 New York St Dorm Auth Rev
Ser B (Prerefunded @
05/15/09) 7.500 05/15/11 781,183 781,183
5,000 5,000 New York St Dorm Auth Rev
St Univ Ed Fac Ser A 5.500 05/15/08 5,427,050 5,427,050
1,500 1,500 New York St Dorm Auth Revs
Upstate Cmnty Colleges
Ser B 5.250 07/01/20 1,634,190 1,634,190
1,000 1,000 New York St Dorm Auth Revs
Upstate Cmnty Colleges
Ser B 5.250 07/01/21 1,085,390 1,085,390
1,380 1,380 New York St Mtg Agy Rev
Homeowner Mtg Ser 82 (AMT) 5.650 04/01/30 1,445,191 1,445,191
3,780 3,780 New York St Mtg Agy Rev
Ser 101 (AMT) 5.400 04/01/32 3,902,812 3,902,812
2,160 2,160 New York St Twy Auth Svc
Contract Rev Loc Hwy & Brdg 5.500 04/01/16 2,424,341 2,424,341
4,000 4,000 Port Auth NY & NJ Spl
Oblig Rev Spl Proj JFK
Intl Arpt Terminal 6 (AMT)
(MBIA Insd) 5.750 12/01/22 4,348,840 4,348,840
1,500 1,500 3,000 Sales Tax Asset Receivable
Corp NY Ser A (MBIA Insd) 5.000 10/15/21 1,637,880 1,637,880 3,275,760
------------------------- --------------
53,158,924 31,732,101 84,891,025
------------------------- --------------
H-5
NORTH CAROLINA 6.0%
1,500 1,500 North Carolina Eastn Muni
Pwr Agy Pwr Sys Rev Ser D 6.700 01/01/19 1,691,505 1,691,505
11,000 11,000 22,000 North Carolina Muni Pwr
Agy No 1 Catawba Elec Rev
Rfdg (MBIA Insd) 6.000 01/01/12 12,826,660 12,826,660 25,653,320
4,000 3,000 7,000 North Carolina Muni Pwr
Agy Ser A (MBIA Insd) 5.250 01/01/19 4,440,560 3,330,420 7,770,980
------------------------- --------------
17,267,220 17,848,585 35,115,805
------------------------- --------------
NORTH DAKOTA 0.3%
1,130 1,130 North Dakota St Hsg Fin
Agy Rev Hsg Fin Pgm Home
Mtg Fin Ser B (AMT) (MBIA
Insd) 5.500 07/01/29 1,162,137 1,162,137
535 535 North Dakota St Hsg Fin
Agy Ser C (AMT) 5.550 07/01/29 537,402 537,402
------------------------- --------------
1,162,137 537,402 1,699,539
------------------------- --------------
OHIO 3.2%
385 385 Akron, OH Ctf Part Akron
Muni Baseball Stad Proj 6.500 12/01/07 415,080 415,080
1,190 1,190 Bowling Green St Univ OH
(FGIC Insd) 5.750 06/01/14 1,352,209 1,352,209
2,335 2,335 Cleveland, OH Muni Sch
Dist (FSA Insd) 5.250 12/01/18 2,613,449 2,613,449
1,000 1,000 Cleveland, OH Muni Sch
Dist (FSA Insd) 5.250 12/01/24 1,102,660 1,102,660
1,000 500 1,500 Cuyahoga Cnty, OH Hosp Fac
Rev Canton Inc Proj 7.500 01/01/30 1,132,570 566,285 1,698,855
2,000 2,000 Lorain Cnty, OH Hosp Rev
Catholic Hlthcare 5.375 10/01/30 2,086,580 2,086,580
2,450 2,450 Lorain Cnty, OH Hosp Rev
Catholic Hlthcare Ser A
Impt & Rfdg 5.250 10/01/33 2,524,627 2,524,627
3,000 3,000 Lucas Cnty, OH Hosp Rev
Promedica Hlthcare Oblig
Rfdg (MBIA Insd) 6.000 11/15/07 3,231,000 3,231,000
1,500 1,500 Mahoning Cnty, OH Hosp Fac
Forum Hlth Oblig Group
Ser A 6.000 11/15/32 1,611,495 1,611,495
1,000 1,000 Marion Cnty, OH Hosp Rev
Cmnty Hosp Impt & Rfdg 6.375 05/15/11 1,046,530 1,046,530
1,000 1,000 Ohio St Air Quality Dev
Auth Rev JMG Fdg Ltd Part
Proj Rfdg (AMT) (AMBAC Insd) 6.375 04/01/29 1,022,210 1,022,210
------------------------- --------------
10,506,416 8,198,279 18,704,695
------------------------- --------------
OKLAHOMA 4.1%
470 470 Central OK Transn & Pkg
Auth Pkg Sys (AMBAC Insd) 5.000 07/01/19 507,299 507,299
525 525 Central OK Transn & Pkg
Auth Pkg Sys (AMBAC Insd) 5.000 07/01/20 564,716 564,716
3,410 3,410 Jenks, OK Aquarium Auth
Rev Rfdg (MBIA Insd) (a) 5.250 07/01/24 3,777,837 3,777,837
1,475 1,475 Jenks, OK Aquarium Auth
Rev Rfdg (MBIA Insd) 5.250 07/01/33 1,600,154 1,600,154
4,770 4,770 McAlester, OK Pub Wks Auth
Util Cap Apprec (FSA Insd) * 02/01/34 1,136,453 1,136,453
1,100 1,100 Oklahoma City, OK Indl &
Cultural Fac Tr Rev Dist
Heating & Cooling Trigen
(AMT) (LOC: Societe
Generale) 6.750 09/15/17 1,103,476 1,103,476
1,065 1,065 Oklahoma Dev Fin Auth
Lease Rev OK Council Law
Enforcement (MBIA Insd) (a) 5.500 06/01/17 1,200,191 1,200,191
1,120 1,120 Oklahoma Dev Fin Auth
Lease Rev OK Council Law
Enforcement (MBIA Insd) (a) 5.500 06/01/18 1,262,173 1,262,173
1,185 1,185 Oklahoma Dev Fin Auth
Lease Rev OK Council Law
Enforcement (MBIA Insd) (a) 5.500 06/01/19 1,335,424 1,335,424
2,000 1,300 3,300 Sapulpa, OK Muni Auth Cap
Rev Impt & Rfdg
(Prerefunded @ 07/01/10)
(FSA Insd) 5.750 07/01/30 2,289,520 1,488,188 3,777,708
1,250 1,000 2,250 Tulsa Cnty, OK Pub Fac
Auth Cap Impt Rev (AMBAC
Insd) 6.250 11/01/22 1,453,688 1,162,950 2,616,638
2,000 2,000 Tulsa, OK Indl Auth Hosp
Rev Hillcrest Med Cent
Proj Rfdg (Escrowed to
Maturity) (Connie Lee Insd) 6.125 06/01/05 2,026,880 2,026,880
3,140 3,140 Tulsa, OK Indl Auth Hosp
Rev Hillcrest Med Cent
Proj Rfdg (Escrowed to
Maturity) (Connie Lee Insd)
(a) 6.250 06/01/08 3,490,267 3,490,267
------------------------- --------------
14,022,463 10,376,753 24,399,216
------------------------- --------------
OREGON 3.6%
2,500 2,500 5,000 Oregon Hlth Sciences Univ
Insd Ser A (MBIA Insd) 5.250 07/01/22 2,766,650 2,766,650 5,533,300
5,000 5,000 10,000 Oregon St Dept Admin Ser C
Rfdg (MBIA Insd) 5.250 11/01/18 5,522,050 5,522,050 11,044,100
4,000 4,000 Portland, OR Swr Sys Rev
Ser A (FGIC Insd) 5.750 08/01/18 4,511,760 4,511,760
------------------------- --------------
12,800,460 8,288,700 21,089,160
------------------------- --------------
PENNSYLVANIA 7.2%
2,295 2,295 Allegheny Vly, PA Sch Dist
Ser A (MBIA Insd) 5.000 11/01/24 2,469,994 2,469,994
2,650 2,650 Central Dauphin, PA Sch
Dist (FSA Insd) 5.000 12/01/19 2,894,516 2,894,516
2,210 2,210 Chartiers Vly, PA Sch Dist
Ser A (FSA Insd) (a) 5.250 10/15/19 2,482,272 2,482,272
2,000 2,000 Harrisburg, PA Auth Res
Gtd Sub Ser D-2 (FSA Insd) 5.000 12/01/33 2,191,460 2,191,460
1,000 1,000 Harrisburg, PA Cap Apprec
Nts Ser F Rfdg (AMBAC Insd) * 03/15/15 656,830 656,830
700 700 Harrisburg, PA Cap Apprec
Ser D Rfdg (AMBAC Insd) * 03/15/14 484,960 484,960
1,830 1,830 Harrisburg, PA Cap Apprec
Ser D Rfdg (AMBAC Insd) (a) * 09/15/14 1,241,179 1,241,179
1,865 1,865 Harrisburg, PA Cap Apprec
Ser D Rfdg (AMBAC Insd) * 03/15/16 1,163,685 1,163,685
1,865 1,865 Harrisburg, PA Cap Apprec
Ser D Rfdg (AMBAC Insd) (a) * 09/15/15 1,199,195 1,199,195
2,750 2,750 Hempfield, PA Area Sch Dist
Westmoreland Cnty Ser A
(FGIC Insd) 5.250 03/15/19 3,086,408 3,086,408
2,515 4,000 6,515 Hempfield, PA Area Sch Dist
Westmoreland Cnty Ser A
(FGIC Insd) 5.250 03/15/20 2,816,171 4,479,000 7,295,171
3,090 3,090 Philadelphia, PA Gas Wks
Rev 1975 Gen Ordinance
17th Ser (FSA Insd) 5.375 07/01/19 3,441,209 3,441,209
2,440 2,440 Philadelphia, PA Sch Dist
Ser A (FSA Insd) 5.750 02/01/11 2,787,676 2,787,676
2,000 2,000 Radnor Twp, PA Sch Dist
(Prerefunded @ 03/15/07) 5.750 03/15/26 2,136,860 2,136,860
3,000 3,000 Susquehanna Area Regl Arpt
Auth PA Ser A (AMT) (AMBAC
Insd) 5.375 01/01/21 3,240,030 3,240,030
5,415 5,415 Susquehanna Area Regl Arpt
Auth PA Ser A (AMT) (AMBAC
Insd) (a) 5.375 01/01/22 5,833,146 5,833,146
------------------------- --------------
21,371,251 21,233,340 42,604,591
------------------------- --------------
SOUTH CAROLINA 2.1%
1,250 1,250 Easley, SC Util Rev Comb
(FSA Insd) (a) 5.250 12/01/18 1,392,525 1,392,525
1,385 1,385 Easley, SC Util Rev (FSA
Insd) (a) 5.250 12/01/20 1,536,921 1,536,921
2,500 2,500 5,000 South Carolina Jobs Econ
Dev Auth Indl Rev Elec &
Gas Co Proj Ser A (AMBAC
Insd) 5.200 11/01/27 2,681,200 2,681,200 5,362,400
3,750 3,750 South Carolina Jobs Econ
Dev Auth Indl Rev Elec &
Gas Co Proj Ser B (AMT)
(AMBAC Insd) 5.450 11/01/32 3,992,775 3,992,775
------------------------- --------------
8,210,896 4,073,725 12,284,621
------------------------- --------------
SOUTH DAKOTA 0.7%
1,375 1,375 Deadwood, SD Ctfs Partn
(ACA Insd) 6.375 11/01/20 1,484,038 1,484,038
2,500 2,500 South Dakota St Hlth & Ed
Fac Auth Rev Sioux Vly
Hosp & Hlth Sys Ser A 5.250 11/01/34 2,565,425 2,565,425
------------------------- --------------
2,565,425 1,484,038 4,049,463
------------------------- --------------
TENNESSEE 1.0%
1,000 1,000 2,000 Elizabethton, TN Hlth & Ed
Fac Brd Rev Hosp First Mtg
Ser B Impt & Rfdg 8.000 07/01/33 1,200,920 1,200,920 2,401,840
1,500 1,500 Elizabethton, TN Hlth & Ed
Fac Brd Rev Hosp Ser B Impt
& Rfdg (MBIA Insd) 7.750 07/01/29 1,931,940 1,931,940
100 100 Franklin, TN Spl Sch Dist
Cap Apprec (FSA Insd) * 06/01/16 62,614 62,614
1,000 1,000 Johnson City, TN Hlth & Ed
Fac Brd Hosp Rev First Mtg
Mtn St Hlth Ser A Rfdg
(MBIA Insd) 7.500 07/01/25 1,271,460 1,271,460
------------------------- --------------
3,195,474 2,472,380 5,667,854
------------------------- --------------
TEXAS 18.7%
2,350 2,350 Austin, TX Ctf Oblig (MBIA
Insd) (a) 5.375 09/01/20 2,626,572 2,626,572
980 980 Austin, TX Utility Sys Rev
Comb (AMBAC Insd) 6.500 11/15/05 1,012,693 1,012,693
20 20 Austin, TX Utility Sys Rev
Comb Rfdg (Escrowed to
Maturity) (AMBAC Insd) 6.500 11/15/05 20,684 20,684
2,545 2,545 Dallas Cnty, TX Cmnty
College Fin Sys (AMBAC
Insd) (a) 5.375 02/15/17 2,785,172 2,785,172
3,000 3,000 6,000 Dallas Cnty, TX Util &
Reclamation Dist Ser B
Rfdg (AMBAC Insd) 5.875 02/15/29 3,056,550 3,056,550 6,113,100
2,500 2,500 Dallas, TX Wtrwks & Swr
Sys Rev & Impt Rfdg (FSA
Insd) 5.375 10/01/18 2,815,025 2,815,025
5,500 5,500 Dallas-Fort Worth, TX Intl
Arpt Rev Impt Jt Ser A
Rfdg (AMT) (FGIC Insd) (e) 5.500 11/01/31 5,815,040 5,815,040
4,000 4,000 8,000 Dallas-Fort Worth, TX Intl
Arpt Rev Jt Ser A (AMT)
(FSA Insd) 5.500 11/01/21 4,394,120 4,394,120 8,788,240
2,500 1,500 4,000 Dallas-Fort Worth, TX Intl
Arpt Rev Jt Ser A (AMT)
(FGIC Insd) 5.750 11/01/30 2,719,850 1,631,910 4,351,760
2,000 2,000 Harris Cnty, TX Hlth Fac
Dev Mem Hermann Hlthcare
Ser A 6.375 06/01/29 2,201,020 2,201,020
2,000 2,000 Houston, TX Arpt Sys Rev
Sub Lien (FSA Insd) 5.500 07/01/20 2,248,120 2,248,120
H-6
3,000 3,000 Houston, TX Arpt Sys Rev
Sub Lien Ser A (AMT)
(FSA Insd) 5.625 07/01/30 3,267,180 3,267,180
5,000 5,000 10,000 Houston, TX Arpt Sys Rev
Sub Lien Ser A (AMT)
(FSA Insd) 5.125 07/01/32 5,143,550 5,143,550 10,287,100
6,000 6,000 12,000 Houston, TX Util Sys Rev
First Lien Ser A Rfdg
(FSA Insd) 5.250 05/15/21 6,643,020 6,643,020 13,286,040
2,910 2,910 Houston, TX Wtr & Swr Sys
Rev Jr Lien Ser C
(Prerefunded @ 12/01/07)
(FGIC Insd) 5.375 12/01/27 3,164,654 3,164,654
4,625 4,625 Little Elm, TX Indpt Sch
Dist (Prerefunded @
08/15/05) (PSF Gtd) 6.750 08/15/29 4,740,718 4,740,718
515 515 Little Elm, TX Indpt Sch
Dist (PSF Gtd) 6.750 08/15/29 527,000 527,000
2,185 2,185 Lower CO Riv Auth TX
LCRA Svcs Corp Proj Rfdg
(FGIC Insd) 5.000 05/15/24 2,324,294 2,324,294
2,185 2,185 Lower CO Riv Auth TX
Transmission Contract Rev
Svc Corp Proj Rfdg
(FGIC Insd) 5.000 05/15/25 2,316,646 2,316,646
2,000 2,000 4,000 Lower CO Riv Auth TX
Transmission Contract Rev
Svc Corp Proj Rfdg
(FGIC Insd) 5.000 05/15/33 2,057,980 2,057,980 4,115,960
1,000 1,000 Matagorda Cnty, TX Navig
Dist No 1 Rev Coll
Centerpoint Energy
Proj Rfdg 5.600 03/01/27 1,038,350 1,038,350
1,500 1,500 3,000 Metropolitan Hlth Fac Dev
Corp TX Wilson N Jones Mem
Hosp Proj 7.250 01/01/31 1,504,005 1,504,005 3,008,010
5,000 5,000 10,000 North Cent TX Hlth Fac Dev
Hosp Childrens Med Ctr Dallas
(AMBAC Insd) 5.250 08/15/32 5,304,850 5,304,850 10,609,700
5,000 5,000 San Antonio, TX Elec & Gas
Sys Rfdg 5.375 02/01/19 5,557,900 5,557,900
2,000 2,000 San Antonio, TX Elec & Gas
Sys Rfdg 5.375 02/01/20 2,223,160 2,223,160
1,090 1,090 Texas Gen Svcs Comm Partn
Int Lease Purch Ctfs
(Acquired 03/16/95, Cost
$1,090,022) (c) 7.250 08/01/11 1,098,622 1,098,622
1,000 1,000 Trinity Riv Auth TX Rev
Tarrant Cnty Wtr Proj Impt
& Rfdg (MBIA Insd) 5.500 02/01/21 1,129,350 1,129,350
2,360 2,360 University TX Rev Fin Sys
Ser B 5.250 08/15/20 2,610,042 2,610,042
--------------------------- ---------------
56,349,295 53,732,857 110,082,152
--------------------------- ---------------
UTAH 0.4%
2,380 2,380 Mountain Regl Wtr Spl Svc
Dist Rfdg (MBIA Insd) 5.000 12/15/33 2,479,389 2,479,389
--------------------------- ---------------
2,479,389 - 2,479,389
--------------------------- ---------------
WASHINGTON 8.0%
9,850 9,850 Bellevue, WA Convention Cent
Comp Int Rfdg (MBIA Insd) * 02/01/25 3,777,475 3,777,475
3,750 3,750 7,500 Chelan Cnty, WA Pub Util
Dist No. 001 Cons Rev Chelan
Hydro Ser A (AMT) (MBIA Insd) 5.600 01/01/36 4,020,900 4,020,900 8,041,800
5,000 5,000 Energy Northwest WA Elec Rev
Columbia Generating Ser A
Rfdg (FSA Insd) 5.500 07/01/16 5,602,150 5,602,150
2,500 2,500 Energy Northwest WA Elec Rev
Proj No 3 Ser A Rfdg (FSA Insd) 5.500 07/01/18 2,801,075 2,801,075
5,000 5,000 Energy Northwest WA Elec Rev
Proj No 3 Ser B Rfdg (FSA Insd) 6.000 07/01/16 5,820,800 5,820,800
1,400 1,400 King Cnty, WA Hsg Auth Hsg Rev
Pooled Sr Ser A Rfdg 6.700 03/01/15 1,430,548 1,430,548
2,000 2,000 Port Seattle, WA Rev Ser B (AMT)
(MBIA Insd) 5.625 02/01/24 2,186,380 2,186,380
2,120 2,120 Seattle, WA Muni Lt & Pwr Rev 5.625 12/01/17 2,328,163 2,328,163
3,000 3,000 Spokane, WA Pub Fac Dist
Hotel Motel & Sales Use Tax
(MBIA Insd) 5.250 09/01/33 3,197,220 3,197,220
1,500 1,500 Tacoma, WA Elec Sys Rev
Ser B Rfdg (FSA Insd) 5.500 01/01/12 1,701,060 1,701,060
4,750 4,750 Tacoma, WA Elec Sys Rev
Ser A Rfdg (FSA Insd) 5.750 01/01/14 5,424,975 5,424,975
1,000 1,000 Thurston & Pierce Cntys, WA
(FSA Insd) 5.000 12/01/20 1,084,830 1,084,830
5,125 5,125 Washington St Pub Pwr Supply
Sys Nuclear Proj No 3 Rev
Ser C Rfdg (MBIA Insd) * 07/01/14 3,487,511 3,487,511
-------------------------- ---------------
27,809,571 19,074,416 46,883,987
-------------------------- ---------------
WEST VIRGINIA 1.6%
8,000 8,000 Harrison Cnty, WV Cmnty Solid
Waste Disp Rev West Penn Pwr
Co Proj Ser A (AMT) (MBIA Insd) 6.875 04/15/22 8,026,320 8,026,320
1,135 1,135 West Virginia St Hsg Dev Fd Ser A 5.550 05/01/17 1,155,782 1,155,782
--------------------------- ---------------
1,155,782 8,026,320 9,182,102
--------------------------- ---------------
WISCONSIN 0.8%
1,500 1,500 Southeast WI Professional Baseball
Pk Dist Sales Tax Rev Ser A Rfdg
(MBIA Insd) 5.500 12/15/20 1,773,135 1,773,135
3,000 3,000 Wisconsin St Hlth & Ed Fac Wheaton
Franciscan Svc Rfdg 5.750 08/15/30 3,187,950 3,187,950
--------------------------- ---------------
3,187,950 1,773,135 4,961,085
--------------------------- ---------------
WYOMING 0.2%
1,000 1,000 University WY Univ Rev Fac Impt
(FSA Insd) 5.500 06/01/18 1,124,160 1,124,160
--------------------------- ---------------
1,124,160 - 1,124,160
--------------------------- ---------------
PUERTO RICO 2.2%
10,000 10,000 Puerto Rico Comwlth Hwy & Tran
Auth Hwy Rev Ser Y Rfdg
(FSA Insd) (e) 6.250 07/01/21 12,779,700 12,779,700
--------------------------- ---------------
12,779,700 - 12,779,700
--------------------------- ---------------
TOTAL LONG-TERM INVESTMENTS 156.1 %
(Cost $844,787,873) 511,236,314 407,737,250 918,973,564
SHORT-TERM INVESTMENTS 1.0%
(Cost $5,500,000) 1,900,000 3,600,000 5,500,000
--------------------------- ---------------
TOTAL INVESTMENTS 157.1%
(Cost $850,287,873) 513,136,314 411,337,250 924,473,564
OTHER ASSETS IN EXCESS OF
LIABILITIES 0.7% 2,754,736 1,277,534 4,032,270
PREFERRED SHARES (INCLUDING
ACCRUED DISTRIBUTIONS) (57.8%) (190,137,331) (150,151,516 (340,288,847)
--------------------------- ---------------
NET ASSETS APPLICABLE TO COMMON
SHARES 100.0% $ 325,753,719 $262,463,268 $ 588,216,987
=========================== ===============
Percentages are calculated as a percentage of net assets applicable to common
shares.
* Zero coupon bond.
(a) The Trust owns 100% of the bond issuance.
(b) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933, as amended. These securities may only be resold
in transactions exempt from registration which are normally those transactions
with qualified institutional buyers.
(c) These securities are restricted and may
be resold only in transactions exempt from registration which are normally those
transactions with qualified institutional buyers. Restricted securities comprise
0.5% of net assets applicable to common shares.
(d) Securities purchased on a when-issued or delayed delivery basis.
(e) All or a portion of these securities have been physically segregated in
connection with open futures contracts.
(f) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.
ACA - American Capital Access
AMBAC - AMBAC Indemnity Corp.
AMT - Alternative Minimum Tax
Connie Lee - Connie Lee Insurance Co.
FGIC - Financial Guaranty Insurance Co.
FHA - Federal Housing Administration
FNMA - Federal National Mortgage Association
FSA - Financial Security Assurance Inc.
GNMA - Government National Mortgage Association
LOC - Letter of Credit
PSF - Permanent School Fund
MBIA - Municipal Bond Investors Assurance Corp.
XLCA - XL Capital Assurance Inc.
See Notes to Financial Statements
H-7
VAN KAMPEN ADVANTAGE MUNICIPAL INCOME TRUST
VAN KAMPEN MUNICIPAL OPPORTUNITY TRUST
PROFORMA CONDENSED STATEMENT OF ASSETS AND LIABILITIES
JANUARY 31, 2005
(UNAUDITED)
AMOUNTS IN THOUSANDS
PROFORMA-
VAN KAMPEN VAN KAMPEN VAN KAMPEN
ADVANTAGE MUNICIPAL MUNICIPAL
MUNICIPAL INCOME OPPORTUNITY OPPORTUNITY
TRUST TRUST ADJUSTMENTS TRUST
---------------------- ----------------- ------------- --------------
ASSETS:
Total Investments (Cost of $472,811, $377,477
and $850,288, respectively) $ 513,136 $ 411,337 $ 924,473
Cash 8 105 113
Receivables:
Interest 5,589 4,483 10,072
Investment Sold 311 5,447 5,758
Variation Margin on Futures 55 44 99
Other 5 4 9
--------------------- ---------------- ------------ -------------
Total Assets 519,104 421,420 940,524
--------------------- ---------------- ------------ -------------
LIABILITIES:
Payable:
Investment Purchased 2,473 8,154 10,627
Investment Advisory Fee 239 191 430
Income Distributions-Common Shares 72 58 130
Other Affiliates 17 13 30
Trustee's Deferred Compensation and
Retirement Plans 306 285 591
Accrued Expenses 106 104 444 (2) 654
--------------------- ---------------- ------------ -------------
Total Liabilities 3,213 8,805 444 12,462
Preferred Shares (Including
accrued distributions) 190,137 150,152 340,289
--------------------- ---------------- ------------ -------------
NET ASSETS APPLICABLE TO COMMON SHARES $ 325,754 $ 262,463 $ (444) $ 587,773
===================== ================ ============ =============
Net Assets Applicable to Common Shares 325,754 262,463 (444) (2) 587,773
Share outstanding 19,107 15,358 (48) (1) 34,417
--------------------- ---------------- -------------
Net Asset Value Per Common Share $ 17.05 $ 17.09 $ 17.08
===================== ================ =============
NET ASSETS CONSIST OF:
Common Shares $ 191 $ 153 $ 344
Paid in Surplus 282,026 226,764 (444) (2) 508,346
Net Unrealized Appreciation 39,932 33,535 73,467
Accumulated Undistributed Net Investment Income 2,842 1,062 3,904
Accumulated Net Realized Gain (Loss) 763 949 1,712
--------------------- ---------------- -------------
NET ASSETS APPLICABLE TO COMMON SHARES $ 325,754 $ 262,463 $ (444) $ 587,773
===================== ================ ============ =============
PREFERRED SHARES $ 190,000 $ 150,000 $ 340,000
===================== ================ ============ =============
NET ASSETS INCLUDING PREFERRED SHARES $ 515,754 $ 412,463 $ (444) $ 927,773
===================== ================ ============ =============
(1) The proforma statements presume the issuance by the Van Kampen Municipal
Opportunity Trust of approximately 19,059,234 common shares in exchange for the
assets and liabilities of the Van Kampen Advantage Municipal Income Trust.
(2) A non-recurring cost associated with this transaction of approximately
$444,000 will be incurred. The approximate cost and per share cost that will be
borne by the common shareholders are as follows:
Approximate Cost Cost Per Share
---------------- --------------
Van Kampen Advantage Municipal Income Trust............. $ 222,000 $ 0.014
Van Kampen Municipal Opportunity Trust.................. 222,000 0.012
----------------
$ 444,000
================
--------------------------------------------------------------------------------
Net Assets Net NAV
New Share issuance Calculation: @ 01/31/05 Merger Cost Assets After of Survivor New Shares
-------------- ----------- -------------- ------------ ----------
Van Kampen Advantage Municipal Income Trust..... $ 325,753,719 $ (222,000) $ 325,531,719 $ 17.08 19,059,234
Van Kampen Municipal Opportunity Trust.......... 262,463,268 (222,000) 262,241,268 $ 17.08 15,357,684
----------- -----------
$ (444,000) 34,416,918
--------------------------------------------------------------------------------
H-8
VAN KAMPEN ADVANTAGE MUNICIPAL INCOME TRUST
VAN KAMPEN MUNICIPAL OPPORTUNITY TRUST
PROFORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED JANUARY 31, 2005
(UNAUDITED)
AMOUNTS IN THOUSANDS
PROFORMA-
VAN KAMPEN VAN KAMPEN VAN KAMPEN
ADVANTAGE MUNICIPAL MUNICIPAL
MUNICIPAL INCOME OPPORTUNITY OPPORTUNITY
TRUST TRUST ADJUSTMENTS TRUST
---------------- ----------- --------------- -----------
INVESTMENT INCOME:
Interest $ 25,645 $ 20,564 $ 46,209
-------- -------- -------- --------
EXPENSES:
Investment Advisory Fee 2,987 2,387 5,374
Preferred Share Maintenance 527 400 (24)(1) 903
Trustee's Fees and Related Expenses 90 81 (76)(2) 95
Administration Fee 84 67 151 (1)
Legal 56 43 (33)(1) 66
Custody 30 25 (2)(1) 53
Other 245 214 (118)(1) 341
-------- -------- -------- --------
Total Expenses 4,019 3,217 (253) 6,983
-------- -------- -------- --------
NET INVESTMENT INCOME $ 21,626 $ 17,347 $ 253 $ 39,226
======== ======== ======== ========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain $ 965 $ 966 $ 1,931
-------- -------- -------- --------
Unrealized Appreciation/Depreciation:
Beginning of the Period 38,255 32,155 70,410
End of the Period 39,932 33,535 73,467
-------- -------- -------- --------
Net Unrealized Appreciation During the Period 1,677 1,380 $ 3,057
-------- -------- -------- --------
NET REALIZED AND UNREALIZED GAIN $ 2,642 $ 2,346 $ 4,988
-------- -------- -------- --------
DISTRIBUTION TO PREFERRED SHAREHOLDERS $ (2,455) $ (1,994) $ (4,449)
======== ======== ======== ========
NET INCREASE IN NET ASSETS APPLICABLE TO COMMON
SHARES FROM OPERATIONS $ 21,813 $ 17,699 $ 253 $ 39,765
======== ======== ======== ========
(1) Reflects the reduction in other operating expenses as a result of the
elimination of certain duplicative expenses and the result of operating a
larger, more efficient fund.
(2) Reflects the exclusion of unrealized net appreciation related to the
trustees deferred compensation plan and the elimination of certain duplicative
expenses.
H-9
VAN KAMPEN ADVANTAGE MUNICIPAL INCOME TRUST - VAN KAMPEN MUNICIPAL OPPORTUNITY
TRUST
NOTES TO PRO FORMA FINANCIAL STATEMENTS
JANUARY 31, 2005 (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The Acquiring Fund, Van Kampen Municipal Opportunity Trust (the "Acquiring
Fund") is registered as a diversified, closed-end management investment company
under the Investment Company Act of 1940, as amended. The Acquiring Fund's
investment objective is to provide a high level of current income exempt from
federal income tax, consistent with preservation of capital. The Acquiring Fund
commenced investment operations on April 24, 1992.
The following is a summary of significant accounting policies
consistently followed by the Acquiring Fund in the preparation of its financial
statements. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
A. SECURITY VALUATION Municipal bonds are valued by independent pricing services
or dealers using the mean of the bid and asked prices or, in the absence of
market quotations, at fair value based upon yield data relating to municipal
bonds with similar characteristics and general market conditions. Securities
which are not valued by independent pricing services or dealers are valued at
fair value using procedures established in good faith by the Board of Trustees.
Futures contracts are valued at the settlement price established each day on the
exchange on which they are traded. Short-term securities with remaining
maturities of 60 days or less are valued at amortized cost, which approximates
market value.
B. SECURITY TRANSACTIONS Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Acquiring Fund may purchase and sell securities on a "when-issued" or "delayed
delivery" basis, with settlement to occur at a later date. The value of the
security so purchased is subject to market fluctuations during this period. The
Acquiring Fund will segregate assets with the custodian having an aggregate
value at least equal to the amount of the when-issued or delayed delivery
purchase commitments until payment is made.
C. INVESTMENT INCOME Interest income is recorded on an accrual basis. Bond
premium is amortized and discount is accreted over the expected life of each
applicable security.
D. FEDERAL INCOME TAXES It is the Acquiring Fund's policy to comply with the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no provision for federal income
taxes is required.
E. DISTRIBUTION OF INCOME AND GAINS The Acquiring Fund declares and pays monthly
dividends from net investment income to common shareholders. Net realized gains,
if any, are distributed annually on a pro rata basis to common and preferred
shareholders. Distributions from net realized gains for book purposes may
include short-term capital gains, which are included as ordinary income for tax
purposes.
H-10
PART C: OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Section 5.3 of the Registrant's Declaration of Trust, a copy of which
is filed as an exhibit hereto, provides for indemnification, as set forth below:
Section 5.3 Mandatory Indemnification.
(a) Subject to the exceptions and limitations contained in paragraph
(b) below:
(i) every person who is or has been a Trustee or officer of the
Trust shall be indemnified by the Trust to the fullest
extent permitted by law against all liability and against
all expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in
which he becomes involved as a party or otherwise by virtue
of his being or having been a Trustee or officer and
against amounts paid or incurred by him in the settlement
thereof;
(ii) the words, "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil,
criminal, administrative or other, including appeals),
actual or threatened; and the words "liability" and
"expenses" shall include, without limitation, attorneys'
fees, costs, judgments, amounts paid in settlement, fines,
penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
(i) against any liability to the Trust or its Shareholders by
reason of a final adjudication by the court or other body
before which the proceeding was brought that he engaged in
willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of
his office;
(ii) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the
reasonable belief that his action was in the best interest
of the Trust;
(iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in paragraph
(b)(i) or (b)(ii) resulting in a payment by a Trustee or
officer, unless there has been either a determination that
such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his
office by the court or other body approving the settlement
or other disposition or a reasonable determination, based
upon a review of readily available facts (as opposed to a
full trial-type inquiry) that he did not engage in such
conduct:
C-1
(A) by vote of a majority of the Disinterested Trustees
acting on the matter (provided that a majority of
the Disinterested Trustees then in office act on the
matter); or
(B) by written opinion of independent legal counsel.
(C) The rights of indemnification herein provided by be
insured against by policies maintained by the Trust,
shall be severable, shall not effect any other rights
to which any Trustee or officer may now or hereafter
be entitled, shall continue as to a Person who has
ceased to be such Trustee or officer and shall inure
to the benefit of the heirs, executors,
administrators, and assigns of such Person. Nothing
contained herein shall affect any rights to
indemnification to which personnel of the Trust other
than Trustees and officers may be entitled by
contract or otherwise under law.
(D) Expenses of preparation and presentation of a defense
to any claim, action, suit, or proceeding of the
character described in paragraph (a) of this Section
5.3 shall be advanced by the Trust prior to final
disposition thereof upon receipt of an undertaking by
or on behalf of the recipient to repay such amount if
it is ultimately determined that he is not entitled
to indemnification under this Section 5.3, provided
that either:
(i) such undertaking is secured by a surety bond or
some other appropriate security or the Trust
shall be insured against losses arising out of
any such advances; or
(ii) a majority of the Disinterested Trustees acting
on the matter (provided that a majority of the
Disinterested Trustees then in office act on
the matter) or an independent legal counsel in
a written opinion shall determine, based upon a
review of readily available facts (as opposed
to a full trial-type inquiry), that there is
reason to believe that the recipient ultimately
will be found entitled to indemnification.
As used in this Section 5.3, a "Disinterested Trustee" is one (i) who
is not an "Interested Person" of the Trust (including anyone who has
been exempted from being an "Interested Person" by any rule, regulation
or order of the Commission), and (ii) against whom none of such
actions, suits or other proceedings or another action, suit or other
proceeding on the same or similar grounds is then or had been pending.
ITEM 16. EXHIBITS
(1) (a) (i) Declaration of Trust of the Registrant and
amendments thereto++
C-2
(b) Form of Certificate of Vote Establishing Preferred Shares
and amendments thereto (included as Appendix B to the
Statement of Additional Information contained in this
Registration Statement)+
(2) Bylaws of the Registrant and amendments thereto++
(3) Not applicable
(4) Form of Agreement and Plan of Reorganization between the
Registrant and the Target Fund (included as Appendix A to
the Statement of Additional Information contained in this
Registration Statement)+
(5) (a) Specimen share certificate for common shares of the
Registrant++
(b) Specimen share certificate for preferred shares of the
Registrant++
(6) (a) Investment Advisory Agreement++
(b) Amendment Number One to the Investment Advisory
Agreement++
(7) Not Applicable
(8) (a) Form of Amended and Restated Deferred Compensation Plan++
(b) Form of Retirement Plan++
(9) (a) Custodian Contract++
(b) Amendment to Custodian Contract++
(10) Not Applicable
(11) (a) Consent of Skadden, Arps, Slate, Meagher & Flom
LLP+
(b) Opinion of Skadden, Arps, Slate, Meagher & Flom LLP++
(12) Tax opinion of Skadden, Arps, Slate, Meagher & Flom LLP+++
(13) (a) Transfer Agency and Service Agreement++
(b) Auction Agency Agreement++
(c) Form of Broker-Dealer Agreement++
(d) (i) Letter of Representations++
(ii) Form of Letter of Representations ++
(e) Fund Accounting Agreement++
(f) Amended and Restated Legal Services Agreement++
(14) Consent of Independent Registered Public Accounting Firm++
(15) Not Applicable
(16) Power of Attorney+
(17) (a) Code of Ethics of the Investment Adviser++
(b) Code of Ethics of the Funds++
(99) (a) Proxy card for the Target Fund+
(b) Proxy card for the Registrant+
C-3
+ Filed herewith.
++ To be filed by further amendment.
+++ To be filed by post-effective amendment.
ITEM 17. UNDERTAKINGS
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through use of a
prospectus which is part of this Registration Statement by any
person or party who is deemed to be an underwriter within the
meaning of Rule 145(c) of the Securities Act of 1933, as
amended, the reoffering prospectus will contain information
called for by the applicable registration form for reofferings
by persons who may be deemed underwriters, in addition to the
information called for by other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that
is filed under paragraph (1) above will be filed as part of an
amendment to the registration statement and will not be used
until the amendment is effective, and that, in determining any
liability under the Securities Act of 1933, as amended, each
post-effective amendment shall be deemed to be a new
registration statement for the securities offered therein, and
the offering of securities at that time shall be deemed to be
the initial bona fide offering of them.
(3) The undersigned Registrant agrees that, if the Reorganization
discussed in the registration statement closes, it shall file
by post-effective amendment either a copy of the Internal
Revenue Service private letter ruling applied for or an
opinion supporting the tax matters discussed in the
registration statement.
C-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, hereunto duly authorized, in the City of New York,
and the Sate of New York, on June 30, 2005.
VAN KAMPEN MUNICIPAL OPPORTUNITY TRUST
By: /s/ Lou Anne McInnis
----------------------------------
Lou Anne McInnis
Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
SIGNATURES TITLE
---------- -----
PRINCIPAL EXECUTIVE OFFICER:
/s/ Ronald E. Robison* Executive Vice President
--------------------------------------
Ronald E. Robison
PRINCIPAL FINANCIAL OFFICER:
/s/ James W. Garrett* Chief Financial Officer and Treasurer
---------------------------------------
James W. Garrett
TRUSTEES:
/s/ David C. Arch* Trustee
---------------------------------------
David C. Arch
/s/ Jerry D. Choate* Trustee
---------------------------------------
Jerry D. Choate
/s/ Rod Dammeyer* Trustee
---------------------------------------
Rod Dammeyer
C-5
/s/ Linda Hutton Heagy* Trustee
---------------------------------------
Linda Hutton Heagy
/s/ R. Craig Kennedy* Trustee
---------------------------------------
R. Craig Kennedy
/s/ Howard J Kerr* Trustee
---------------------------------------
Howard J Kerr
/s/ Michell M. Merin* Trustee
---------------------------------------
Michell M. Merin
/s/ Jack E. Nelson* Trustee
---------------------------------------
Jack E. Nelson
/s/ Richard F. Powers, III* Trustee
---------------------------------------
Richard F. Powers, III
/s/ Hugo F. Sonnenschein* Trustee
---------------------------------------
Hugo F. Sonnenschein
/s/ Wayne W. Whalen* Trustee
---------------------------------------
Wayne W. Whalen
/s/ Suzanne H. Woolsey* Trustee
---------------------------------------
Suzanne H. Woolsey
------------------
* Signed by Lou Anne McInnis pursuant to a power of attorney filed herewith.
/s/ Lou Anne McInnis June 30, 2005
----------------------------------------
Lou Anne McInnis
Attorney-in-Fact
C-6
EXHIBIT INDEX
(11) (a) Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(16) Power of Attorney
(99) (a) Proxy Card for the Target Fund
(99) (b) Proxy Card for the Registrant