As filed with the Securities and Exchange Commission on February 9, 2001
Securities Act File No. 333-
Investment Company Act File No. 811-06536
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 TRUST FOR INVESTMENT GRADE
NEW JERSEY MUNICIPALS
(Exact Name of Registrant as Specified in Its Declaration of Trust)
(630) 684-6000
(Area Code and Telephone Number)
1 Parkview Plaza
Oakbrook Terrace, Illinois 60181-5555
(Address of Principal Executive Offices)
A. Thomas Smith III
Executive Vice President,
General Counsel and Secretary
Van Kampen Investments Inc.
1 Parkview Plaza
Oakbrook Terrace, Illinois 60181-5555
(Name and Address of Agent for Service)
Copies To:
Wayne W. Whalen, Esq.
Thomas A. Hale, Esq.
Skadden, Arps, Slate, Meagher & Flom (Illinois)
333 West Wacker Drive
Chicago, Illinois 60606
(312) 407-0700
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.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Proposed Proposed
Maximum Maximum Amount of
Amount Being Offering Price Aggregate Offering Registration
Title of Securities Being Registered Registered (1) Per Unit (1) Price (1) Fee
- ------------------------------------ -------------- ------------ --------- ---
Common Shares ($0.01 par value) 2,250,000 $ 17.53 $39,442,500 $9,861
Auction Preferred Shares ($0.01 par value). 1,000 $25,000 $25,000,000 $6,250
(1) Estimated solely for the purpose of calculating the filing fee.
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.
MARCH 2001
IMPORTANT NOTICE TO
VAN KAMPEN NEW JERSEY VALUE
MUNICIPAL INCOME TRUST SHAREHOLDERS
QUESTIONS & ANSWERS
-------------------------------------------------------------------------------
Although we recommend that you read the complete Prospectus/Proxy Statement,
for your convenience, we have provided a brief overview of the issue to be
voted on.
-------------------------------------------------------------------------------
Q WHY IS A SHAREHOLDER MEETING BEING HELD?
A You are being asked to vote on a proposal to reorganize the Van Kampen
New Jersey Value Municipal Income Trust into the Van Kampen Trust for Investment
Grade New Jersey Muncipals, a closed-end investment company that pursues a
similar investment objective and has similar investment policies.
Q WHY IS THE REORGANIZATION BEING RECOMMENDED?
A The Board of Trustees of the Van Kampen New Jersey Muncipal Opportunity Fund
has determined that the reorganization will benefit the Fund's common shares.
Specifically, after the reorganization, common shareholders will remain invested
in a closed-end fund with an investment objective and policies substantially
similar to the Fund's investment objective and policies and that uses
substantially the same management personnel. In addition, it is anticipated that
common shareholders of the Fund will be subject to a reduced overall operating
expense ratio. The Board of Trustees also considered the relative tax positions
of the Funds' portfolios. It is not anticipated that the reorganization will
directly benefit the holders of preferred shares of the Fund; however, the
reorganization will not adversely affect the holders of preferred shares and
none of the expenses of the reorganization will be borne by the holders of
preferred shares.
Q HOW WILL THE REORGANIZATION AFFECT ME?
A Assuming shareholders approve the reorganization, the assets and liabilities
of the Van Kampen New Jersey Value Municipal Income Trust will be combined with
those of the Van Kampen Trust for Investment Grade New Jersey Municipals, and
you will become a shareholder of the Van Kampen Trust for Investment Grade New
Jersey Municipals. If you are a holder of common shares, you will receive
newly-issued common shares of the Van Kampen Trust for Investment Grade New
Jersey Municipals and if you are a holder of preferred shares, you will receive
newly-issued preferred shares of the Van Kampen Trust for Investment Grade New
Jersey Municipals. The net asset value of the shares you receive in the
reorganization will equal the net asset value of the shares you own immediately
prior to the reorganization (though you may receive cash for fractional shares).
No certificates for shares of the Van Kampen Trust for Investment Grade New
Jersey Municipals shares will be issued in connection with the reorganization,
although such certificates will be available upon request.
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 proposed reorganization, including the costs associated with
the shareholder meeting, will be borne by the Funds in proportion to their
projected declines in total operating expenses.
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 Van Kampen
New Jersey Value Municipal Income Trust will recognize no gain or loss upon the
receipt solely of the shares of the Van Kampen Trust for Investment Grade New
Jersey Municipals in connection with the reorganization. Additionally, the Van
Kampen New Jersey Value Municipal Income Trust would not recognize any gain or
loss as a result of the transfer of all of its assets and liabilities solely in
exchange for the shares of the Van Kampen Trust for Investment Grade New Jersey
Municipals or as a result of its liquidation.
Q WHERE DO I CALL FOR FURTHER INFORMATION?
A Please call Investor Services at 1-800-341-2911 (Telecommunications Device for
the Deaf users may call 1-800-772-8889) weekdays from 7:00a.m. to 7:00 p.m.
Central time.
2
ABOUT THE PROXY CARD
Please vote on the reorganization issue using blue or black ink to mark
an X in one of the boxes provided on the proxy card.
APPROVAL OF REORGANIZATION - 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.
SAMPLE
PROXY
VAN KAMPEN NEW JERSEY VALUE MUNICIPAL INCOME TRUST
SPECIAL MEETING OF SHAREHOLDERS
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
1. The proposal to approve the Agreement FOR [ ] AGAINST [ ] ABSTAIN [ ]
and Plan of Reorganization XXXXXXXX.
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
VAN KAMPEN NEW JERSEY VALUE MUNICIPAL
INCOME TRUST
1 Parkview Plaza
Oakbrook Terrace, Illinois 60181-5555
NOTICE OF SPECIAL MEETING
TO BE HELD ON _______, 2001
NOTICE IS HEREBY GIVEN that a special meeting of shareholders (the
"Meeting") of Van Kampen New Jersey Value Municipal Income Trust (the "Target
Fund") will be held at the offices of Van Kampen Investments Inc., Parkview
Plaza, Oakbrook Terrace, Illinois 60181-5555 on _______, 2001 at [3:00] p.m.
(the "Meeting").
1. To approve or disapprove an Agreement and Plan of Reorganization
(the "Agreement and Plan of Reorganization") contemplating the
acquisition of substantially all of the assets and the assumption of
substantially all of the liabilities of the Target Fund by Van
Kampen Trust for Investment Grade New Jersey Municipals (the
"Acquiring Fund"), in exchange solely for an equal aggregate value
of newly-issued common shares of beneficial interest ("Acquiring
Fund Common Shares") of the Acquiring Fund and newly-issued auction
preferred shares ("Acquiring Fund APS") of the Acquiring Fund and
the distribution by the Target Fund of such Acquiring Fund Common
Shares to the holders of common shares of the Target Fund ("Target
Fund Common Shares") and such Acquiring Fund APS to the holders of
Auction Preferred Shares of the Target Fund ("Target Fund APS"), and
the dissolution under state law of the Target Fund and the
termination of the Target Fund's registration under the Investment
Company Act of 1940;
2. To transact such other business as properly may come before the
Meeting or any adjournment thereof.
If the proposed Reorganization is approved by the shareholders at the
Meeting and effected by the Target Fund and the Acquiring Fund, any Target Fund
shareholder (1) who files with the Target Fund before the taking of the vote on
the approval of such Agreement and Plan of Reorganization written objection to
the proposed Reorganization stating that he or she intends to demand payment for
his or her shares if the Reorganization takes place and (2) whose shares are not
voted in favor of such Agreement and Plan of Reorganization has or may have the
right to demand in writing from the Target Fund, within twenty days after the
date of mailing to him or her of notice in
writing that the Reorganization has become effective, payment for his or her
shares and an appraisal of the value thereof. The Target Fund and any such
shareholders shall in such cases have the rights and duties and shall follow the
procedure set forth in sections 88 to 98, inclusive, of chapter 156B of the
General Laws of The Commonwealth of Massachusetts. See "The
Reorganization--Agreement and Plan of Reorganization--Appraisal Rights" in the
Proxy Statement and Prospectus.
The Board of Trustees of the Target Fund has fixed the close of business
on January 31, 2001 as the record date for the determination of shareholders
entitled to notice of, and to vote at, the Meeting or any adjournment thereof.
A complete list of the shareholders of the Target Fund entitled to vote at
the Meetings will be available and open to the examination of any shareholder of
the Target Fund for any purpose germane to the Meeting during ordinary business
hours from and after [ ], at the offices of the Target Fund at the
address set forth above.
You are cordially invited to attend the Meeting. Shareholders who do not
expect to attend the Meeting in person are requested to complete, date and sign
the enclosed form of proxy and return it promptly in the envelope provided for
that purpose. The enclosed proxy is being solicited on behalf of the Board of
Trustees of the Target Fund.
For the Board of Trustees,
A. Thomas Smith III
Secretary
[ ], 2001
PROXY STATEMENT AND PROSPECTUS
VAN KAMPEN NEW JERSEY VALUE
MUNICIPAL INCOME TRUST
1 Parkview Plaza
Oakbrook Terrace, Illinois 60181-5555
SPECIAL MEETING OF SHAREHOLDERS
_______, 2001
This Proxy Statement and Prospectus is furnished to you as a shareholder
of Van Kampen New Jersey Value Municipal Income Trust (the "Target Fund"). A
Special Meeting of the shareholders of the Target Fund will be held on _______,
2001 to consider the items that are listed below and discussed in greater detail
elsewhere in this Proxy Statement and Prospectus. The Board of Trustees is
requesting shareholders to submit a proxy to be used at the Special Meeting to
vote the shares held by the shareholder submitting the proxy.
The proposals to be considered at the Special Meetings are:
1. To approve or disapprove an Agreement and Plan of Reorganization;
2 To transact such other business as may properly come before the
Special Meeting or any adjournment thereof.
The Agreement and Plan of Reorganization that you are being asked to
consider involves a transaction that will be referred to in this Proxy Statement
and Prospectus as the "Reorganization." In the Reorganization, Van Kampen Trust
for Investment Grade Municipals (the "Acquiring Fund" and, together with the
Target Fund, the "Funds") will acquire substantially all of the assets and
assume substantially all of the liabilities of the Target Fund solely in
exchange for 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 the Acquiring Fund
Common Shares and Acquiring Fund APS received in the Reorganization to its
shareholders and will then liquidate and terminate its registration under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Acquiring Fund
will continue to operate as a registered closed-end investment company with the
investment objective and policies described in this Proxy Statement and
Prospectus.
1
This Proxy Statement and Prospectus sets forth concisely the information
shareholders of the Target Fund should know before voting on the Reorganization
and constitutes an offering of Acquiring Fund Common Shares and Acquiring Fund
APS only. Please read it carefully and retain it for future reference. A
Statement of Additional Information dated [____________], 2001, relating to this
Proxy Statement and Prospectus (the "Statement of Additional Information") has
been filed with the Securities and Exchange Commission and is incorporated
herein by reference. If you wish to request the Statement of Additional
Information, please ask for the "Reorganization Statement of Additional
Information." In addition, each Fund will furnish, without charge, a copy of its
most recent annual report and, if applicable, semi-annual report to any
shareholder upon request. Any such request should be directed to Van Kampen
Investor Services Inc. by calling (800) 421-5666 or by writing the respective
fund at the address shown above.
----------
No person has been authorized to give any information or make any
representation not contained in this Proxy Statement and Prospectus and, if so
given or made, such information or representation must not be relied upon as
having been authorized. This Proxy Statement and 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 Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy of this Proxy Statement and
Prospectus. Any representation to the contrary is a criminal offense.
The date of this Proxy Statement and Prospectus is [ ], 2001.
2
TABLE OF CONTENTS
PAGE
----
INTRODUCTION........................................................... 5
THE REORGANIZATION..................................................... 7
SUMMARY................................................................ 7
RISK FACTORS AND SPECIAL CONSIDERATIONS................................ 18
New Jersey Municipal Securities..................................... 19
Interest Rate and Credit Risk....................................... 19
Non-diversification................................................. 19
Private Activity Bonds.............................................. 19
Taxes............................................................... 19
Leverage............................................................ 20
Inverse Floating Obligations........................................ 21
Options and Futures Transactions.................................... 21
Antitakeover Provisions............................................. 21
Ratings Considerations.............................................. 22
COMPARISON OF THE FUNDS................................................ 23
Financial Highlights................................................ 23
Investment Objective and Policies................................... 25
Special Considerations Relating to New Jersey Municipal Bonds....... 31
Investment Restrictions............................................. 31
Rating Agency Guidelines............................................ 33
Portfolio Composition............................................... 34
Portfolio Transactions.............................................. 35
Portfolio Turnover.................................................. 36
Net Asset Value..................................................... 36
Capital Shares...................................................... 37
Common Shares....................................................... 38
Preferred Shares.................................................... 39
Capitalization...................................................... 39
Certain Provisions of the Declarations of Trust..................... 40
Conversion to Open-End Fund......................................... 41
Management of the Funds............................................. 42
Management and Advisory Arrangements................................ 42
The Administrator................................................... 44
Codes of Ethics..................................................... 45
Voting Rights....................................................... 45
Dividends and Distributions......................................... 45
Automatic Dividend Reinvestment Plan................................ 47
Liquidation Rights of Holders of APS................................ 49
Federal Income Tax Rules Applicable to the Funds and
their Shareholders................................................ 49
3
PAGE
----
New Jersey Taxation of the Funds.................................... 51
AGREEMENT AND PLAN OF REORGANIZATION................................... 52
Terms of the Agreement and Plan of Reorganization................... 54
Valuation of Assets and Liabilities................................. 54
Surrender and Exchange of Share Certificates........................ 55
Federal Income Tax Consequences of the Reorganization............... 56
Appraisal Rights.................................................... 57
Certain Voting Information Regarding APS............................ 58
Shareholder Approval................................................ 58
OTHER INFORMATION...................................................... 59
Shareholder Information............................................. 59
Section 16(a) Beneficial Ownership Reporting Compliance............. 59
Shareholder Proposals............................................... 59
General............................................................. 59
INDEPENDENT AUDITORS REPORT............................................ 61
EXHIBIT I ECONOMIC AND OTHER CONDITIONS IN
NEW JERSEY............................................ I-1
EXHIBIT II RATINGS OF MUNICIPAL BONDS............................ II-1
EXHIBIT III SECTIONS 86 THROUGH 98 OF CHAPTER 156B
OF THE MASSACHUSETTS GENERAL LAWS
(THE MASSACHUSETTS BUSINESS
CORPORATION LAW)...................................... III-1
4
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies on behalf of the Board of Trustees of Van Kampen New
Jersey Value Municipal Income Trust (the "Target Fund") for use at the Special
Meeting to be held at the offices of Van Kampen Investments Inc., 1 Parkview
Plaza, Oakbrook Terrace, Illinois 60181-5555 on _______, 2001 at 3:00 p.m. (the
"Meeting"). The mailing address for the Target Fund and for Van Kampen Trust for
Investment Grade New Jersey Municipals (the "Acquiring Fund") is P.O. Box 5555,
Oakbrook Terrace, Illinois 60181-5555. The approximate mailing date of this
Proxy Statement and Prospectus is [ ], 2001.
Any person giving a proxy may revoke it at any time prior to its exercise
by executing a superseding proxy, by giving written notice of the revocation to
the Secretary of the Target Fund at the address indicated above or by voting in
person at the Meeting. All properly executed proxies received prior to the
Meeting will be voted at the Meeting in accordance with the instructions marked
thereon or otherwise as provided therein. Unless instructions to the contrary
are marked, proxies will be voted "FOR" the approval of the Agreement and Plan
of Reorganization between the Target Fund and the Acquiring Fund (the "Agreement
and Plan of Reorganization").
Assuming a quorum is present at the Meeting, approval of the Agreement and
Plan of Reorganization will require the affirmative vote of shareholders
representing a majority of the outstanding common shares of beneficial interest
("Target Fund Common Shares") and Auction Preferred Shares, liquidation
preference $25,000 per share ("Target Fund APS") of the Target Fund, voting as
separate classes.
The Board of Trustees the Target Fund has fixed the close of business on
January 31, 2001 as the record date (the "Record Date") for the determination of
shareholders entitled to notice of, and to vote at, the 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 2,499,940 Target Fund Common Shares
and 1,000 Target Fund APS. At the Record Date, the Acquiring Fund had
outstanding 3,935,130 Acquiring Fund Common Shares and 1,600 Acquiring Fund APS.
The Board of Trustees of the Target Fund knows of no business other than
that discussed above that will be presented for consideration at the 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.
In the Reorganization, the Acquiring Fund will issue its common shares of
beneficial interest, par value $.01 per share ("Acquiring Fund Common Shares")
5
and Auction Preferred Shares, par value $.01 per share, liquidation preference
$25,000 per share to the Target Fund based on the value of the assets
transferred to the Acquiring Fund by the Target Fund. These shares will then be
distributed by the Target Fund to its shareholders based on the value of the
shares held by each shareholder immediately prior to the Reorganization. A
holder of Target Fund Common Shares will receive newly-issued Acquiring Fund
Common Shares and a holder of Target Fund APS will receive newly-issued APS of
the Acquiring Fund.
This Proxy Statement and 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.
The Proxy Statement and Prospectus sets forth information about the Funds
that shareholders should know before considering the Reorganization and should
be retained for future reference. The Fund has authorized the solicitation of
proxies in connection with the Reorganization solely on the basis of this Proxy
Statement and Prospectus and the accompanying documents.
The address of the principal executive offices of the Funds is 1 Parkview
Plaza, Oakbrook Terrace, Illinois 60181-5555, and the telephone number is (630)
684-6000 or (800) 421-5666.
The Acquiring Fund Common Shares are listed on the New York Stock Exchange
(the "NYSE") under the ticker symbol "VTJ". The Target Fund Common Shares are
listed on the American Stock Exchange (the "AMEX") under the ticker symbol
"VJV". Subsequent to the Reorganization, the Acquiring Fund Common Shares will
continue to be listed on the NYSE under the ticker symbol "VTJ." Reports, proxy
materials and other information concerning the Acquiring Fund may be inspected
at the offices of the NYSE, 20 Broad, New York, New York 10005. Information
concerning the Target Fund may be inspected at the offices of the AMEX, 86
Trinity Place, New York, New York 10006.
6
THE REORGANIZATION
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and Prospectus and is qualified in its entirety by
reference to the more complete information contained in this Proxy Statement and
Prospectus and in the Agreement and Plan of Reorganization attached as Appendix
A to the Statement of Additional Information.
In this Proxy Statement and Prospectus, the term "Reorganization" refers
to the acquisition of substantially all of the assets and the assumption of
substantially all of the liabilities of the Target Fund and the subsequent
distribution of Acquiring Fund Common Shares and Acquiring Fund APS to the
holders of Target Fund Common Shares and Target Fund APS, respectively, and the
subsequent deregistration and dissolution of the Target Fund.
At a meeting of the Board of Trustees of the Target Fund, the
Reorganization was approved by the Board of Trustees by a unanimous vote.
Subject to obtaining the necessary approvals from the shareholders of the Target
Fund, the Board of Trustees of the Target Fund also deemed advisable the
deregistration of the Target Fund under the Investment Company Act of 1940, as
amended (the "1940 Act"), and its termination under the laws of The Commonwealth
of Massachusetts.
Each Fund seeks to provide holders of its common shares of beneficial
interest with a high level of current income exempt from federal income taxes,
consistent with preservation of capital. Both Funds also seek to offer
shareholders the opportunity to own securities exempt from New Jersey gross
income taxes. Each Fund seeks to achieve its investment objective primarily by
investing substantially all of its total assets in New Jersey municipal
securities rated investment grade at the time of investment.
Each Fund is a closed-end management investment company registered under
the 1940 Act; the Target Fund is classified as non-diversified and the Acquiring
Fund is classified as diversified. If the shareholders of the Target Fund
approve the Reorganization, 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 its
organization under Massachusetts law.
Based upon their evaluation of all relevant information, the Board of
Trustees of the Target Fund has determined that the Reorganization will benefit
the holders of Target Fund Common Shares. Specifically, after the
Reorganization, shareholders of the Target Fund will remain invested in a
closed-end fund with
7
an investment objective and policies substantially similar to the Target Fund's
investment objective and policies and that uses substantially the same
management personnel. In addition, it is anticipated that common shareholders of
the Target Fund will be subject to a reduced overall operating expense ratio
based on the anticipated pro forma combined total operating expenses and the
total combined assets of the surviving fund after the Reorganization. The Board
of Trustees also considered the relative tax positions of the Funds' portfolios.
It is not anticipated that the Reorganization will directly benefit the holders
of APS of either Fund; however, the Reorganization will not adversely affect the
holders of APS of either Fund and the expenses of the Reorganization will not be
borne by the holders of APS of either Fund.
If all of the requisite approvals are obtained, it is anticipated that the
Reorganization will occur as soon as practicable after such approval. Under the
Agreement and Plan of Reorganization, however, 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 such Fund to do so. The Agreement and Plan of Reorganization
may be terminated, and the Reorganization abandoned, whether before or after
approval by the Target Fund's shareholders, at any time prior to the Exchange
Date (as defined below), (i) by mutual consent of the Boards of Trustees of the
Funds or (ii) by the Board of Trustees of either Fund if any condition to that
Fund's obligations has not been fulfilled or waived by such Fund's Board of
Trustees.
Fee Table for Common Shareholders of the Target Fund and the Acquiring Fund as
of October 31, 2001
Actual Pro Forma
------ ---------
Target Fund Acquiring Fund Acquiring Fund
----------- -------------- --------------
Common Shareholder Transaction Expenses(a):
Maximum Sales Load (as a percentage of
offering price) ................................ None(b) None(b) None(b)
Dividend Reinvestment Plan Fees .................. None None None
Annual Expenses (as a percentage of
net assets attributable to Common Shares)
at October 31, 2000 ............................ 2.04% 1.85% 1.84%
Investment Advisory Fees(d) ...................... 1.06% 1.12% 1.08%
Interest Payments on Borrowed Funds .............. None None None
Total Annual Expenses(d) ......................... 2.04% 1.85% 1.84%
(a) No information is presented with respect to APS because neither Fund's
operating expenses or expenses of the Reorganization will be borne by the
holders of APS. Generally, APS are sold at a fixed liquidation preference
of $25,000 per share and investment return is set at an auction.
(b) Common Shares purchased in the secondary market may be subject to
brokerage commissions or other charges.
(c) No sales load will be charged on the issuance of 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.
(d) Based on assets of each Fund and pro forma Acquiring Fund, excluding
assets attributable to APS. If assets attributable to APS are included,
the investment advisory fees for each Fund and for pro forma Acquiring
Fund would be 0.65%, 0.65% and 0.65% and the Total Annual Expenses would
be 1.19%, 1.13% and 1.11%.
8
Example:
Cumulative Expenses Paid on Common Shares
for the Periods Indicated:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
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:
Target Fund.......................... $21 $64 $110 $237
Acquiring Fund....................... $19 $58 $100 $217
Pro Forma -- Acquiring Fund*......... $19 $58 $100 $216
* Assumes that the Reorganization had taken place on October 31, 2000.
The foregoing fee table is intended to assist investors in understanding
the costs and expenses that a common shareholder of each of the Funds will bear
directly or indirectly as compared to the costs and expenses that would be borne
by such investors taking into account the Reorganization. The example set forth
above assumes Common Shares of each Fund were purchased in the initial offerings
and the reinvestment of all dividends and distributions and uses a 5% annual
rate of return as mandated by Securities and Exchange Commission ("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.
Potential Benefits to Shareholders of the Target Fund as a Result of the
Reorganization
In approving the Reorganization, the Board of Trustees of the Target Fund
identified certain benefits that are likely to result from the Reorganization,
including lower aggregate operating expenses, per Common Share, greater
efficiency and flexibility in portfolio management, and a more liquid trading
market and increased analyst attention for the Common Shares of the combined
fund. Following the Reorganization, shareholders of the Target Fund will remain
invested in a closed-end fund that has investment objectives and policies
substantially similar to those of the Target Fund. The Board of Trustees also
considered the possible risks and costs of combining the Funds, and examined the
relative credit strength, maturity characteristics, mix of type and purpose, and
yield of the Funds' portfolios of municipal securities and the costs involved in
a transaction such as the Reorganization. The Board of Trustees noted the many
similarities between the Funds, including their substantially similar investment
objectives and investment policies, their use of substantially the same
management personnel and their similar portfolios. The Board also considered the
relative tax positions of each of the Funds' portfolios. Based on these and
other factors, the Board of Trustees concluded that the Reorganization is likely
to benefit the shareholders of the Target Fund.
9
The surviving fund that would result from the Reorganization would have a
larger asset base than either of the Funds has currently. Based on data
presented by Van Kampen Investment Advisory Corp., investment adviser to each of
the Funds (the "Adviser"), the Board of Trustees of the Target Fund believes
that administrative expenses for a larger combined fund would be less than the
aggregate expenses for the individual Funds, resulting in a lower expense ratio
for common shareholders of the combined fund and potentially higher earnings per
Target Fund Common Share. In particular, certain fixed costs, such as costs of
printing shareholder reports and proxy statements, legal expenses, audit fees,
mailing costs and other expenses will be spread across a larger asset base,
thereby lowering the expense ratio of the combined fund.
In approving the Reorganization, the Board of Trustees of each Fund
determined that the Reorganization is in the best interests of that Fund and,
with respect to net asset value and liquidation preference, that the interests
of existing shareholders of that Fund would not be diluted as a result of the
Reorganization. The Board of Trustees of the Acquiring Fund also considered that
although the Acquiring Fund will realize a smaller decline in its total
operating expenses than will the Target Fund, the Acquiring Fund will also pay a
significantly lower proportion of the expenses of the Reorganization.
It is not anticipated that the Reorganization directly would benefit the
holders of APS of either of the Funds; however, the Reorganization will not
materially adversely affect the holders of APS of either of the Funds and the
expenses of the Reorganization will not be borne by the holders of APS of either
of the Funds.
Summary of Voting and Meeting Requirements
The affirmative vote of shareholders of the Target Fund representing more
than 50% of the outstanding Target Fund Common Shares and of the Target Fund
APS, each voting separately as a class, is required to approve the Agreement and
Plan of Reorganization.
Shareholders of the Target Fund may vote by mail, by returning the
enclosed ballot, or in person at the Meeting. In addition, shareholders may vote
by telephone or via the internet. Instructions for telephone and internet voting
are included with the enclosed proxy voting material. The required control
number for telephone and internet voting is printed on the enclosed proxy card.
The control number is used to match proxies with shareholders' respective
accounts and to ensure that, if multiple proxies are executed, shares are voted
in accordance with the proxy bearing the latest date. Shareholders who execute
proxies by mail, telephone or the internet may revoke them at any time prior to
the Meeting by filing with the Fund a written notice of revocation, by executing
another proxy bearing a later date or by attending the Meeting and voting in
person. Van Kampen Investments Inc. ("Van Kampen") and the Fund employ
procedures for telephone and internet voting, such as requiring the control
number from the
10
proxy card in order to vote by either of these methods, which they consider to
be reasonable to confirm that the instructions received are genuine. If
reasonable procedures are employed, neither Van Kampen nor the Fund will be
liable for following telephone or internet instructions which it believes to be
genuine.
All properly executed proxies received prior to the Meeting will be voted
at the Meeting in accordance with the instructions marked thereon. Proxies
received prior to the Meeting on which no vote is indicated will be voted "For"
each proposal as to which it is entitled to vote. 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. Abstentions
and broker non-votes will have the same effect as votes "Against" the proposal,
since approval of the proposal is based on the affirmative vote of a percentage
of the total shares outstanding. A majority of the outstanding shares entitled
to vote must be present in person or by proxy to have a quorum to conduct
business at the Meeting. Abstentions and broker non-votes will be deemed present
for quorum purposes.
The Board of Trustees of the Target Fund knows of no business other than
that described in the Notice which will be presented for consideration at the
Meeting. If any other matters are properly presented, it is the intention of the
persons named on the enclosed proxy to vote proxies in accordance with their
best judgment. In the event that a quorum is present at the Meeting but
sufficient votes to approve any of the proposals are not received, the persons
named as proxies may propose one or more adjournments of the Meeting to permit
further solicitation of proxies on such proposal(s), provided that they
determine 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 nature of the particular proposal(s), the percentage of
votes then cast, the percentage of negative votes then cast, the nature of the
proposed solicitation activities and the nature of the reasons for such further
solicitation.
11
About the Target Fund The Target Fund was organized as a business trust
under the laws of The Commonwealth of
Massachusetts on July 8, 1992 and commenced
operations on April 30, 1993. The Target Fund is a
non-diversified, closed-end management investment
company whose investment objective is to provide
common shareholders with a high level of current
income exempt from federal income tax, consistent
with preservation of capital. The Target Fund also
seeks to offer its common shareholders the
opportunity to own securities exempt from New
Jersey gross income taxes. The Target Fund seeks
to achieve its investment objective by investing
substantially all of its assets in New Jersey
municipal securities rated investment grade at the
time of investment. Municipal securities are
obligations issued by or on behalf of states,
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 the
gross income for federal income tax purposes. New
Jersey municipal securities are municipal
securities which, in the opinion of bond counsel
or other counsel of the issuer of such securities
are, at the time of issuance, exempt from New
Jersey gross income taxes. Under normal market
conditions, at least 80% of the Target Fund's net
assets are invested in New Jersey municipal
securities. Investment grade rated securities are
securities rated BBB or higher by Standard &
Poor's ("S&P") or Baa or higher by Moody's
Investors Service ("Moody's") (or comparably rated
by any other nationally recognized statistical
rating organization) in the case of long-term
obligations, and have equivalent ratings in the
case of short-term obligations. See "Comparison of
the Funds - Investment Objectives and Policies."
As of October 31, 2000 the Target Fund had
outstanding 2,499,940 Target Fund Common Shares
and one series of Target Fund APS, with an aggre-
12
gate liquidation preference of $25,000,000. As of
October 31, 2000, the Target Fund had net assets
of $61,185,181.
About the Acquiring Fund The Acquiring Fund was organized as a business
trust under the laws of The Commonwealth of
Massachusetts on January 21, 1992 and commenced
operations on March 27, 1992. The Acquiring Fund
is a diversified, closed-end management investment
company whose investment objective is to provide
common shareholders with a high level of current
income exempt from federal income tax, consistent
with preservation of capital. The Acquiring Fund
also seeks to offer its common shareholders the
opportunity to own securities exempt from New
Jersey gross income taxes. The Acquiring Fund
seeks to achieve its investment objective by
investing substantially all of its assets in New
Jersey municipal securities rated investment grade
at the time of investment. Under normal market
conditions, at least 80% of the Acquiring Fund's
net assets are invested in New Jersey municipal
securities. See "Comparison of the
Funds--Investment Objectives and Policies."
As of October 31, 2000, the Acquiring Fund had
outstanding 3,935,130 Acquiring Fund Common Shares
and one series of Acquiring Fund APS, with an
aggregate liquidation preference of $40,000,000.
As of October 31, 2000, the Acquiring Fund had net
assets of $105,300,750.
Comparison of the Funds Investment Objectives and Policies. The Funds have
substantially similar investment objectives and
policies. Both Funds seek to provide common
shareholders with a high level of current income
exempt from federal income tax, consistent with
preservation of capital. Both Funds also seek to
offer their common shareholders the opportunity to
own securities exempt from New Jersey gross income
taxes and invest substantially all of their assets
in New Jersey municipal securities rated
investment grade at the time of investment. Under
normal market conditions, each Fund invests at
least 80% of its assets in
13
New Jersey municipal securities. See "Comparison
of the Funds -- Investment Objective and
Policies."
Capital Shares. Each Fund has outstanding both
Common Shares and APS. Target Fund Common Shares
are traded on the American Stock Exchange (the
"AMEX") under the symbol "VJV." Acquiring Fund
Common Shares are traded on the New York Stock
Exchange under the symbol "VTJ." As of October 31,
2000, (i) the net asset value per share for Target
Fund Common Shares was $14.47 and the market price
per share was $13.38; and (ii) the net asset value
per share for Acquiring Fund Common Shares was
$16.59 and the market price per share was $13.81.
The APS of each of the Funds have a liquidation
preference of $25,000 per share and are sold
principally at auctions. See "Comparison of the
Funds -- Capital Shares."
Auctions are generally held every seven days for
the Target Fund APS and every twenty-eight days
for the Acquiring Fund APS unless the applicable
Fund elects, subject to certain limitations, to
declare a special dividend period. In connection
with the Reorganization, a holder of Target Fund
APS would receive Acquiring Fund APS. Accordingly,
the Acquiring Fund APS received in connection with
the Reorganization would have a regular dividend
period of twenty-eight days rather than seven
days, as is the case for the Target Fund APS. In
all other material respects, the terms of the
Target Fund APS and the Acquiring Fund APS are
substantially similar. The following table
provides information about the dividend rates for
each Fund's APS as of a recent auction.
Auction Dividend
Date Fund Rate
---- ---- ----
January 12, 2001 Target Fund 3.521%
December 29, 2000 Acquiring Fund 3.97%
14
Investment Advisory Fees. The investment adviser
for each of the Funds is Van Kampen Investment
Advisory Corp. The principal business address of
the Adviser is 1 Parkview Plaza, Oakbrook Terrace,
Illinois 60181-5555. The Adviser is a wholly owned
subsidiary of Van Kampen. Van Kampen 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 $97 billion under management or supervision
as of December 31, 2000. The Adviser and its
affiliates currently serve as investment adviser
to municipal bond funds with combined assets of
over $11 billion. Timothy D. Haney has served as
portfolio manager for both the Target Fund and the
Acquiring Fund since 1995.
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 0.65% of such Fund's average weekly net
assets, including assets attributable to its APS.
Subsequent to the Reorganization, the Adviser will
continue to receive compensation at the rate of
0.65% of the average weekly net assets, including
assets attributable to APS, of the combined fund.
Administration Fees. Van Kampen Funds Inc. (the
"Administrator") serves as administrator to each
of the Funds. The principal business address of
the Administrator is 1 Parkview Plaza, Oakbrook
Terrace, Illinois 60181-5555. The administrative
services provided by the Administrator include
record keeping and reporting responsibilities with
respect to such Fund's portfolio and preferred
shares and providing certain services to
shareholders. Each Fund pays the Administrator a
monthly administrative fee at an annual rate of
0.20% of the average net assets of the Fund.
Custodian and Transfer Agent Fees. State Street
Bank and Trust Company is the custodian, trans-
15
fer agent, dividend disbursing agent and registrar
for the Common Shares of each of the Funds. It
principal business address is: P.O. Box 43071,
Providence, Rhode Island, 02940-3071. Bankers
Trust Company is the transfer agent, registrar and
auction agent for each Fund's APS. Its business
address is: Four Albany Street, New York, New York
10006.
Overall Expense Ratio. As of October 31, 2000, the
overall annualized operating expense ratio for the
Target Fund was 1.19%, based on net assets of
approximately $61.2 million, including net assets
attributable to APS; the overall annualized
operating expense ratio for the Acquiring Fund was
1.13%, based on net assets of approximately $105.3
million, including net assets attributable to APS.
If the Reorganization had taken place on October
31, 2000, the overall pro forma operating expense
ratio for the Acquiring Fund would have been
1.11%, based on net assets of approximately $166
million, including net assets attributable to APS.
Purchases and Sales of Common Shares and APS.
Purchase and sale procedures for the Common Shares
of each of the Funds are identical, and investors
typically purchase and sell Common Shares of the
Funds through a registered broker-dealer on the
NYSE or AMEX, as the case may be, 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.
Purchase and sale procedures for the APS of each
of the Funds also are substantially identical.
Such APS generally are purchased and sold at
separate auctions conducted on a regular basis by
Bankers Trust Company, as the auction agent for
each Fund's APS (the "Auction Agent"). Unless
otherwise permitted by the Funds, existing and
potential holders of Acquiring Fund or Target Fund
APS, as the case may be, only may participate in
auctions through their broker-deal-
16
ers. 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.
Ratings of APS. The Target Fund APS and the
Acquiring Fund APS have each been assigned a
rating of AAA from Standard & Poor's ("S&P") and
"aaa" from Moody's Investors Service, Inc.
("Moody's"). See "Comparison of the Funds --
Rating Agency Guidelines."
Ratings of Municipal Obligations. Under normal
market conditions, each Fund invests substantially
all of its assets in New Jersey municipal
obligations that are at the time of purchase
considered investment grade. See Exhibit II --
"Ratings of Municipal Bonds."
Portfolio Transactions. The portfolio transactions
in which the Funds may engage are similar, as are
the procedures for such transactions. See
"Comparison of the Funds -- Portfolio
Transactions."
Dividends and Distributions. The methods of
dividend payment and distributions are similar for
the Funds, both with respect to the Common Shares
and the APS of each Fund. See "Comparison of the
Funds -- Dividends and Distributions."
Net Asset Value. The net asset value per Common
Share of each Fund is determined after the close
of business on the NYSE (generally, 4:00 p.m.,
Eastern time) on the last business day in each
17
week. For purposes 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
preference of the outstanding shares of APS of the
Fund is divided by the total number of Common
Shares of the Fund outstanding at such time. See
"Comparison of the Funds -- Net Asset Value."
Voting Rights. The corresponding voting rights of
the holders of each Fund's Common Shares are
substantially similar. The corresponding voting
rights of the holders of each Fund's APS are also
substantially similar. See "Comparison of the
Funds -- Capital Shares."
Shareholder Services. An automatic dividend
reinvestment plan is available to holders of each
Fund's Common Shares. The plans are substantially
similar for the Funds. See "Comparison of the
Funds -- Automatic Dividend Reinvestment Plan."
Other shareholder services, including the
provision of annual and semi-annual reports, are
the same for the Funds.
Outstanding Securities of the Target Fund and the
Acquiring Fund as of October 31, 2000
Amount
Amount Held Outstanding
by Fund Exclusive of Amount
Amount for its Own Shown in Previous
Title of Class Authorized Account Column
-------------- ---------- ------- ------
Target Fund
Common Shares ................ Unlimited -0- 2,499,940
APS .......................... 100,000,000 -0- 1,000*
Acquiring Fund
Common Shares ................ Unlimited -0- 3,935,130
APS .......................... 100,000,000 -0- 1,600*
* Reflects a two-for-one share split and simultaneous reduction of the
liquidation preference per share from $50,000 to $25,000, which became effective
as of the close of business on April 24, 1999.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Since each of the Funds invests substantially all of its assets, under
normal market conditions, in investment-grade New Jersey municipal securities,
any risks inherent in such investments are equally applicable to both Funds and
will
18
apply to the combined fund after the Reorganization. It is expected that the
Reorganization itself will not adversely affect the rights of holders of Common
Shares or of APS of either of the Funds or create additional risks.
New Jersey Municipal Securities
Since each of the Funds invests substantially all of its assets, under
normal market conditions, in investment-grade New Jersey municipal securities,
each Fund is more exposed to risks affecting issuers of New Jersey municipal
securities than is a municipal bond fund that invests more widely. See
"Comparison of the Funds--Special Considerations Relating to New Jersey
Municipal Securities" and Exhibit I--"Economic and Other Conditions in New
Jersey."
Interest Rate and Credit Risk
Each Fund invests in municipal securities, which are subject to interest
rate and credit 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 is the risk that the issuer will be unable to pay the interest or
principal when due. The degree of credit risk depends on both the financial
condition of the issuer and the terms of the obligation. The Funds invest in
municipal bonds that are rated investment grade by S&P or Moody's (or comparably
rated by another nationally recognized statistical rating organization).
Securities rated in the lowest investment grade category may have certain
speculative characteristics.
Non-diversification
The Target Fund is registered as a "non-diversified" investment company.
This means that the Fund may invest a greater percentage of its assets in a
single issuer than a diversified investment company. Since a Fund may invest a
relatively high percentage of its assets in a limited number of issuers, the
Target Fund may be more exposed to any single economic, political or regulatory
occurrence than a more widely-diversified fund. The Acquiring Fund is registered
as a "diversified" investment company. Both Funds are each required to meet the
diversification requirements of applicable federal income tax law.
Private Activity Bonds
Each Fund may invest in certain tax-exempt securities classified as
"private activity bonds." These securities may subject certain investors to the
federal alternative minimum tax.
Taxes
It is possible that a Fund may not be able to fully dispose of a
sufficient portion of its assets subject to New Jersey gross income tax by the
last business day of the calendar year. This could subject shares of a Fund to
New Jersey gross
19
income tax. See "Comparison of the Funds -- Federal Income Tax Rules Applicable
to the Funds and their Shareholders."
Leverage
Use of leverage, through the issuance of APS, involves certain risks to
holders of Common Shares of the Funds. For example, each Fund's issuance of APS
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
amount of taxable income allocable to, the APS of a Fund will affect the yield
to holders of Common Shares of the Fund. In certain circumstances, when a Fund
is required to allocate taxable income to holders of its APS, the 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 the Fund were not leveraged
as long as the 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 APS.
Similarly, since a pro rata portion of each Fund's net realized capital gains is
generally payable to holders of the Fund's Common Shares, the use of leverage
will increase the amount of such gains distributed to holders of the 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
APS approaches the net return on the Fund's investment portfolio, the benefit of
leverage to holders of Common Shares of the Fund will be decreased. If the
current dividend rate (and any Additional Dividend) on the APS were to exceed
the net return on a Fund's portfolio, holders of Common Shares of the Fund would
receive a lower rate of return than if the Fund were not leveraged. Similarly,
since both the costs of issuing APS and any decline in the value of a Fund's
investments (including investments purchased with the proceeds from any APS
offering) will be borne entirely by holders of the 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 the Fund were not leveraged.
If a Fund is liquidated, holders of that Fund's APS will be entitled to receive
liquidating distributions before any distribution is made to holders of Common
Shares of the Fund.
In an extreme case, a decline in net asset value could affect a Fund's
ability
20
to pay dividends on its Common Shares. Failure to make such dividend payments
could adversely affect the Fund's qualification as a regulated investment
company under the federal tax laws. See "Comparison of the Funds -- Federal
Income Tax Rules Applicable to the Funds and their Shareholders." 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 APS, the Fund may have
to liquidate certain of its investments. In addition, each Fund has the
authority to redeem its APS for any reason and may be required to redeem all or
part of its APS in the following circumstances:
o if the asset coverage for the APS declines below 200%, either as a
result of a decline in the value of the Fund's portfolio investments
or as a result of the repurchase of Common Shares in tender offers
or otherwise, or
o in order to maintain the asset coverage guidelines established by
Moody's and S&P in rating the APS.
Redemption of the APS or insufficient investment income to make dividend
payments, may reduce the net asset value of a Fund's Common Shares and require
the Fund to liquidate a portion of its investments at a time when it may be
disadvantageous to do so.
Inverse Floating Obligations
A Fund's investments in "inverse floating obligations" or "residual
interest bonds" provide investment leverage because their market value increases
or decreases in response to market changes at a greater rate than fixed rate,
long-term tax exempt securities. The market values of such securities are more
volatile than the market values of fixed rate, tax exempt securities.
Options and Futures Transactions
Each Fund may engage in certain options and futures transactions to reduce
its exposure to interest rate movements. If a Fund incorrectly forecasts market
values, interest rates or other factors, that Fund's performance could suffer.
Each Fund also may suffer a loss if the other party to the transaction fails to
meet its obligations. The Funds are not required to use hedging and may choose
not to do so.
Anti-takeover Provisions
The Declaration of Trust of each of the Funds (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
shareholders to sell their shares at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of the Fund.
21
Ratings Considerations
The Funds have received ratings of their APS of "AAA" from S&P and "aaa"
from Moody's. In order to maintain these ratings, the Funds are required to
maintain portfolio holdings meeting specified guidelines of such rating
agencies. These guidelines may impose asset coverage requirements that are more
stringent than those imposed by the 1940 Act.
As described by Moody's and S&P, a preferred stock rating is an assessment
of the capacity and willingness of an issuer to pay preferred stock obligations.
The ratings of the APS are not recommendations to purchase, hold or sell APS,
inasmuch as the ratings do not comment as to market price or suitability for a
particular investor, nor do the rating agency guidelines address the likelihood
that a holder of APS will be able to sell such shares in an auction. The ratings
are based on current information furnished to Moody's and S&P by the Funds and
the Adviser and information obtained from other sources. The ratings may be
changed, suspended or withdrawn as a result of changes in, or the unavailability
of, such information. The Common Shares of the Funds have not been rated by a
nationally recognized statistical rating organization.
The Board of Trustees of each of the Funds, without shareholder approval,
may amend, alter or repeal certain definitions or restrictions which have been
adopted by the Fund pursuant to the rating agency guidelines, in the event the
Fund receives confirmation from the rating agencies that any such amendment,
alteration or repeal would not impair the ratings then assigned to its APS.
22
COMPARISON OF THE FUNDS
Target Fund
Financial Highlights
The following schedule presents financial highlights for one common share of the
Target Fund outstanding throughout the periods indicated.
Year Ended October 31,
----------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
NET ASSET VALUE, BEGINNING OF THE PERIOD (A) ............................. $ 14.02 $ 15.84 $ 15.12 $ 14.32 $ 14.20
------- ------- ------- ------- -------
Net Investment Income .................................................. 1.11 1.09 1.07 1.09 1.10
Net Realized and Unrealized Gain/Loss .................................. .55 (1.86) .73 .78 .05
------- ------- ------- ------- -------
Total from Investment Operations ......................................... 1.66 (.77) 1.80 1.87 1.15
------- ------- ------- ------- -------
Less:
Distributions from Net Investment Income:
Paid to Common Shareholders ........................................... .83 .76 .75 .74 .70
Common Share Equivalent of Distributions Paid to Preferred Shareholders .38 .29 .33 .33 .33
Distributions from Net Realized Gain:
Paid to Common Shareholders ........................................... -0- -0- -0- -0- -0-
Common Share Equivalent of Distributions Paid to Preferred Shareholders -0- -0- -0- -0- -0-
------- ------- ------- ------- -------
Total Distributions ...................................................... 1.21 1.05 1.08 1.07 $ 14.32
------- ------- ------- ------- -------
NET ASSET VALUE, END OF THE PERIOD ....................................... $ 14.47 $ 14.02 $ 15.84 $ 15.12 $11.625
======= ======= ======= ======= =======
Market Price Per Share at End of the Period .............................. $13.375 $12.250 $14.750 $13.375 5.98%
Total Investment Return at Market Price (b) .............................. 16.31% -12.40% 16.12% 21.79% 5.98%
Total Return at Net Asset Value (c) ...................................... 9.47% -6.96% 9.94% 11.09% 5.91%
Net Assets at End of the Period (In millions) ............................ $ 61.2 $ 60.0 $ 64.6 $ 62.8 $ 60.8
Ratio of Expenses to Average Net Assets Applicable to Common Shares** .... 2.04% 1.95% 2.01% 2.09% 2.15%
Ratio of Net Investment Income to Average Net
Assets Applicable to Common Shares (d) ................................. 5.24% 5.26% 4.78% 5.23% 5.40%
Portfolio Turnover ....................................................... 11% 14% 10% 8% 25%
* Non-Annualized
** Ratio of Expenses to Average Net Assets Including Preferred Shares .... 1.19% 1.18% 1.22% 1.24% 1.26%
April 30, 1993
(Commencement
of Investment
Year Ended October 31, Operations) to
---------------------- October
1995 1994 31, 1993
------- ------- -------
NET ASSET VALUE, BEGINNING OF THE PERIOD (A) ............................. $ 12.14 $ 15.60 $ 14.64
------- ------- -------
Net Investment Income .................................................. 1.09 1.04 .38
Net Realized and Unrealized Gain/Loss .................................. 2.07 (3.46) .91
------- ------- -------
Total from Investment Operations ......................................... 3.16 (2.42) 1.29
------- ------- -------
Less:
Distributions from Net Investment Income:
Paid to Common Shareholders ........................................... .74 .78 .26
Common Share Equivalent of Distributions Paid to Preferred Shareholders .36 .25 .07
Distributions from Net Realized Gain:
Paid to Common Shareholders ........................................... -0- .01 -0-
Common Share Equivalent of Distributions Paid to Preferred Shareholders -0- -0- -0-
------- ------- -------
Total Distributions ...................................................... $ 14.20 $ 12.14 $ 15.60
------- ------- -------
NET ASSET VALUE, END OF THE PERIOD ....................................... $11.625 $10.875 $14.625
======= ======= =======
Market Price Per Share at End of the Period .............................. 13.78% -20.92% -.78%*
Total Investment Return at Market Price (b) .............................. 13.78% -20.92% -.78%*
Total Return at Net Asset Value (c) ...................................... 23.66% -17.60% 5.78%*
Net Assets at End of the Period (In millions) ............................ $ 60.5 $ 55.3 $ 64.0
Ratio of Expenses to Average Net Assets Applicable to Common Shares** .... 2.30% 2.24% 2.01%
Ratio of Net Investment Income to Average Net
Assets Applicable to Common Shares (d) ................................. 5.51% 5.69% 4.07%
Portfolio Turnover ....................................................... 34% 53% 7%*
* Non-Annualized
** Ratio of Expenses to Average Net Assets Including Preferred Shares .... 1.31% 1.31% 1.47%
(a) Net Asset Value at April 30, 1993, is adjusted for common and preferred
share offering costs of $.362 per common share.
(b) Total return based on market price assumes an investment at the 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 stock
price at the end of the period indicated.
(c) Total return based on net asset value (NAV) assumes an investment at the
beginning of the period indicated, reinvestment of all distributions for
the period, and sale of all shares at the end of the period, all at NAV.
(d) Net Investment Income is adjusted for the common share equivalent of
distributions paid to preferred shareholders.
See Notes to Financial Statements
23
Acquiring Fund
Financial Highlights
The following schedule presents financial highlights for one common share of the
Acquiring Fund outstanding throughout the periods indicated.
Year Ended October 31
--------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
NET ASSET VALUE, BEGINNING OF THE
PERIOD (A) ........................................................ $ 16.12 $ 18.17 $ 17.57 $ 16.95 $ 16.91
--------- --------- --------- --------- ---------
Net Investment Income ............................................. 1.25 1.25 1.26 1.29 1.29
Net Realized and Unrealized Gain/Loss ............................. .55 (1.96) .64 .65 .08
--------- --------- --------- --------- ---------
Total from Investment Operations .................................... 1.80 (.71) 1.90 1.94 1.37
--------- --------- --------- --------- ---------
Less:
Distributions from Net Investment Income:
Paid to Common Shareholders ...................................... .95 .95 .95 .95 .94
Common Share Equivalent of Distributions
Paid to Preferred Shareholders ................................. .38 .30 .35 .36 .36
Distributions from Net Realized Gain:
Paid to Common Shareholders ...................................... -0- .07 -0- .01 .02
Common Share Equivalent of Distributions
Paid to Preferred Shareholders ................................. -0- .02 -0- -0- .01
--------- --------- --------- --------- ---------
Total Distributions ................................................. 1.33 1.34 1.30 1.32 1.33
--------- --------- --------- --------- ---------
NET ASSET VALUE, END OF THE PERIOD .................................. $ 16.59 $ 16.12 $ 18.17 $ 17.57 $ 16.95
========= ========= ========= ========= =========
Market Price Per Share at End of the Period ......................... $ 13.8125 $ 16.1875 $ 17.6250 $ 16.5625 $ 15.375
Total Investment Return at Market Price (b) ......................... -8.98% -2.61% 12.37% 14.32% 10.91%
Total Return at Net Asset Value (c) ................................. 9.12% -5.97% 9.04% 9.61% 6.09%
Net Assets at End of the Period (In millions) ...................... $ 105.3 $ 103.4 $ 111.3 $ 109.0 $ 106.5
Ratio of Expenses to Average Net Assets Applicable to Common Shares** 1.85% 1.75% 1.73% 1.74% 1.80%
Ratio of Net Investment Income to Average Net
Assets Applicable to Common Shares (d) ............................ 5.36% 5.45% 5.08% 5.44% 5.50%
Portfolio Turnover .................................................. 19% 6% 10% 6% 11%
* Non-Annualized
** Ratio of Expenses to Average Net Assets Including Preferred Shares 1.13% 1.10% 1.10% 1.09% 1.12%
March 27, 1992
(commencement
of Investment
Year Ended October 31 Operations) to
--------------------------------- October 31,
1995 1994 1993 1992
--------- --------- --------- ---------
NET ASSET VALUE, BEGINNING OF THE
PERIOD (A) ........................................................ $ 14.80 $ 18.18 $ 14.88 $ 14.68
--------- --------- --------- ---------
Net Investment Income ............................................. 1.29 1.29 1.31 .58
Net Realized and Unrealized Gain/Loss ............................. 2.13 (3.37) 3.31 .15
--------- --------- --------- ---------
Total from Investment Operations .................................... 3.42 (2.08) 4.62 .73
--------- --------- --------- ---------
Less:
Distributions from Net Investment Income:
Paid to Common Shareholders ...................................... .92 .93 .92 .39
Common Share Equivalent of Distributions
Paid to Preferred Shareholders ................................. .39 .29 .28 .14
Distributions from Net Realized Gain:
Paid to Common Shareholders ...................................... -0- .06 .09 -0-
Common Share Equivalent of Distributions
Paid to Preferred Shareholders ................................. -0- .02 .03 -0-
--------- --------- --------- ---------
Total Distributions ................................................. 1.31 1.30 1.32 .53
--------- --------- --------- ---------
NET ASSET VALUE, END OF THE PERIOD .................................. $ 16.91 $ 14.80 $ 18.18 $ 14.88
========= ========= ========= =========
Market Price Per Share at End of the Period ......................... $ 14.750 $ 13.125 $ 16.750 $ 14.750
Total Investment Return at Market Price (b) ......................... 19.79% -16.32% 20.92% .83%*
Total Return at Net Asset Value (c) ................................. 21.03% -13.59% 29.84% 1.62%*
Net Assets at End of the Period (In millions) ...................... $ 106.4 $ 98.1 $ 111.4 $ 98.4
Ratio of Expenses to Average Net Assets Applicable to Common Shares** 1.89% 1.85% 1.80% 1.77%
Ratio of Net Investment Income to Average Net
Assets Applicable to Common Shares (d) ............................ 5.63% 5.99% 6.15% 4.83%
Portfolio Turnover .................................................. 14% 12% 19% 28%*
* Non-Annualized
** Ratio of Expenses to Average Net Assets Including Preferred Shares 1.15% 1.15% 1.12% 1.23%
(a) Net Asset Value at March 27, 1992, is adjusted for common and preferred
share offering costs of $.322 per common share.
(b) Total return based on market price assumes an investment at the 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 stock
price at the end of the period indicated.
(c) Total return based on net asset value (NAV) assumes an investment at the
beginning of the period indicated, reinvestment of all distributions for
the period, and sale of all shares at the end of the period, all at NAV.
(d) Net Investment Income is adjusted for the common share equivalent of
distributions paid to preferred shareholders.
See Notes to Financial Statements
24
Investment Objective and Policies
The structure, organization and investment policies of the Funds are
substantially similar, with the differences between the Target Fund and the
Acquiring Fund set forth below. Each Fund's investment objective is to provide
common shareholders with a high level of current income exempt from federal
income tax, consistent with preservation of capital. Each Fund also seeks to
offer its common shareholders the opportunity to own securities exempt from New
Jersey gross income taxes.
Under normal market conditions, each Fund invests substantially all of its
assets in New Jersey municipal securities rated investment grade at the time of
investment. Investment grade rated securities are rated BBB or higher by S&P or
Baa or higher by Moody's (or comparably rated by any other nationally recognized
statistical rating organization) in the case of long-term obligations, and have
equivalent ratings in the case of short-term obligations. Securities rated Baa
by Moody's are considered by Moody's as medium-grade obligations which lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Securities rated BBB by S&P are regarded by S&P as
having an adequate capacity to pay interest and repay principal. Neither Fund
invests in unrated New Jersey municipal securities.
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.
New Jersey Municipal Securities. Municipal securities are obligations
issued by or on behalf of states, 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 federal income tax purposes. New Jersey municipal
securities are municipal securities which in the opinion of bond counsel or
other counsel to the issuer of such securities are, at the time of issuance,
exempt from New Jersey gross income taxes. Under normal market conditions, at
least 80% of each Fund's net assets are invested in municipal securities. The
Funds have not established any limit on the percentage of their respective
portfolios that may be invested in New Jersey municipal securities subject to
the alternative minimum tax provisions of federal tax law, and a substantial
portion of the income produced by a Fund may be taxable under the federal
alternative minimum tax.
25
The two principal classifications of municipal securities are "general
obligation" and "revenue" securities. "General obligation" securities are
secured by the issuee's pledge of its faith, credit and taxing power for the
payment of principal and interest. "Revenue" securities are usually payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
revenue source. Industrial development bonds are usually revenue securities, the
credit quality of which is normally directly related to the credit standing of
the industrial user involved.
Within these principal classifications of municipal securities, there are
a variety of categories of municipal securities, including fixed and variable
rate securities, municipal bonds, municipal notes, municipal leases, custodial
receipts, participation certificates and municipal securities the terms of which
include elements of, or are similar in effect to, certain Strategic Transactions
(as defined below) in which the Funds may engage. Variable rate securities bear
rates of interest that are adjusted periodically according to formulae intended
to reflect market rates of interest and include securities whose rates vary
inversely with changes in market rates of interest. Neither Fund may invest more
than 15% of its total assets in municipal securities whose rates vary inversely
with changes in market rates of interest. Municipal notes include tax, revenue
and bond anticipation notes of short maturity, generally less than three years,
which are issued to obtain temporary funds for various public purposes.
Municipal leases are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities. Certain
municipal lease obligations may include "nonappropriation" 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. Custodial receipts are underwritten by securities dealers or banks
and evidence ownership of future interest payments, principal payments or both
on certain municipal securities. Participation certificates are obligations
issued by 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. Municipal
securities may not be backed by the faith, credit and taxing power of the
issuer. The Funds may also invest in New Jersey municipal securities backed by
original issue insurance or secondary market insurance (collectively,
"insurance").
The Funds do not generally invest more than 25% of their respective total
assets in any one industry. Governmental issuers of New Jersey municipal
securities are not considered part of any "industry." However, New Jersey
municipal securities backed only by the assets and revenues of non-governmental
users may for this purpose be deemed to be issued by such non-governmental
users, and the 25% limitation would apply to such obligations. It is, therefore,
possible that a Fund may invest more than 25% of its total assets in a broader
seg-
26
ment of the New Jersey municipal securities market, such as revenue obligations
of hospitals and other health care facilities, housing agency revenue
obligations, or airport revenue obligations.
Temporary Defensive Strategies. At times the Adviser may judge that
conditions in the markets for New Jersey 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 such Fund's assets. In
implementing these "defensive" strategies, a Fund may invest to a substantial
degree in other investment grade municipal securities, including 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, the Fund may invest in investment grade
taxable securities. To the extent that the Fund invests in taxable securities
for temporary defensive purposes, the Fund will not be invested in a manner
primarily designed to achieve its investment objective of seeking to provide
common shareholders with a high level of current income exempt from federal
income tax, consistent with preservation of capital.
Portfolio Securities. The net asset value of each Fund's Common Shares
changes with fluctuations in the value of its portfolio securities. Because each
Fund invests in fixed income New Jersey municipal securities, the net asset
value of the Common Shares of a Fund can be expected to change as general levels
of interest rates fluctuate. Generally, when interest rates increase, the value
of fixed income securities held by a Fund in its portfolio can be expected to
decrease and when interest rates decrease, the value of the fixed income
securities held by a Fund in its portfolio can be expected to increase. Each
Fund may also invest up to 15% of its total assets in municipal securities that
bear interest at rates that vary inversely with changes in market rates of
interest. The value of such municipal 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 New Jersey municipal security
having similar credit quality, redemption provisions and maturity. Net asset
value and market value may be volatile due to the Funds' leveraged capital
structures and their investments in such municipal securities. For example, when
interest rates in general are increasing, the value of the Common Shares of a
Fund may decrease to a more significant extent than if the Fund did not utilize
a leveraged capital structure due to correspondingly higher dividend rates on
the Fund's APS. Such volatility may be increased when a Fund also holds residual
interest bonds.
Volatility may be greater during periods of general economic uncertainty.
Although the New Jersey municipal securities in which the Funds may invest will
be rated investment grade at the time of investment, New Jersey municipal
securities, like other debt obligations, are subject to the risk of nonpayment.
27
The ability of issuers of New Jersey municipal securities to make timely
payments of interest and principal may be adversely impacted in general economic
downturns and as relative governmental cost burdens are allocated and
reallocated among federal, state and local governmental units. Such non-payment
would result in a reduction of income to a Fund, and could result in a reduction
in the value of the New Jersey municipal security experiencing non-payment and a
potential decrease in the net asset value of the Fund.
Each Fund may invest in New Jersey municipal securities backed by
insurance. The credit rating assigned by Moody's or S&P (or any other nationally
recognized statistical rating organization) to New Jersey municipal securities
covered by insurance ordinarily will be based, at least in part, on such
insurance. Although the Adviser periodically reviews the financial condition of
insurers, there can be no assurance that the insurers will be able to honor
their obligations in all circumstances. In the event of a default by an insurer
on its obligations with respect to any New Jersey municipal securities in a
Fund's portfolio, the Fund would look to the issuer or guarantor of such New
Jersey municipal securities for payments of principal and interest and such
issuer or any guarantor may not be rated investment grade. Alternatively, the
Fund could elect to dispose of such New Jersey municipal securities; however,
the market prices for such New Jersey municipal securities may be lower than the
Fund's purchase price for them and the Fund could sustain a capital loss as a
result.
The amount of available information about the financial condition of New
Jersey municipal securities issuers may be less extensive than that for
corporate issuers with publicly traded securities. New Jersey municipal
securities in which the Funds may each invest include special obligation bonds,
lease obligations, participation certificates, variable rate instruments and New
Jersey municipal securities the terms of which include elements of, or are
similar in effect to, certain Strategic Transactions in which the Funds may
engage. Certain of these instruments represent relatively recent innovations in
the municipal securities markets. While the markets for such recent innovations
progress through stages of development, such markets may be less liquid than
more fully developed markets for municipal securities. Liquidity relates to the
ability of a Fund to sell a security in a timely manner at a price which
reflects the value of that security. Although it is generally the policy of the
Funds to hold New Jersey municipal securities until their maturity, the relative
illiquidity of some of a Fund's portfolio securities may adversely affect the
ability of the Fund to dispose of such securities in a timely manner and at a
fair price.
Neither Fund has established any limit on the percentage of its portfolio
that may be invested in New Jersey municipal securities that are subject to the
federal alternative minimum tax. A substantial portion of the income produced by
a Fund may be taxable under the federal alternative minimum tax. Accordingly,
the Funds may not be suitable investments for investors who are already subject
to the federal alternative minimum tax or who could become subject to the
federal alterna-
28
tive minimum tax as a result of an investment in a Fund. In addition, income
earned or deemed to be earned by the Funds with respect to their Strategic
Transactions (as defined below), if any, will be taxable income of the Funds.
Investment Practices. 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, facilitate
portfolio management and 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. Under existing New Jersey
law, shares of a Fund will not be subject to the New Jersey gross income tax for
any year if, at the close of each quarter of such calendar year, the Fund's
portfolio consisted solely of (1) notes, bonds and other obligations issued by
the State of New Jersey or its municipalities, counties, and other taxing
districts, or by the United States Government and its agencies, or by the
governments of Puerto Rico, Guam or the U.S. Virgin Islands, or (2) any other
obligations which result in gross income exempt from the New Jersey gross income
tax. Under normal market conditions, the Funds will engage in Strategic
Transactions, if at all, only to the extent that the Common Shares will not
become subject to the New Jersey gross income tax as a result thereof.
Strategic Transactions. The Funds may each purchase and sell
exchange-listed and over-the-counter put and call options on securities,
financial futures, fixed income indices and other financial instruments,
purchase and sell financial futures contracts and enter into various interest
rate transactions such as swaps, caps, floors or collars. Collectively, all the
above are referred to as "Strategic Transactions." Strategic Transactions may be
used to attempt to protect against possible changes in the market value of
securities held in or to be purchased for the Fund's portfolio resulting from
securities markets fluctuations, to protect a Fund's 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 the Fund's
portfolio, or to establish a position in the derivatives markets as a temporary
substitute for purchasing or selling particular securities. Strategic
Transactions may also be used to enhance potential gain although no more than 5%
of a Fund's assets may be committed to Strategic Transactions for non-hedging
purposes. 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
29
strategies, techniques and instruments. 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 the 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 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 APS of a Fund on a pro rata
basis.
"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 the 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 transaction may result in the Fund missing
the opportunity of obtaining a price or yield considered to be advantageous.
Non-Diversification. The Target Fund is classified as non-diversified
within the meaning of the 1940 Act, which means that the Fund is not limited by
such
30
Act in the proportion of its total assets that it may invest in securities of a
single issuer. However, the Target Fund's investments are limited so as to
qualify the Fund for the special tax treatment afforded regulated investment
companies under the federal tax laws. To qualify, among other requirements, each
Fund limits its investments so that, at the close of each quarter of the taxable
year, (i) not more than 25% of the market value of the Fund's total assets will
be invested in the securities (other than U.S. Government securities) of a
single issuer, and (ii) with respect to 50% of the market value of its total
assets, not more than 5% of the market value of its total assets will be
invested in the securities (other than U.S. Government securities) of a single
issuer. The Acquiring Fund is registered as a "diversified" fund within the
meaning of the 1940 Act, which means that the Acquiring Fund must satisfy the
foregoing 5% requirement with respect to 75% of its total assets. To the extent
that a Fund assumes large positions in the securities of a small number of
issuers, the Fund's yield may fluctuate to a greater extent than that of a
diversified company as a result of changes in the financial condition or in the
market's assessment of the issuers.
Special Considerations Relating to New Jersey Municipal Bonds
Each Fund, under normal market conditions, invests substantially all of
its total assets in investment-grade New Jersey municipal securities and,
therefore, is more susceptible to factors adversely affecting issuers of New
Jersey municipal securities than is a municipal bond fund that is not
concentrated in issuers of New Jersey municipal securities to this degree. Many
different social, environmental and economic factors may affect the financial
condition of New Jersey and its political subdivisions. The State had a high
bond rating from Moody's Aa1 as of May 1, 2000, Fitch (AA++ as of April 25,
2000) and S&P (AA++ as of November 8, 2000) on all of its general obligation
bonds. For a discussion of economic and other conditions in the State of New
Jersey, see Exhibit I -- "Economic and Other Conditions in New Jersey."
Investment Restrictions
Each Fund's investment objective, its investment policy with respect to
investing at least 80% of its total 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 Fund's outstanding voting
securities (defined in the 1940 Act as the lesser of (i) more than 50% of the
Fund's outstanding Common Shares and of its 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.
Neither Fund may:
31
1. Invest more than 25% of its total assets in a single industry;
however, the Fund may from time to time invest more than 25% of its
total assets in a particular segment of the municipal securities
market.
2. 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 borrowing described under
subparagraph (4) below or with respect to hedging and risk
management transactions or the writing of options.
3. 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 borrowing
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.
4. 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.
5. Buy any securities "on margin." Neither the deposit of initial
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.
6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell futures or options, except
in connection with hedging or risk management transactions.
7. 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.
8. 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.
9. Invest in securities of other investment companies in an amount
exceeding the limitations set forth in the 1940 Act and the rules
thereunder, except as part of a merger, consolidation or other
acquisition.
10. Invest in equity interests in oil, gas or other mineral exploration
or devel-
32
opment programs except pursuant to the exercise by the Fund of its
rights under agreements relating to municipal securities.
11. Purchase or sell real estate, commodities or commodity contracts,
except to the extent the 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 such 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.
In addition, the Acquiring Fund may not:
12. With respect to 75% of its total assets, purchase any securities
(other than tax-exempt obligations guaranteed 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.
Rating Agency Guidelines
Each Fund intends that, so long as its APS are outstanding, the
composition of its portfolio will reflect guidelines established by Moody's and
S&P in connection with each Fund's receipt of a rating for such shares of at
least "aaa" from Moody's and AAA from S&P. Moody's and S&P, 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 Moody's and
S&P 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 Moody's and S&P to issue the above-described ratings
for APS, 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 Moody's or S&P. 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 rat-
33
ing 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 Preferred Shares 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 Moody's and S&P that any such change would not impair the
ratings then assigned by Moody's and S&P to the APS. See "The
Reorganization--Risk Factors and Special Considerations--Ratings
Considerations."
For so long as any shares of a Fund's APS are rated by Moody's or S&P, 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.
Portfolio Composition
Although the investment portfolios of both Funds must satisfy the same
standards of credit quality, the actual securities owned by each Fund are
different, as a result of which there are certain differences in the composition
of the two investment portfolios. The tables below set forth the percentages of
the New Jersey municipal securities held by each Fund, as of a certain date.
Target Fund. As of October 31, 2000, approximately 99.5% of the market
value of the Target Fund's portfolio was invested in long-term municipal
obligations and approximately 0.5% of the market value of the Target Fund's
portfolio was invested in short-term municipal obligations. The following table
sets forth certain information with respect to the composition of the Target
Fund's long-term municipal obligation investment portfolio as of October 31,
2000.
Number of Value
S&P* Moody's* Issues (in thousands) Percent
- ---- -------- ------ -------------- -------
AAA Aaa 61.8%
AA Aa 10.1%
A A 11.9%
BBB Baa 16.2%
* Ratings: Using the higher of S&P's or Moody's rating on the Target
Fund's municipal obligations. S&P's rating categories may be
modified further by a plus (+) or minus (-) in AA, A and BBB
ratings. Moody's rating categories may be modified further by a 1, 2
or 3 in Aaa, Aa, A and Baa ratings. See Exhibit II --"Ratings of
Municipal Bonds."
Acquiring Fund. As of October 31, 2000, approximately 99.6% of the market
value of the Acquiring Fund's portfolio was invested in long-term municipal
obligations and approximately 0.4% of the market value of the Acquiring Fund's
portfolio was invested in short-term municipal obligations. The following table
sets forth certain information with respect to the composition of the
34
Acquiring Fund's long-term municipal obligation investment portfolio as of
October 31, 2000.
Number of Value
S&P* Moody's* Issues (in thousands) Percent
- ---- -------- ------ -------------- -------
AAA Aaa 56.1%
AA Aa 29.8%
A A 8.5%
BBB Baa 5.6%
* Ratings: Using the higher of S&P's or Moody's rating on the
Acquiring Fund's municipal obligations. S&P's rating categories may
be modified further by a plus (+) or minus (-) in AA, A and BBB
ratings. Moody's rating categories may be modified further by a 1, 2
or 3 in Aaa, Aa, A ratings. See Exhibit II --"Ratings of Municipal
Bonds."
Portfolio Transactions
The Adviser places orders for portfolio transactions for each Fund with
broker-dealer firms giving consideration to the quality, quantity and nature of
each firm's professional services. These services include execution, clearance
procedures, wire service quotations and statistical and other research
information provided to the Fund and the Adviser, including quotations necessary
to determine the value of the Fund's net assets. Any research benefits derived
are available for all clients of the Adviser and the Adviser may not use all the
research it receives from broker-dealers in connection with a particular Fund.
Since statistical and other research information is only supplementary to the
research efforts of the Adviser and still must be analyzed and reviewed by its
staff, the receipt of research information is not expected to reduce its
expenses materially. In selecting among the firms believed to meet the criteria
for handling a particular transaction, the Adviser may take into consideration
that certain firms have sold shares of a Fund and that certain firms provide
market, statistical or other research information to a Fund and the Adviser, and
may select firms that are affiliated with the Funds, the Adviser or principal
underwriters of the Funds' shares.
If it is believed to be in the best interests of a Fund, the Adviser may
place portfolio transactions with brokers who provide the types of services
described above, even if it means the Fund will have to pay a higher commission
(or, if the broker's profit is part of the cost of the security, will have to
pay a higher price for the security) than would be the case if no weight were
given to the broker's furnishing of those services. This will be done, however,
only if, in the opinion of the Adviser, the amount of additional commission or
increased cost is reasonable in relation to the value of the services.
If purchases or sales of securities of a Fund and of one or more other
investment companies or clients advised by the Adviser are considered at or
about the same time, transactions in such securities will be allocated among the
several investment companies and clients in a manner deemed equitable by the
Adviser, to each such investment company or client, taking into account their
respective
35
sizes and the amount of securities to be purchased or sold. Although it is
possible that in some cases this procedure could have a detrimental effect on
the price paid for the security by a Fund or the volume of the security
purchased by a Fund, it is also possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to such Fund.
While the Adviser will be primarily responsible for the management of each
Fund's portfolio, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the Board of
Trustees of each Fund.
The Board of Trustees of each of the Funds has adopted certain policies
incorporating the standards of Rule 17e-1 issued by the SEC under the 1940 Act,
which requires that the commissions paid to affiliates of a Fund, or to
affiliates of such persons, 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 each Fund's Board of
Trustees and to maintain records in connection with such reviews. After
consideration of all factors deemed relevant, each Fund's Board of Trustees will
consider from time to time whether the advisory fee will be reduced by all or a
portion of the brokerage commission given to brokers that are affiliated with a
Fund.
Portfolio Turnover
Generally, neither Fund purchases securities for short-term trading
profits. However, any of the Funds may dispose of securities without regard to
the time that they have been held when such action, for defensive or other
reasons, is deemed appropriate by the Adviser. (The portfolio turnover rate is
calculated by dividing the lesser of purchases or sales of portfolio securities
for the particular fiscal year by the monthly average of the value of the
portfolio securities owned by a Fund during the particular fiscal year. For
purposes of determining this rate, all securities whose maturities at the time
of acquisition are one year or less are excluded.) A high portfolio turnover
rate results in greater transaction costs, which are borne directly by the Fund,
and also has certain tax consequences for shareholders. The portfolio turnover
rates the Target Fund and the Acquiring Fund, respectively, for the fiscal year
ended October 31, 2000 were 11% and 19%:
Net Asset Value
The net asset value per share of each Fund's Common Shares is determined
by calculating the total value of the Fund's assets, deducting its total
liabilities and the liquidation value of the Fund's APS (without giving effect
to any potential redemption premium with respect to such APS), and dividing the
result by the number of Common Shares outstanding. The net asset value for each
Fund
36
is computed no less frequently than the last business day of each week after the
close of business on the NYSE. Each Fund reserves the right to calculate the net
asset value more frequently if deemed desirable.
Fixed-income securities are valued by using market quotations, prices
provided by market makers or estimates of market values obtained from yield data
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by the Boards of Trustees of the
Funds. The relative illiquidity of some securities in a Fund's portfolio may
adversely affect the ability of the Fund to accurately value such securities.
Short-term securities with remaining maturities of 60 days or less are valued at
amortized cost. Other assets are valued at fair value by the Adviser as
determined in good faith by the Board of Trustees of each Fund.
If any securities held by a Fund are restricted as to resale, the Adviser
will determine their fair value following procedures approved by the Board of
Trustees of each Fund. The Board of Trustees of each Fund periodically reviews
such valuations and procedures. The fair value of such securities generally will
be determined as the amount which a Fund could reasonably expect to realize from
an orderly disposition of such securities over a reasonable period of time. The
valuation procedures applied in any specific instance are likely to vary from
case to case. However, consideration generally will be given to the financial
position of the issuer and other fundamental analytical data relating to the
investment and to the nature of the restrictions on disposition of securities
(including any registration expenses that might be borne by the Fund in
connection with such disposition). In addition, specific factors also generally
will be considered, such as the cost of the investment, the market value of any
unrestricted securities of the same class (both at the time of purchase and at
the time of valuation), the size of the holding, the prices of any recent
transactions or offers with respect to such securities, and any available
analysts' reports regarding the issuer.
Capital Shares
Each Fund has outstanding both Common Shares and APS. The Target Fund
Common Shares are traded on the AMEX. The Acquiring Fund Common Shares are
traded on the NYSE. The Target Fund Common Shares commenced trading on the AMEX
on June 16, 1993. As of October 31, 2000, the net asset value per Target Fund
Common Share was $14.47 and the market price per share was $13.38. The Acquiring
Fund Common Shares commenced trading on the NYSE on May 13, 1992. As of October
31, 2000, the net asset value per Acquiring Fund Common Share was $16.59 and the
market price per share was $13.81.
Each Fund is authorized to issue an unlimited number of common shares of
beneficial interest and up to 100,000,000 preferred shares of beneficial
interest. The Board of Trustees of each Fund may authorize separate classes of
shares
37
together with such designation or preferences, rights, voting powers,
restrictions, limitations, qualifications or terms as may be determined from
time to time by the Trustees.
Each Fund is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a 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 for acts or obligations of the Fund and
provides for indemnification and reimbursement of expense 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.
The Declaration of Trust of each Fund further provides that no Trustee,
officer, employee or agent of the Fund is liable to the Fund or to any
shareholder, nor is any Trustee, officer, employee or agent liable to any third
persons in connection with the affairs of the 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 the Fund property for satisfaction of claims arising in
connection with the affairs of the Fund. With the exceptions stated, the
Declaration of Trust provides that a Trustee, officer, employee or agent is
entitled to be indemnified against all liability in connection with the affairs
of the Fund.
Common Shares
Holders of each Fund's Common Shares are entitled to share equally in
dividends declared by each Fund's Board of Trustees payable to holders of the
Common Shares and in the net assets of the Fund available for distribution to
holders of the Common Shares after payment of the preferential amounts payable
to holders of any outstanding preferred shares. See "Voting Rights" and
"Liquidation Rights of Holders of APS" below. Holders of a Fund's Common Shares
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. So long as any APS of a Fund or any other preferred shares are
outstanding, holders of the Fund's Common Shares will not be entitled to receive
any dividends of or other distributions from the Fund unless all accumulated
dividends on the Fund's outstanding APS and any other preferred shares have been
paid, and unless asset coverage (as defined in the 1940 Act) with respect to
such APS and any other preferred shares would be at least 200% after giving
effect to such distributions.
38
Preferred Shares
The APS of each Fund have a similar structure. The APS are preferred
shares of the applicable Fund that entitle their holders to receive dividends
when, as and if declared by the Board of Trustees, out of funds legally
available therefor, at a rate per annum that may vary for the successive
dividend periods. The APS of each Fund have a liquidation preferences of $25,000
per share; neither Fund's APS are traded on any stock exchange or
over-the-counter. Each Fund's APS can be purchased at an auction or through
broker-dealers who maintain a secondary market in the APS.
Auctions generally have been held and will be held every seven days for
Target Fund APS and every twenty-eight days for Acquiring Fund APS, unless the
applicable Fund elects, subject to certain limitations, to declare a special
dividend period. The following table provides information about the dividend
rates for each Fund's APS as of a recent auction.
Auction Date Fund Dividend Rate
------------ ---- -------------
January 12, 2001 Target Fund 3.52%
December 29, 2000 Acquiring Fund 3.97%
Under the 1940 Act, each Fund is permitted to have outstanding more than
one series of preferred shares as long as no single series has priority over
another series as to the distribution of assets of the Fund or the payment of
dividends. Each Fund currently has only one series of preferred shares
outstanding. Holders of a Fund's preferred shares do not have preemptive rights
to purchase any shares of APS or any other preferred shares that might be
issued. The net asset value per share of a Fund's APS equals its liquidation
preference plus accumulated but unpaid dividends per share.
The redemption provisions pertaining to the APS of each Fund are
substantially similar. It is anticipated that shares of APS of each Fund will
generally be redeemable at the option of the Fund at a price equal to their
liquidation preference of $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. Shares of 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.
Capitalization
The following table sets forth as of October 31, 2000 (i) the
capitalization of the Target Fund, (ii) the capitalization of the Acquiring
Fund, and (iii) the pro forma capitalization of the Acquiring Fund as adjusted
to give effect to the Reorganization.
39
Capitalization as of October 31, 2000
(unaudited)
The following table sets forth the unaudited capitalization of the Funds
as of October 31, 2000 and the pro forma combined capitalization of the combined
Fund as if the Reorganization had occurred on that date.
(Amounts in thousands)
Acquiring Fund Target Fund Acquiring Fund
(Actual) (Actual) (As Adjusted)
-------- -------- -------------
Shareholders' Equity:
Common Shares, $.01 par value per share;
3,935,130 shares outstanding for
Acquiring Fund (Actual) $ 39
2,499,940 shares outstanding for Target
Fund (Actual) $ 25
[ ] shares outstanding for Acquiring
Fund (As Adjusted) $ 61
Preferred shares $25,000 liquidation
preference per share $ 40,000 $ 25,000 $ 65,000
Paid-in surplus $ 57,680 $ 36,521 $ 94,201
Undistributed net investment income $ 194 $ 185 $ 198
Net realized gain (loss) from investment
transactions $ 163 $ (3,164) $ (3,001)
Net unrealized appreciation of investments $ 7,224 $ 2,618 $ 9,842
Net Assets $ 105,300 $ 61,185 $ 166,304
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 the 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, in each year 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, 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
40
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 the Fund. The transactions subject to these special
approval requirements are: (i) the merger or consolidation of the Fund or any
subsidiary of the Fund with or into any Principal Shareholder; (ii) the issuance
of any securities of the 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 the 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 the Fund or any subsidiary
thereof, in exchange for securities of the 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 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.
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 the Fund, and (b) the lesser of (i) more than 50% of the Fund's outstanding
common and preferred shares each voting as a class or (ii) 67% of each of the
common and preferred shares, 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 the 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 the Fund. In the event of
conversion, the Common Shares would cease to be listed on the New York Stock
Exchange, the American Stock Exchange, the 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
41
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 and comply with
various state law restrictions not currently applicable to the Funds. 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.
Management of the Funds
Trustees and Officers. The Boards of Trustees of the Target Fund and the
Acquiring Fund currently consist of the same seven persons, five of whom are not
"interested persons," as defined in the 1940 Act, of any of those Funds. The
Trustees of each Fund are responsible for the overall supervision of the
operations of the Fund and perform the various duties imposed on the Trustees of
investment companies by the 1940 Act and under applicable Massachusetts law. The
Funds have the same slate of officers.
Portfolio Manager. Timothy D. Haney, CFA, has been primarily responsible
for the for the day-to-day management of each Fund's portfolio since 1995 and
has worked in the tax-free fixed-income sector dating back to 1988. Prior to
joining the investment advisory area, Mr. Haney was responsible for purchasing
securities for the Van Kampen family of municipal investment trusts. Prior to
assuming that position, Mr. Haney was a credit analyst responsible for covering
a wide variety of sectors.
Management and Advisory Arrangements
Each Fund is advised by the Adviser, which is a wholly owned subsidiary of
Van Kampen. Van Kampen 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 $97
billion in assets under management as of December 31, 2000. Van Kampen has more
than 50 open-end funds, 39 closed-end funds and more than 2,700 unit investment
trusts that are distributed by leading authorized dealers nationwide. The
Adviser and its affiliates currently serve as investment adviser to municipal
bond funds with combined assets of over $11 billion. Van Kampen is an indirect
wholly owned subsidiary of Morgan Stanley Dean Witter & Co. The principal
offices of Van Kampen and the Adviser are located at 1 Parkview Plaza, Oakbrook
Terrace, Illinois 60181-5555.
Each Fund has entered into an investment advisory agreement (each an
42
"Advisory Agreement") between the Adviser and the Fund which provides that the
Adviser will supply investment research and portfolio management, including the
selections of securities for the Fund to purchase, hold, or sell and the
selection of brokers through whom the Fund's portfolio transactions are
executed. The Adviser also furnishes offices, necessary facilities and equipment
and permits its officers and employees to serve without compensation as Trustees
and officers of the Fund if duly elected to such positions.
Each Fund's Advisory Agreement provides that the Adviser shall not be
liable for any error of judgment or of law, or for any loss suffered by the Fund
in connection with the matters to which the agreement relates, except a loss
resulting from willful misfeasance, bad faith, or gross negligence on the part
of the Adviser in the performance of its obligations and duties, or by reason of
its reckless disregard of its obligations and duties under the Advisory
Agreement. The Adviser's activities are subject to the review and supervision of
the Trustees to whom the Adviser renders periodic reports of each Fund's
investment activities. The Trustees are responsible for the overall management
and supervision of the Fund's affairs. Each Advisory Agreement may be terminated
without penalty upon 60 days' written notice by either party (in the case of the
Fund, such termination may be effected by the Fund's Board of Trustees or by a
majority of the common shares and preferred shares, voting together as a single
class) and will automatically terminate in the event of assignment.
For the services provided by the Adviser under the Advisory Agreements,
each Fund pays the Adviser an annualized fee (accrued daily and paid monthly)
equal to .65% of the average daily managed assets of the Fund (which for
purposes of determining such fee, means the average daily value of the Fund,
including the liquidation preference of the Fund's outstanding APS, minus the
sum of accrued liabilities other than the aggregate amount of any borrowings
undertaken by the Fund). The liquidation preference of the APS is not considered
a liability of either Fund.
Each Fund pays all other expenses incurred in its operation including, but
not limited to, direct charges relating to the purchase and sale of its
portfolio securities, interest charges, fees and expenses of legal counsel and
independent auditors, taxes and governmental fees, cost of share certificates
and any other expenses (including clerical expenses) of issuance, sale or
repurchase of the Funds' shares, expenses in connection with the Funds' dividend
reinvestment plan, membership fees in trade associations, expenses of
registering and qualifying shares of the Funds for sale under federal and state
securities laws, expenses of obtaining and maintaining stock exchange listings
of the Fund's shares, expenses of printing and distributing reports, notices and
proxy materials to existing shareholders, expenses of filing reports and other
documents filed with governmental agencies, expenses of annual and special
shareholder meetings, fees and disbursements of the transfer agents, custodians
and sub-custodians, expenses of disbursing dividends and distributions, fees,
expenses and out-of-pocket costs of
43
Trustees of the Funds who are not affiliated with the Adviser, insurance
premiums, indemnification and other expenses not expressly provided for in the
Advisory Agreement, and any extraordinary expenses of a nonrecurring nature.
The Administrator
The administrator for each Fund is Van Kampen Funds Inc. (in such
capacity, the "Administrator"). Its principal business address is 1 Parkview
Plaza, Oakbrook Terrace, Illinois 60181-5555. The Administrator is an indirect
wholly owned subsidiary of Morgan Stanley Dean Witter & Co.
Pursuant to the administration agreement between each Fund and the
Administrator (each an "Administration Agreement") and in consideration of its
administrative fee, the Administrator (i) prepares and assembles reports
required to be sent to Fund shareholders and arrange for the printing and
dissemination of such reports to shareholders; (ii) assembles reports required
to be filed with the SEC and files such completed reports with the SEC; (iii)
arranges for the dissemination to shareholders of the Fund's proxy material and
oversee the tabulation of proxies by the Fund's transfer agent; (iv) negotiates
the terms and conditions under which custodian services will be provided to the
Fund and the fees to be paid by the Fund to its custodian in connection
therewith; (v) negotiates the terms and conditions under which dividend
disbursing services will be provided to the Fund, negotiates the fees to be paid
by the Fund in connection therewith and review the provision of dividend
disbursing services to the Fund; (vi) determines the amounts available for
distribution as dividends and distributions to be paid by the Fund to its
shareholders; prepares and arranges for the printing of dividend notices to
shareholders; and provides the Fund's dividend disbursing agent and custodian
with such information as is required for such parties to effect the payment of
dividends and distributions and to implement the Fund's dividend reinvestment
plan; (vii) provides services to holders or potential holders of the Fund's
securities including but not limited to responding to shareholder requests for
information; (viii) assists in providing to the Fund's independent auditors such
information as is necessary for such auditors to prepare and file the Fund's
federal income and excise tax returns and the Fund's state and local tax
returns; (ix) assists the Adviser in monitoring compliance of the Fund's
operations with the 1940 Act and with its investment policies and limitations as
currently in effect; (x) in connection with the issuance of the Fund's APS,
calculates, monitors and provides to the rating agencies such asset coverage and
liquidity reports as the Board of Trustees deems advisable with respect to
obtaining a rating on the APS; (xi) oversees the maintenance of the Fund's books
and records under the 1940 Act by the custodians and accounting agent, as
applicable; and (xii) makes such reports and recommendations to the Board of
Trustees as the Board of Trustees reasonably requests or deems appropriate.
For the services rendered to each Fund and related expenses borne by the
Administrator, each Fund pays the Administrator a fee, accrued daily and paid
44
monthly, at the annualized rate of .20% of each Fund's average daily managed
assets (determined in the same manner as described above with respect to the
Advisory Agreement).
Codes of Ethics
Each Fund and the Adviser have adopted Codes of Ethics designed to
recognize the fiduciary relationship between each Fund and the Adviser and its
employees. The Codes of Ethics permit directors, trustees, officers and
employees to buy and sell certain securities for their personal accounts subject
to certain restrictions. Persons with access to certain sensitive information
are subject to pre-clearance and other procedures designed to prevent conflicts
of interest.
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 below or under "Certain Provisions of the Declarations
of Trust" or "Conversion to Open-End Fund," 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 APS, holders of APS have no voting rights.
When holders of a Fund's APS are entitled to vote, each holder is entitled to
cast one vote per share of APS held.
Holders of APS, voting as a class, are entitled to elect two of each
Fund's trustees. Under the 1940 Act, if at any time dividends on a Fund's APS
are unpaid in an amount equal to two full years dividends thereon, the holders
of all outstanding APS, 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 affirmative vote of a majority of the holders of APS of a Fund,
voting as a class, is required to amend, alter or repeal any of the preferences,
rights or powers of holders of APS so as to materially and adversely affect such
preferences, rights or powers, or increase or decrease the number of preferred
shares authorized to be issued. Unless a higher percentage is provided for under
"Certain Provisions of the Declarations of Trust," the affirmative vote of the
holders of a majority of a Fund's outstanding APS, voting as a class, is
required to approve any plan of reorganization adversely affecting such shares
and any action requiring a vote of security holders under Section 13(a) of the
1940 Act including, among other things, changes in the Fund's investment
objective or changes in the Fund's fundamental investment restrictions.
Dividends and Distributions
The Funds' current policies with respect to dividends and distributions
relating to their respective Common Shares are identical.
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
45
substantially all net investment income of the Fund remaining after the payment
of dividends on any outstanding APS. Under current federal tax law, each Fund is
required to allocate net capital gains and other taxable income, if any, among
its Common Shares and the APS on a pro rata basis in the year for which such
capital gains and other income is realized. Net income of each Fund consists of
all interest income accrued on portfolio assets less all expenses of the Fund.
Expenses of the 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 of its APS outstanding, neither Fund may declare any cash dividend or
other distribution on its Common Shares, unless at the time of such declaration,
(1) all accrued APS 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 the Fund, is at least
200% (as required by the 1940 Act) of the liquidation value of the outstanding
APS (expected to equal the aggregate original purchase price of the outstanding
APS plus any accrued and unpaid dividends thereon, whether or not earned or
declared an on a cumulative basis). In addition to the requirements of the 1940
Act, the Fund may be required to comply with other asset coverage requirements
as a condition of the Fund obtaining a rating of its APS 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 the Fund to maintain its qualification for taxation as a
regulated investment company. Each Fund intends, however, to the extent
possible, to purchase or redeem APS from time to time to maintain compliance
with such asset coverage requirements and may pay special dividends to the
holders of the APS in certain circumstances in connection with any such
impairment of the Fund's status as a regulated investment company.
Similarly, the Funds' current policies with respect to dividends and
distributions on their APS are identical. The holders of a Fund's APS are
entitled to receive, when, as and if declared by the Board of Trustees of the
Fund, out of funds legally available therefor, cumulative cash dividends on
their shares. Dividends on a Fund's APS so declared and payable shall be paid
(i) in preference to and in priority over any dividends so declared and payable
on the Fund's Common Shares, and (ii) to the extent permitted under the Internal
Revenue Code (the "Code") and to the extent available, out of net tax-exempt
income earned on the Fund's investments. Prior to each dividend payment date,
the relevant Fund is required to deposit with the Auction Agent sufficient funds
for the payment of such declared dividends. Neither Fund intends to establish
any reserves for the payment of dividends, and no interest will be payable in
respect of any dividend payment or payment on a Fund's APS which may be in
arrears.
For information concerning the manner in which dividends and distributions
to holders of each Fund's Common Shares may be reinvested automatically in the
46
Fund's Common Shares, see "Automatic Dividend Reinvestment Plan" below.
If a Fund retroactively allocates any net capital gains or other income
subject to regular federal income tax to its APS without having given advance
notice thereof as described above, the Fund will make certain payments to
holders of its APS to which such allocation was made to offset substantially the
tax effect thereof. In no other instances will the Fund be required to make
payments to holders of its APS to offset the tax effect of any reallocation of
net capital gains or other taxable income.
Automatic Dividend Reinvestment Plan
Each Fund offers a Dividend Reinvestment Plan (each a "Plan") 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 substantially
identical. Unless common shareholders elect to participate in a Plan, all common
shareholders will receive distributions of dividends and capital gains in cash.
State Street Bank and Trust Company, as plan agent (the "Plan Agent"),
serves as agent for the common shareholders of each Fund in administering the
Plans. Participants in the Plans will receive the equivalent in Common Shares
valued on the valuation date, generally at the lower of market price or net
asset value, except as specified below. The valuation date will be the dividend
or distribution payment date or, if that date is not a trading day on the New
York Stock Exchange or other national securities exchange or market system on
which the Common Shares are listed for trading, the next preceding trading day.
If the market price per Common Share on the valuation date equals or exceeds net
asset value per Common Share on that date, the appropriate Fund will issue new
Common Shares to participants valued at the higher or net asset value or 95% of
the market price on the valuation date. In the foregoing situation, a Fund will
not issue Common Shares under its Plan below net asset value. If net asset value
per Common Share on the valuation date exceeds the market price per Common Share
on that date, or if the Board of Trustees should declare a dividend or capital
gains distribution payable to the Common shareholders only in cash, participants
in the Plan will be deemed to have elected to receive Common Shares from the
Fund valued at the market price on that date. Accordingly, in this circumstance,
the Plan Agent will, as agent for the participants, buy the Fund's Common Shares
in the open market for the participants' accounts on or shortly after the
payment date. If, before the Plan Agent has completed its purchases, the market
price exceeds the net asset value per share of the Common Shares, the average
per share purchase price paid by the Plan Agent may exceed the net asset value
of the Fund's Common Shares, resulting in the acquisition of fewer Common Shares
than if the dividend or distribution had been paid in Common Shares issued by
the Fund.
47
The Plan Agent maintains each common shareholder's account in the Plan and
furnishes monthly written confirmations of all transactions in the accounts,
including information needed by common shareholders for personal and tax
records. Common Shares in the account of each Plan participant will be held by
the Plan Agent in non-certificated form in the name of the participant, and each
common shareholder's proxy will include those Common Shares purchased pursuant
to the Plan.
In the case of common shareholders, such as banks, brokers or nominees,
which hold Common Shares for others who are the beneficial owners, the Plan
Agent will administer the Plan on the basis of the number of Common Shares
certified from time to time by the record common shareholders as representing
the total amount registered in the record common shareholder's name and held for
the account of beneficial owners who are participating in the Plan.
The Plan Agent's fees for the handling of the reinvestment of dividends
and distributions will be paid by the Fund. However, each participant will pay a
pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of dividends
and distributions. No other charges will be made to participants for reinvesting
dividends or capital gain distributions, except for certain brokerage
commissions, as described above.
The automatic reinvestment of dividends and distributions will not relieve
participants of any federal income tax that may be payable or required to be
withheld on such dividends or distributions.
Experience under the Plans may indicate that changes are desirable.
Accordingly, each Fund reserves the right to amend or terminate its Plan as
applied to any dividend or distribution paid subsequent to written notice of the
change sent to all common shareholders of the Fund at least 90 days before the
record date for the dividend or distribution. The Plans also may be amended or
terminated by the Plan Agent by at least 90 days' written notice to all common
shareholders of the Fund. A common shareholder may withdraw from a Plan at any
time by contacting the Plan Agent at the address or telephone number set forth
below. There is no penalty for non-participation in or withdrawal from a Plan,
and common shareholders who have previously withdrawn from the Plan may rejoin
it at any time.
After the Reorganization, a holder of shares of a Fund who currently
elects to receive dividends in cash will continue to receive dividends in cash;
all other holders 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 8200, Boston, Massachusetts 02101. 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.
48
Liquidation Rights of Holders of APS
Upon any liquidation, dissolution or winding up of either Fund, whether
voluntary or involuntary, the holders of the Fund's APS will be entitled to
receive, out of the assets of the Fund available for distribution to
shareholders, before any distribution or payment is made upon any of the Fund's
Common Shares or any other capital shares of the Fund ranking junior in right of
payment upon liquidation to APS, $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. 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 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 the Fund except for any additional dividends. 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 the Fund
shall not be deemed or construed to be a liquidation, dissolution or winding up
of the Fund for this purpose.
Federal Income Tax Rules Applicable to the Funds and their Shareholders
The Funds intend to invest in sufficient tax-exempt municipal securities
to permit payment of "exempt-interest dividends" (as defined under applicable
federal income tax law). Exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. Exempt-interest dividends are included in determining what
portion, if any, of a person's social security and railroad retirement benefits
will be includable in gross income subject to federal income tax.
Under applicable federal income tax law, the interest on certain municipal
securities may be an item of tax preference subject to the federal alternative
minimum tax. The Funds may invest a portion of their assets in municipal
securities subject to this provision so that a portion of their exempt-interest
dividends may be an item of tax preference to the extent such dividends
represent interest received from such municipal securities. Accordingly,
investment in the Funds could cause shareholders to be subject to (or result in
an increased liability under) the alternative minimum tax.
Although exempt-interest dividends from the Funds generally may be treated
by shareholders as interest excluded from their gross income, each
49
shareholder is advised to consult his or her tax adviser with respect to whether
exempt-interest dividends retain this exclusion given the shareholder's
particular tax circumstances. For example, exempt-interest dividends may not be
excluded if the shareholder would be treated as a "substantial user" (or a
"related person" of a substantial user, as each term is defined by applicable
federal income tax law) of the facilities financed with respect to any of the
tax-exempt obligations held by the Funds.
If the Funds distribute exempt-interest dividends during the shareholder's
taxable year, some or all of the interest on indebtedness incurred or continued
by the shareholder to purchase or carry shares of the Funds will not be
deductible for federal income tax purposes, based on the ratio of
exempt-interest dividends to the total of exempt-interest dividends plus taxable
dividends received by the shareholders (excluding capital gain dividends) during
the year. If a shareholder receives an exempt-interest dividend with respect to
any shares and such shares are held for six months or less, any loss on the sale
or exchange of the shares will be disallowed to the extent of the amount of such
exempt-interest dividend.
While the Funds expect that a major portion of their income will
constitute tax-exempt interest, a significant portion of the Funds' income may
consist of investment company taxable income (generally ordinary income and net
short-term capital gains). Distributions of investment company taxable income
are taxable to shareholders as ordinary income to the extent of the Funds'
earnings and profits, whether paid in cash or reinvested in additional shares.
Distributions of the Funds' net capital gain (which is the excess of net
long-term capital gain over net short-term capital loss) as capital gain
dividends, if any, are taxable to shareholders as long-term capital gain,
whether paid in cash or reinvested in additional shares, and regardless of how
long the shares of the Funds have been held by such shareholders. Distributions
in excess of the Funds' earnings and profits will first reduce the adjusted tax
basis of a shareholder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such shareholder (assuming such shares
are held as a capital asset). Although distributions generally are treated as
taxable in the year they are paid, distributions declared in October, November
or December, payable to shareholders of record on a specified date in such month
and paid during January of the following year will be treated as having been
distributed by the Funds and received by the shareholders on the December 31st
prior to the date of payment. The Funds will inform shareholders of the source
and tax status of all distributions promptly after the close of each calendar
year. The aggregate amount of dividends designated as exempt-interest dividends
cannot exceed, however, the excess of the amount of interest exempt from tax
under Section 103 of the Code received by the Funds during the year over any
amounts disallowed as deductions under Sections 265 and 171(a)(2) of the Code.
Since the percentage of dividends which are exempt-interest dividends is
determined on an average annual method
50
for the taxable year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of the
Funds' income that was tax exempt during the period covered by the dividend.
Fund distributions generally will not qualify for the dividends received
deduction for corporations.
The sale or exchange of shares may be a taxable transaction for federal
income tax purposes. Shareholders who sell their shares will generally recognize
a gain or a loss in an amount equal to the difference between their adjusted tax
basis in the shares sold and the amount received. If the shares are held by the
shareholder as a capital asset, the gain or loss will be a capital gain or loss.
Any recognized capital gains may be taxed at different rates depending on how
long the shareholders held the shares.
The Funds are required, in certain circumstances, to withhold 31% of
dividends and certain other payments, including redemptions, paid to
shareholders who do not furnish to the Funds their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain required certifications or who are otherwise subject to backup
withholding.
Each of the Funds has elected and qualified, and the Funds intend to
continue to qualify, as a regulated investment company under federal income tax
law. If the Funds so qualify and distribute each year to their shareholders at
lest 90% of their investment company taxable income and at least 90% of their
net tax-exempt interest, the Funds will not be required to pay federal income
taxes on any income they distribute to shareholders. If the Funds distribute
less than an amount equal to the sum of 98% of their ordinary income and 98% of
their capital gain net income, then the Funds will be subject to a 4% excise tax
on the undistributed amounts.
The federal income tax discussion set forth above is for general
information only. Prospective investors should consult their own tax advisers
regarding the specific federal tax consequences of purchasing, holding and
disposing of shares of the Funds, as well as the effects of state, local and
foreign tax law and any proposed tax law changes.
New Jersey Taxation of the Funds
Individual shareholders of the Funds, including trusts and estates, who
are subject to the New Jersey gross income tax will not be required to include
in their New Jersey gross income distributions from the Funds which the Funds
clearly identify as directly distributable to interest or gains from New Jersey
municipal securities, obligations of the United States or any other obligations
the interest and gain on which is exempt from New Jersey gross income tax under
New Jersey or federal law, provided that the Fund qualifies as a RIC and
provided that the Funds satisfy New Jersey's statutory requirements for
treatment as a qualified investment fund under the provisions of the New Jersey
51
Gross Income Tax Act (N.J. Stat. Ann. ss.ss.54A:5-1 et seq.), as amended and
supplemented, and any regulations promulgated thereunder.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations and New Jersey tax laws
presently in effect. For the complete provisions, reference should be made to
the pertinent Code sections, the Treasury Regulations promulgated thereunder and
the applicable tax laws. The Code and the Treasury Regulations, as well as the
New Jersey tax laws, are subject to change by legislative, judicial or
administrative action either prospectively or retroactively.
Shareholders are urged to consult their tax advisers regarding specific
questions as to federal, foreign, state or local tax consequences of an
investment in a Fund.
AGREEMENT AND PLAN OF REORGANIZATION
General
Under the Agreement and Plan of Reorganization (attached as Appendix A to
the Statement of Additional Information), (i) the Acquiring Fund will acquire
substantially all of the assets, and will assume substantially all of the
liabilities, of the Target Fund, in exchange solely for an equal aggregate value
of Acquiring Fund Common Shares and Acquiring Fund APS to be issued by the
Acquiring Fund. The number of 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 (except that cash will be paid in lieu of
any fractional shares), and the number of shares of Acquiring Fund APS 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 date
that the Reorganization takes place (the "Exchange Date"), 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 would 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 previous holders
of the Target Fund would represent the respective pro rata number of Acquiring
Fund Common Shares (rounded down, in the case
52
of fractional shares, to the next largest number of whole shares) due such
holder of Common Shares. No fractional Acquiring Fund Common Shares will be
issued. In lieu thereof, 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 previous holders
of Target Fund APS would represent the respective pro rata number of Acquiring
Fund APS due such holder. See "Surrender and Exchange of Share Certificates"
below for a description of the procedures to be followed by the shareholders of
the Target Fund to obtain their Acquiring Fund Common Shares or Acquiring Fund
APS (and cash in lieu of fractional shares, if any).
Accordingly, 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) would have an aggregate net
asset value immediately after the Exchange Date equal to the aggregate net asset
value of that shareholder's Target Fund Common Shares immediately prior to the
Exchange Date. Since the Acquiring Fund Common Shares would 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. Similarly, since the Acquiring Fund
APS would be issued at a liquidation preference per share equal to the
liquidation preference per share of the APS of the Target Fund, the respective
liquidation preference 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 Acquiring Fund Common Shares, other than to reflect the costs of
the Reorganization, and will result in no dilution to the value per share of
holders of APS of the Target Fund. However, as a result of the Reorganization, a
shareholder of either of the Funds will hold a reduced percentage of ownership
in the larger combined entity than he or she did in either of the constituent
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 case of a special
dividend period) on a 28-day schedule rather than a seven day schedule as is the
case for Target Fund APS. This change in the standard dividend period should not
materially affect the value of the APS held by holders of Target Fund APS. The
auction procedures for the APS of the two funds are similar. As a result of the
Reorganization, the last dividend period for the Target Fund APS
53
prior to the Exchange Date may be shorter than the dividend period for such APS
determined as set forth in its applicable Certificate of Vote.
Terms of the Agreement and Plan of Reorganization
The following is a summary of the significant terms of the Agreement and
Plan of Reorganization. This summary is qualified in its entirety by reference
to the Agreement and Plan of Reorganization, attached as Appendix A to the
Statement of Additional Information.
Valuation of Assets and Liabilities. The respective assets of each of the
Funds will be valued on the business day prior to the Exchange Date (the
"Valuation Date"). The valuation procedures are the same for each Fund: the net
asset value per Common Share of each Fund will be determined after the close of
business on the NYSE (generally, 4:00 p.m., Eastern time) on the Valuation 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 issuing 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 APS of the issuing Fund is divided by the total number of Common
Shares of the issuing Fund outstanding at such time. Daily expenses, including
the fees payable to the Adviser, will accrue on the Valuation Date. The
municipal securities in which each Fund invests are traded primarily in the
over-the-counter markets. In determining net asset value on the Valuation Date,
each Fund will determine its Net Asset Value as set forth above under
"Comparison of the Fund - Net Asset Value."
Expenses. The Target Fund and the Acquiring Fund will share, in proportion
to their respective projected declines in total operating expenses, 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, 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 this Proxy Statement and 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. Neither Fund will pay any expenses of its respective
shareholders arising out of or in connection with the Reorganization.
Amendments and Conditions. The Agreement and Plan of Reorganization may be
amended at any time prior to the Exchange Date with respect to any of the terms
therein. The obligations of each Fund pursuant to the Agreement and Plan of
Reorganization are subject to various conditions, including a registration
54
statement on Form N-14 being declared effective by the SEC, approval by the
shareholders of the Target 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 Agreement and Plan of Reorganization,
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 Agreement and Plan of Reorganization may be terminated, and the
Reorganization abandoned at any time (whether before or after adoption thereof
by the shareholders of any of the Funds) prior to the Exchange Date, or the
Exchange 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 Agreement and Plan of Reorganization
has not been fulfilled or waived by such Board.
Surrender and Exchange of Share Certificates
After the Exchange 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 Fund Common Shares, together
with cash in lieu of any fractional Acquiring Fund Common Shares. Promptly after
the Exchange 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.
Shares of APS are held in "street names" by the Depository Trust Company
and all transfers will be accomplished by book entry.
If prior to the Reorganization, you held: After the Reorganization, you will hold:
- ----------------------------------------- ----------------------------------------
Target Fund Common Shares Acquiring Fund Common Shares
Target Fund APS Acquiring Fund APS
Please do not send in any share certificates at this time. Upon
consummation of the Reorganization, common shareholders of the Target Fund 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 Exchange 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
55
with respect to the shares of the Target Fund 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 Exchange
Date will be paid to the holders of such outstanding share certificates.
Dividends payable to holders of record of Acquiring Fund Common Shares, as of
any date after the Exchange Date and prior to the exchange of certificates by
any shareholder of the Target Fund, will be paid to such shareholder, without
interest, at the time such shareholder surrenders his or her share certificates
for exchange.
From and after the Exchange Date, there will be no transfers on the share
transfer books of the Target Fund. If, after the Exchange 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, as applicable, and cash in lieu of fractional shares, if any,
distributable with respect to such Target Fund Common Shares in the
Reorganization.
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 Internal Revenue Code of 1986, as amended (the "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 federal income tax
purposes. This summary does not address all of the federal income tax
consequences that may be relevant to a particular shareholder or to shareholders
who may be subject to special treatment under federal income tax laws (such as
non-U.S. persons, banks and other financial institutions, insurance companies,
tax-exempt organizations, dealers in stocks, securities or other financial
instruments and holders who acquired shares of the Target Fund as compensation).
No advance ruling has been or will be sought from the IRS regarding any matter
relating to the Reorganization. Thus, no assurance can be given that the IRS
would not assert a position contrary to any of the tax aspects described below.
Prospective investors should consult their own tax advisers as to the 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 (Illinois), counsel to the Funds ("Skadden Arps"), dated as of
the Closing date, regarding the characterization of the Reorganization as a
56
"reorganization" within the meaning of Section 368(a) of the Code. As such a
reorganization, the federal income tax consequences of the Reorganization can be
summarized as follows:
o 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
solely 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.
o No gain or loss will be recognized by a shareholder of the Target
Fund who exchanges all of his, her or its shares of the Target Fund
solely for Acquiring Fund Common Shares or Acquiring Fund APS
pursuant to the Reorganization.
o The aggregate tax basis of the Acquiring Fund Common Shares or
Acquiring Fund APS 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.
o The holding period of the Acquiring Fund Common Shares or Acquiring
Fund APS 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.
o The Acquiring Fund's tax basis in the Target Fund's assets received
by the Acquiring Fund pursuant to the Reorganization will, in each
instance, 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, in each
instance, include the period during which the assets were held by
the Target Fund.
The opinion of Skadden Arps will be based on federal income tax law in
effect on the Exchange Date (as defined below). 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 operative documents.
An opinion of counsel is not binding on the IRS or any court.
Appraisal Rights
A shareholder of the Target Fund who does not vote in favor of the
Reorganization may have the right under Massachusetts law to object to the
Reorganization and demand payment for his or her shares from the applicable Fund
and an appraisal thereof upon compliance with the procedures specified in
Sections 86 through 98 of the Massachusetts Business Corporation Law (the
"Massachusetts Business Corporation Law"), which are set forth in Exhibit VI
hereto. A vote against the Reorganization or the execution of a proxy directing
57
such a vote will not satisfy the requirements of those provisions. A failure to
vote against the Reorganization will not constitute a waiver of such rights. The
Target Fund takes the position that, if available, this statutory right of
appraisal may be exercised only by shareholders of record.
Section 92 of the Massachusetts Business Corporation Law provides that for
purposes of payment to any shareholder who elects to exercise his or her
statutory right of appraisal, the value of shares of such shareholder is to be
determined as of the day preceding the date of the shareholders' vote approving
the Agreement and Plan of Reorganization. Under the terms of the Agreement and
Plan of Reorganization, the Acquiring Fund will assume the obligations of the
Target Fund, if any, with respect to statutory rights of appraisal.
For federal income tax purposes, dissenting shareholders obtaining payment
for their shares will recognize gain or loss measured by the difference between
any such payment and the tax basis for their shares. Shareholders are advised to
consult their personal tax advisers as to the tax consequences of dissenting.
Certain Voting Information Regarding APS
Shares of 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
Meeting or, if adjourned, one business day before the day to which the Meetings
are adjourned. These conditions include, among others, that (i) at least 30% of
the Target Fund's APS outstanding have voted on the Reorganization, and (ii)
less than 10% of the Target Fund APS 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 the Target Fund's APS who voted on the
Reorganization. The 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 each Fund exists. Proxies that are returned to the Fund but that
are marked "abstain" or on which a broker-dealer has declined to vote on any
proposal ("broker non-votes") will be counted as present for the purposes of
determining a quorum.
Shareholder Approval
Under the Declaration of Trust of the Target Fund (as amended to date and
including the Certificate of Vote of Trustees Establishing Preferred Shares of
the Target Fund), relevant Massachusetts law and the rules of the AMEX,
shareholder approval of the Agreement and Plan of Reorganization requires the
affirmative vote of shareholders of the Target Fund representing more than 50%
of the outstanding Target Fund Common Shares and of the Target Fund APS, each
voting separately as a class.
58
OTHER INFORMATION
Shareholder Information
Except as set for below, as of [ ], 2001, to the knowledge of the
Funds, no shareholder owned beneficially more than 5% of a class of a Fund's
outstanding shares:
As of [ ], 2001, no trustees or executive officers owned, directly or
beneficially, Common Shares or APS of either Fund. As of [ ], 2001, the
trustees and executive officers of the Funds individually and as a group owned
less than 1% of the outstanding shares of each Fund.
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 (the "Exchange Act"), 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 the Fund's equity
securities to file forms with the SEC and the New York Stock Exchange or
American Stock Exchange, as applicable, reporting their affiliation with the
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. Shareholder proposals intended to
be presented at the year 2002 Annual Meeting of Shareholders for a Fund pursuant
to Rule 14a-8 under the Exchange Act, must be received by the Fund at the Fund's
principal executive offices by [ ], 2002. In order for proposals made
outside of Rule 14a-8 under the Exchange Act to be considered "timely" within
the meaning of Rule 14a-4(c) under the Exchange Act, such proposals must be
received by the Fund at the Fund's principal executive offices not later than
[ ], 2002. 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 1 Parkview Plaza, Oakbrook Terrace, Illinois
60181-5555.
General
The Funds are subject to the informational requirements of the Exchange
Act and the 1940 Act and in accordance therewith are required to file reports,
proxy
59
statements and other information with the SEC. Any such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the SEC:
Regional Office, at Seven World Trade Center, Suite 1300, New York, New York
10048; Pacific Regional Office, at 5670 Wilshire Boulevard, 11th Floor, Los
Angeles, California 90036; and Midwest Regional Office, at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such materials can be obtained from the public reference section of
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The SEC maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
the Funds, that file electronically with the SEC.
IF YOU CANNOT BE PRESENT IN PERSON, YOU ARE REQUESTED TO FILL IN, SIGN AND
RETURN THE ENCLOSED PROXY PROMPTLY. NO POSTAGE IS REQUIRED IF MAILED IN THE
UNITED STATES.
A. THOMAS SMITH III,
Vice President and Secretary
[ ], 2001
60
INDEPENDENT AUDITORS REPORT
[To Come]
61
THIS PAGE INTENTIONALLY LEFT BLANK.
62
EXHIBIT I
Economic and Other Conditions in New Jersey
General. As described in the Proxy Statement and Prospectus, except during
temporary periods, the Funds invest substantially all of their respective assets
in New Jersey municipal obligations. The Funds are therefore susceptible to
political, economic, regulatory or other factors affecting issuers of New Jersey
municipal obligations. In addition, the specific New Jersey municipal
obligations in which the Funds invest are expected to change from time to time.
The following information constitutes only a brief summary of some of the
complex factors which may have an impact on the financial situation of issuers
of New Jersey municipal obligations and does not purport to be a complete or
exhaustive description of all adverse conditions to which issuers of New Jersey
municipal obligations may be subject and is not applicable to "conduit"
obligations, such as industrial development revenue bonds, with respect to which
the public issuer itself has no financial responsibility. Such information is
derived from certain official statements of the State of New Jersey published in
connection with the issuance of specific State of New Jersey obligations, as
well as from other publicly available documents. Such information has not been
independently verified by the Funds and may not apply to all New Jersey
municipal obligations acquired by the Funds. Neither Van Kampen nor either of
the Funds assumes any responsibility for the completeness or accuracy of such
information.
Additionally, many factors, including national, economic, social and
environmental policies and conditions, which are not within the control of such
issuers, could have an adverse impact on the financial condition of such
issuers. The Funds cannot predict whether or to what extent such factors or
other factors may affect the issuers of New Jersey municipal obligations, the
market value or marketability of such obligations or the ability of the
respective issuers of such obligations acquired by the Funds to pay interest on
or principal of such obligations. The creditworthiness of obligations issued by
local New Jersey issuers may be unrelated to the creditworthiness of obligations
issued by the State of New Jersey, and there is no responsibility on the part of
the State of New Jersey to make payments on such local obligations. There may be
specific factors that are applicable in connection with investment in the
obligations of particular issuers located within New Jersey, and it is possible
a Fund will invest in obligations of particular issuers as to which such
specific factors are applicable. However, the information set forth below is
intended only as a general summary and not as a discussion of any specific
factors that may affect any particular issuer of New Jersey municipal
obligations.
New Jersey benefits from a diverse economic base which includes such
factors as the State's proximity to New York and Pennsylvania, extensive highway
system large white-collar labor force, growing pharmaceutical industry, and var-
I-1
ious commercial and industrial firms having headquarters and regional offices
located within its borders. New Jersey's 1999 economic indicators showed
employment growth of 1.7% personal income growth of 6.4%; sales of existing
homes rising by 20%; and unemployment rate remaining low at 4.6%. New Jersey's
per capita personal income of $36,106 in 1999 represented 126.6% of the national
average and the second highest ranking for all states in the nation.
New Jersey ended Fiscal Year 1999 with an unreserved general fund balance
of $276.1 million and total operating fund reserves of approximately $1.3
billion. In addition, the State's special revenue property-tax relief fund ended
fiscal 1999 with an undesignated balance of $364 million. Fiscal Year 2000 is
projected to end with an unreserved general fund balance of $200.1 million and
an increase of $23 million in the State's total operating fund reserves.
At the end of Fiscal 2000, New Jersey had approximately $14.5 billion in
outstanding indebtedness, consisting of approximately $3.8 billion of general
obligation bonds and in $10.7 billion of appropriate-backed debt obligations.
Project supported by general obligation bonds are of economic, social, and
environmental importance, including the construction of correctional and human
services facilities, transportation project, and higher education improvements.
The appropriation backed debt obligations of the State included the 1997 New
Jersey Economic Development Authority's issuance of $2.75 billion of State
Pension Funding Bonds, the proceeds of which were used to fully fund the state's
unfunded accrued pension liability. As of the end of Fiscal 2000, the State's
debt ratio remained moderate at $1,755 per capita, or 4.9% of personal income
and 4.5% of operating fund appropriations.
New Jersey state and local government obligations may be adversely
affected by political and economic conditions and developments within the State
of New Jersey and the nation as a whole.
I-2
EXHIBIT II
RATINGS OF MUNICIPAL BONDS
Description of Moody's Investors Service, Inc.'s ("Moody's") Municipal Bond
Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to
impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present, but certain protective elements may be lacking or
may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this
class.
B Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal pay-
II-1
ments or of maintenance of other terms of the contract over any long
period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect
to principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Note: These bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aal,
Al, Baal, Bal and Bl.
Short-term Notes: The three ratings of Moody's for short-term notes are MIG
1/VMIG 1, MIG 2/VMIG 2, and MIG 3/VMIG 3; MIG 1 /VMIG 1 denotes "best quality,
enjoying strong protection from established cash flows"; MIG 2/VMIG 2 denotes
"high quality" with "ample margins of protection"; MIG 3/VMIG 3 instruments are
of "favorable quality ... but ... lacking the undeniable strength of the
preceding grades."
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment of short-term promissory obligations. Prime-1 repayment capacity will
often be evidenced by the following characteristics: leading market positions in
well established industries; high rates of return on funds employed;
conservative capitalization structures with moderate reliance on debt and ample
asset protection; broad margins, in earning coverage of fixed financial charges
and high internal cash generation; and with established access to a range of
financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
II-2
Issuers rated Prime-3 (or supporting institutions) have an acceptable ability
for repayment of short-term promissory obligations. The effects of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes to the level of debt protection
measurements and the requirement for relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
Description of Standard & Poor's, a Division of The McGraw-Hill Companies, Inc.
("Standard & Poor's"), Municipal Debt Ratings
A Standard & Poor's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations or a specific program. It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation.
The debt 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.
The ratings are based on current information furnished by the issuer or obtained
by Standard & Poor's from other sources Standard & Poor's considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability of,
such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default-capacity and willingness of the
obligor as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, 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.
AAA Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity of the obligor to meet its financial commitment on
the obligation is extremely strong.
AA Debt rated "AA" differs from the highest-rated issues only in small
degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
II-3
A Debt rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment on the obligation is still strong.
BBB Debt 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.
BB Debt rated "BB," "B," "CCC," "CC", and "C" are regarded as having
B significant speculative characteristics. "BB" indicates the
CCC least degree of speculation and "C" the highest degree of
CC speculation. While such debt will likely have some quality and
C protective characteristics, these may be outweighed by large
uncertainties or major risk exposures to adverse conditions.
D Debt 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 Standard
& Poor's 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 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.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign
(+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.
II-4
B Issues rated "B" are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not expired
unless Standard & Poor's believes that such payments will be made
during such grace period.
c The "c" subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase
tendered bonds if the long-term credit rating of the issuer is below
an investment-grade level and/or the issuer's bonds are deemed
taxable.
p The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project
financed by the debt being rated and indicates that payment of the
debt service requirements is largely or entirely dependent upon the
successful, timely completion of the project. This rating, however,
while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of or the risk of
default upon failure of such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
r The "r" highlights derivative, hybrid, and certain other obligations
that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of noncredit risks.
Examples of such obligations are securities with principal or
interest return indexed to equities, commodities, or currencies;
certain swaps and options; and interest-only and principal-only
mortgage securities. The absence of an "r" symbol should not be
taken as an indication that an obligation will exhibit no volatility
or variability in total return.
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
II-5
A Standard & Poor's note rating reflects the liquidity factors and market access
risks unique to such notes. Notes due in three years or less will likely receive
a note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assessment.
- -- Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note.
- -- Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined
to possess a very strong capacity to pay debt service is given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest
II-6
EXHIBIT III
SECTIONS 86 THROUGH 98 OF CHAPTER 156B
OF THE MASSACHUSETTS GENERAL LAWS
(THE MASSACHUSETTS BUSINESS CORPORATION LAW)
ss.ss. 86. Sections applicable to appraisal; prerequisites
If a corporation proposes to take a corporate action as to which any section of
this chapter provides that a stockholder who objects to such action shall have
the right to demand payment for his shares and an appraisal thereof, sections
eighty-seven to ninety-eight, inclusive, shall apply except as otherwise
specifically provided in any section of this chapter. Except as provided in
sections eighty-two and eighty-three, no stockholder shall have such right
unless (1) he files with the corporation before taking the vote of the
shareholders on such corporate action, written objection to the proposed action
stating that he intends to demand payment for his shares if the action is taken
and (2) his shares are not voted in favor of the proposed action.
ss.ss. 87. Statement of rights of objecting stockholders in notice of meeting;
form
The notice of the meeting of stockholders at which the approval of such proposed
action to be considered shall contain a statement of the rights of objecting
stockholders. The giving of such notice shall not be deemed to create any rights
in any stockholder receiving the same to demand payment for his stock, and the
directors may authorize the inclusion in any such notice of a statement of
opinion by the management as to the existence or non-existence of the right of
stockholders to demand payment for their stock on account of the proposed
corporate action. The notice may be in such form as the directors or officers
calling the meeting deem advisable, but the following form of notice shall be
sufficient to comply with this section:
"If the action proposed is approved by the stockholders at the meeting and
effected by the corporation, any stockholder (1) who files with the corporation
before the taking of the vote on the approval of such action, written objection
to the proposed action stating that he intends to demand payment for his shares
if the action is taken and (2) whose shares are not voted in favor of such
action has or may have the right to demand in writing from the corporation (or,
in the case of a consolidation or merger, the name of the resulting or surviving
corporation shall be inserted), within twenty days after the date of mailing to
him of notice in writing that the corporate action has become effective, payment
for his shares and an appraisal of the value thereof. Such corporation and any
such stockholder shall in such cases have the rights and duties and shall follow
the procedure set forth in sections 88 to 98, inclusive, of chapter 156B of the
General Laws of Massachusetts."
III-1
ss.ss. 88. Notice of effectiveness of action objected to
The corporation taking such action, or in the case of a merger or consolidation
the surviving or resulting corporation, shall, within ten days after the date on
which such corporate action became effective, notify each stockholder who filed
a written objection meeting the requirements of section eighty-six and whose
shares were not voted in favor of the approval of such action, that the action
approved at the meeting of the corporation of which he is a stockholder has
become effective. The giving of such notice shall not be deemed to create any
rights in any stockholder receiving the same to demand payment for his stock.
The notice shall be sent by registered or certified mail, addressed to the
stockholder at his last known address as it appears in the records of the
corporation.
ss.ss. 89. Demand for payment; time for payment
If within twenty days after the date of mailing of a notice under subsection (e)
of section eighty-two, subsection (f) of section eighty-three, or section
eighty-eight, any stockholder to whom the corporation was required to give such
notice shall demand in writing from the corporation taking such action, or in
the case of a consolidation or merger from the resulting or surviving
corporation, payment for his stock, the corporation upon which such demand is
made shall pay to him the fair value of his stock within thirty days after the
expiration of the period during which such demand may be made.
ss.ss. 90. Demand for determination of value; bill in equity; venue
If during the period of thirty days provided for in section eighty-nine the
corporation upon which such demand is made and any such objecting stockholder
fail to agree as to the value of such stock, such corporation or any such
stockholder may within four months after the expiration of such thirty-day
period demand a determination of the value of the stock of all such objecting
stockholders by a bill in equity filed in the superior court in the county where
the corporation in which such objecting stockholder held stock had or has its
principal office in the commonwealth.
ss.ss. 91. Parties to suit to determine value; service
If the bill is filed by the corporation, it shall name as parties respondent all
stockholders who have demanded payment for their shares and with whom the
corporation has not reached agreement as to the value thereof. If the bill is
filed by a stockholder, he shall bring the bill in his own behalf and in behalf
of all other stockholders who have demanded payment for their shares and with
whom the corporation has not reached agreement as to the value thereof, and
service of the bill shall be made upon the corporation by subpoena with a copy
of the bill annexed. The corporation shall file with its answer a duly verified
list of all such other stockholders, and such stockholders shall thereupon be
deemed to have been added as parties to the bill. The corporation shall give
notice in such form and returnable on such date as the court shall order to each
stockholder
III-2
party to the bill by registered or certified mail, addressed to the last known
address of such stockholder as shown in the records of the corporation, and the
court may order such additional notice by publication or otherwise as it deems
advisable. Each stockholder who makes demand as provided in section eighty-nine
shall be deemed to have consented to the provisions of this section relating to
notice, and the giving of notice by the corporation to any such stockholder in
compliance with the order of the court shall be sufficient service of process on
him. Failure to give notice to any stockholder making demand shall not
invalidate the proceedings as to other stockholders to whom notice was properly
given, and the court may at any time before the entry of a final decree make
supplementary orders of notice.
ss.ss. 92. Decree determining value and ordering payment; valuation date
After hearing the court shall enter a decree determining the fair value of the
stock of those stockholders who have become entitled to the valuation of and
payment for their shares, and shall order the corporation to make payment of
such value, together with interest, if any, as hereinafter provided to the
stockholders entitled thereto upon the transfer by them to the corporation of
the certificates representing such stock if certificated or, if uncertificated,
upon receipt of the instruction transferring such stock to the corporation. For
this purpose, the value of the shares shall be determined as of the day
preceding the date of the vote approving the proposed corporate action and shall
be exclusive of any element of value arising from the expectation or
accomplishment of the proposed corporate action.
ss.ss. 93 Reference to special master
The court in its discretion may refer the bill or any question arising
thereunder to a special master to hear the parties, make findings and report the
same to the court, all in accordance with the usual practice in suits in equity
in the superior court.
ss.ss. 94. Notation on stock certificates of pendency of bill
On motion the court may order stockholder parties to the bill to submit their
certificates of stock to the corporation for the notation thereon of the
pendency of the bill and may order the corporation to note such pendency in its
records with respect to any uncertificated shares held by such stockholder
parties, and may on motion dismiss the bill as to any stockholder who fails to
comply with such order.
ss.ss. 95. Costs; interest
The costs of the bill, including the reasonable compensation and expenses of any
master appointed by the court, but exclusive of fees of counsel or of experts
retained by any party, shall be determined by the court and taxed upon the
parties to the bill, or any of them, in such manner as appears to be equitable,
except
III-3
that all costs of giving notice to stockholders as provided in this chapter
shall be paid by the corporation. Interest shall be paid upon any award from the
date of the vote approving the proposed corporate action, and the court may on
application of any interested party determine the amount of interest to be paid
in the case of any stockholder.
ss.ss. 96. Dividends and voting rights after demand for payment
Any stockholder who has demanded payment for his stock as provided in this
chapter shall not thereafter be entitled to notice of any meeting of
stockholders or to vote such stock for any purpose and shall not be entitled to
the payment of dividends or other distribution on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the date of the vote, approving the proposed corporate action) unless:
1) A bill shall not be filed within the time provided in section
ninety;
2) A bill, if filed, shall be dismissed as to such stockholder; or
3) Such stockholder shall with the written approval of the corporation,
or in the case of a consolidation or merger, the resulting or
surviving corporation, deliver to it a written withdrawal of his
objections to and an acceptance of such corporate action.
Notwithstanding the provisions of clauses (1) to (3), inclusive, said
stockholder shall have only the rights of a stockholder who did not so demand
payment for his stock as provided in this chapter.
ss.ss. 97. Status of shares paid for
The shares of the corporation paid for by the corporation pursuant to the
provisions of this chapter shall have the status of treasury stock, or in the
case of a consolidation or merger the shares or the securities of the resulting
or surviving corporation into which the shares of such objecting stockholder
would have been converted had he not objected to such consolidation or merger
shall have the status of treasury stock or securities.
ss.ss. 98. Exclusive remedy; exception
The enforcement by a stockholder of his right to receive payment for his shares
in the manner provided in this chapter shall be an exclusive remedy except that
this chapter shall not exclude in the right of such stockholder to bring or
maintain an appropriate proceeding to obtain relief on the ground that such
corporate action will be or is illegal or fraudulent as to him.
III-4
SUBJECT TO COMPLETION -- DATED [ ], 2001
Van Kampen Trust for
Investment Grade New Jersey Municipals
1 Parkview Plaza
Oakbrook Terrace, Illinois 60181-5555
(630) 684-6000
----------------------------
STATEMENT OF ADDITIONAL INFORMATION
Van Kampen Trust for Investment
Grade New Jersey Municipals
Relating to the Acquisition of Assets and Liabilities of
Van Kampen New Jersey Value Municipal Income Trust
Dated [______], 2001
----------------------------
This Statement of Additional Information provides information about Van
Kampen Trust For Investment Grade New Jersey Municipals (the "Acquiring Fund"),
a closed-end management investment company organized as a Massachusetts business
trust, in addition to information contained in the Proxy Statement and
Prospectus of the Acquiring Fund, dated [______], 2001, which also serves as the
proxy statement of Van Kampen New Jersey Value Municipal Income Trust (the
"Target Fund"), a closed-end management investment company organized as a
Massachusetts business trust, in connection with the issuance of common shares
of beneficial interest of the Acquiring Fund to common shareholders of the
Target Fund and preferred shares of beneficial interest, designated Auction
Preferred Shares ("APS"), of the Acquiring Fund to holders of preferred shares
of beneficial interest of the Target Fund. This Statement of Additional
Information is not a prospectus. It should be read in conjunction with the
Prospectus/Proxy Statement, into which it has been incorporated by reference and
which may be obtained by contacting the Acquiring Fund or Target Fund located at
1 Parkview Plaza, Oakbrook Terrace, Illinois 60181-5555 (telephone no. (630)
684-6000 or (800) 421-5666).
TABLE OF CONTENTS
Proposed Reorganization of the Target Fund.................. S-2
Additional Information About the Acquiring Fund............. S-2
Additional Information About the Target Fund................ S-2
Additional Information About Taxation....................... S-2
Additional Information Regarding Auction Preferred
Shares of the Acquiring Fund............................ S-5
Pro Forma Financial Statements.............................. S-30
Appendix A
Agreement and Plan of Reorganization................... A-1
Appendix B
Certificate of Vote.................................... B-1
Appendix C
Acquiring Fund Annual Report........................... C-1
Appendix D
Target Fund Annual Report.............................. D-1
Appendix E
Pro Forma Financial Statements................... E-1
S-1
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.
PROPOSED REORGANIZATION OF THE TARGET FUND
The shareholders of the Target Fund are being asked to approve an
acquisition of all the assets of the Target Fund by the Acquiring Fund in
exchange for common and preferred shares of beneficial interest of the Acquiring
Fund (the "Reorganization") pursuant to an Agreement and Plan of Reorganization
by and between the Acquiring Fund and the Target Fund (the "Agreement"). A copy
of the form of the Agreement is attached hereto as Appendix A.
ADDITIONAL INFORMATION ABOUT THE ACQUIRING FUND
Incorporated herein by reference in its entirety is the Certificate of
Vote of Trustees Establishing Preferred Shares (the "Certificate of Vote") of
the Acquiring Fund, attached as Appendix B to this Statement of Additional
Information. Incorporated herein by reference in its entirety is the Annual
Report of the Acquiring Fund, dated October 31, 2000, attached as Appendix C to
this Statement of Additional Information.
ADDITIONAL INFORMATION ABOUT THE TARGET FUND
Incorporated herein by reference in its entirety is the Annual Report of
the Target Fund, for the fiscal year ended October 31, 2000, attached as
Appendix D to this Statement of Additional Information.
ADDITIONAL INFORMATION ABOUT TAXATION
Federal Income Taxation of the Fund
Each of the Funds has elected and qualified, and the Funds intend to
continue to qualify each year, to be treated as regulated investment companies
under Subchapter M of the Internal Revenue Code (the "Code"). To qualify as
regulated investment companies, the Funds must comply with certain requirements
of the Code relating to, among other things, the sources of their income and
diversification of its assets.
If the Funds so qualify and distribute each year to their shareholders at
least 90% of their investment company taxable income (generally including
ordinary income and net short-term capital gain, but not net capital gain, which
is the excess of net long-term capital gain over short-term capital loss) and at
least 90% of their net tax-exempt interest, and meet certain other requirements,
they will not be required to pay federal income taxes on any income they
distribute to shareholders. The Funds intend to distribute at least the minimum
amount of investment company taxable income and net tax-exempt interest
necessary to satisfy the 90% distribution requirement. The Funds will not be
subject to federal income tax on any net capital gain distributed to
shareholders.
To avoid a 4% excise tax, the Funds will be required to distribute, by
December 31st of each year, at least an amount equal to the sum of (i) 98% of
their ordinary income (not including tax-exempt income) for such year and (ii)
98% of their capital gain net income (the latter of which generally is computed
on the basis of the one-year period ending on October 31st of such year), plus
any amounts that were not distributed in previous taxable years. For purposes of
the excise tax, any ordinary income or capital gain net income retained by, and
subject to federal income tax in the hands of, the Funds will be treated as
having been distributed.
If the Funds failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, the Funds would
be taxed as an ordinary corporation on their taxable income (even if such income
were distributed to their shareholders) and all distributions out of earnings
and profits would be taxed to shareholders as ordinary income. In addition, the
Funds could be required to recognize unrealized gains, pay taxes and interest
charges and make distributions before requalifying for taxation as regulated
investment companies.
S-2
Some of the Funds' investment practices are subject to special provisions
of the Code that may, among other things, (i) disallow, suspend or otherwise
limit the allowance of certain losses or deductions, (ii) convert lower taxed
long-term capital gain into higher taxed short-term capital gain or ordinary
income, (iii) convert an ordinary loss or a deduction into a capital loss (the
deductibility of which is more limited) and/or (iv) cause the Funds to recognize
income or gain without a corresponding receipt of cash with which to make
distributions in amounts necessary to satisfy the 90% distribution requirement
and the distribution requirements for avoiding income and excise taxes. The
Funds will monitor their transactions and may make certain tax elections to
mitigate the effect of these rules and prevent disqualification of the Funds as
a regulated investment company.
Investments of the Funds in securities issued at a discount or providing
for deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Funds will be required to accrue as income each year a portion of the discount
and to distribute such income each year to maintain their qualification as
regulated investment companies and to avoid income and excise taxes. To generate
sufficient cash to make distributions necessary to satisfy the 90% distribution
requirement and to avoid income and excise taxes, the Funds may have to dispose
of securities that they would otherwise have continued to hold. A portion of the
discount relating to certain stripped tax-exempt obligations may constitute
taxable income when distributed to shareholders.
Distributions to Shareholders
The Funds intend to invest in sufficient tax-exempt municipal securities
to permit payment of "exempt-interest dividends" (as defined in the Code).
Dividends paid by the Funds from the net tax-exempt interest earned from
municipal securities qualify as exempt-interest dividends if, at the close of
each quarter of its taxable year, at least 50% of the value of the total assets
of the Funds consists of such securities.
Certain limitations on the use and investment of the proceeds of state and
local government bonds and other funds must be satisfied to maintain the
exclusion from gross income for interest on such bonds. These limitations
generally apply to bonds issued after August 15, 1986. In light of these
requirements, bond counsel qualify their opinions as to the federal tax status
of bonds issued after August 15, 1986 by making them contingent on the issuer's
future compliance with these limitations. Any failure on the part of an issuer
to comply could cause the interest on its bonds to become taxable to investors
retroactive to the date the bonds were issued.
Except as provided below, exempt-interest dividends paid to shareholders
generally are not includable in the shareholders' gross income for federal
income tax purposes. The percentage of the total dividends paid by the Funds
during any taxable year that qualify as exempt-interest dividends will be the
same for all shareholders of the Funds receiving dividends during such year.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The
Funds invest a portion of their assets in municipal securities subject to this
provision so that a portion of their exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Funds could cause
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax. Per capita volume limitations on certain
private-activity bonds could limit the amount of such bonds available for
investment by the Funds.
Exempt-interest dividends are included in determining what portion, if
any, of a person's social security and railroad retirement benefits will be
includable in gross income subject to federal income tax.
Although exempt-interest dividends generally may be treated by
shareholders of the Funds as items of interest excluded from their gross income,
each shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" (or a "related person" of a substantial user) of
the facilities financed with respect to any of the tax-exempt obligations held
by the Funds. "Substantial user" is defined under United States Treasury
regulations to include a non-exempt person who regularly uses in his trade or
business a part of any facilities financed with the tax-exempt obligations and
whose gross revenues derived from such facilities exceed 5% of the total
revenues derived
S-3
from the facilities by all users, or who occupies more than 5% of the useable
area of the facilities or from whom the facilities or a part thereof were
specifically constructed, reconstructed or acquired. Examples of "related
persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
While the Funds expect that a major portion of their net investment income
will constitute tax-exempt interest, a significant portion may consist of
investment company taxable income (generally ordinary income and net short-term
capital gain). Distributions of the Funds' investment company taxable income are
taxable to shareholders as ordinary income to the extent of the Funds' earnings
and profits, whether paid in cash or reinvested in additional shares.
Distributions of the Funds' net capital gains as capital gain dividends, if any,
are taxable to shareholders as long-term capital gains regardless of the length
of time shares of the Funds have been held by such shareholders. Distributions
in excess of the Funds' earnings and profits will first reduce the adjusted tax
basis of a holder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such holder (assuming such shares are
held as a capital asset). For a summary of the tax rates applicable to capital
gains (including capital gain dividends), see "Capital Gains Rates" below. Some
or all of the interest on indebtedness incurred to purchase or carry shares of a
mutual fund which distributes exempt-interest dividends during the year will not
be deductible for federal income tax purposes depending upon the ratio of the
exempt-interest dividends to the total of exempt-interest dividends plus taxable
dividends received by the shareholder (excluding capital gain dividends) during
the year.
Shareholders receiving distributions in the form of additional shares
issued by the Funds will be treated for federal income tax purposes as receiving
a distribution in an amount equal to the fair market value of the shares
received, determined as of the distribution date. The basis of such shares will
equal the fair market value on the distribution date.
The Funds will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The aggregate
amount of dividends designated as exempt-interest dividends cannot exceed the
excess of the amount of interest exempt from tax under Section 103 of the Code
received by the Funds during the year over any amounts disallowed as deductions
under Section 265 and 171(a)(2) of the Code. Since the percentage of dividends
which are exempt-interest dividends is determined on an average annual method
for the taxable year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of the
Funds' income that was tax exempt during the period covered by the dividend.
Distributions from the Funds generally will not qualify for the dividends
received deduction for corporations.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Funds and
received by the shareholders on the December 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of the Funds may be "spilled back" and treated as paid by the Funds (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
Sale of Shares
The sale of shares (including transfers in connection with a redemption or
repurchase of shares) may be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize a gain or loss in an
amount equal to the difference between their adjusted tax basis in the shares
sold and the amount received. If the shares sold are held as a capital asset,
the gain or loss will be a capital gain or loss. For a summary of the maximum
tax rates applicable to capital gains (including capital gain dividends), see
"Capital Gains Rates" below. Any loss recognized upon a taxable disposition of
shares held for six months or less will be treated as a long-term capital loss
to the extent of any capital gain dividends received with respect to such
shares. For purposes of determining whether shares have been held for six months
or less, the holding period is suspended for any periods during which the
shareholder's risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property or through certain
options or short sales.
S-4
Capital Gains Rates
The maximum tax rate applicable to net capital gains recognized by
individuals and other non-corporate taxpayers investing in the Funds is (i) the
same as the maximum ordinary income tax rate for capital assets held for one
year of less or (ii) 20% for capital assets held for more than one year. The
maximum long-term capital gains rate for corporations is 35%.
Backup Withholding
The Funds may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends if (i) the
shareholder fails to properly furnish the Funds with its correct taxpayer
identification number, (ii) the Internal Revenue Service ("IRS") notifies the
Funds that the shareholder has failed to properly report certain interest and
dividend income to the IRS and to respond to notices to that effect or (iii)
when required to do so, the shareholder fails to certify that he or she is not
subject to backup withholding. Redemption proceeds may be subject to withholding
under the circumstances described in (i) above.
Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules from payments made to a shareholder may be refunded
or credited against such shareholder's U.S. federal income tax liability, if
any, provided that the required information is furnished to the IRS.
Information Reporting
The Funds must report annually to the IRS and to each shareholder the
amount of dividends paid to such shareholder and the amount, if any, of tax
withheld pursuant to backup withholding rules with respect to such dividends.
General
The federal income tax discussion set forth above is for general
information only. Shareholders and prospective investors should consult their
advisers regarding the specific federal tax consequences of purchasing, holding
and disposing of shares of the Funds, as well as the effects of state, local and
foreign tax law and any proposed tax law changes.
ADDITIONAL INFORMATION RELATING TO AUCTION PREFERRED SHARES OF THE ACQUIRING
FUND
Rating Agency Guidelines
The Acquiring Fund intends that, so long as any APS are outstanding, the
composition of its portfolio will reflect guidelines established by Moody's
Investors Service, Inc. ("Moody's) and Standard & Poor's ("S&P") in connection
with the Acquiring Fund's receipt on the date the Acquiring Fund APS are issued
to the Target Fund of ratings of "aaa" from Moody's and AAA from S&P. Moody's
and S&P, nationally recognized independent rating agencies, issue ratings for
various securities reflecting their perceived creditworthiness of such
securities. The Acquiring Fund will pay certain fees to Moody's and S&P for
rating shares of the APS. The guidelines described below have been developed by
Moody's and S&P in connection with other issuances of asset-backed and similar
securities, including debt obligations and adjustable 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 sufficiently varied 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 the Acquiring
Fund in order to satisfy current requirements necessary for Moody's and S&P to
issue the above-described ratings for APS, which ratings are generally relied
upon by institutional investors in purchasing such securities. In the context of
a closed-end investment company such as the Acquiring Fund, therefore, 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 Investment Company Act of 1940, as amended (the "1940
Act"). A rating agency's guidelines will apply to the APS only so long as such
rating agency is rating such shares. The rating guidelines for the Acquiring
Fund APS are substanitally identical to the rating agency guidelines with
respect to the Target Fund APS.
S-5
Capitalized terms used but not defined in this section shall have the meanings
ascribed to them in the Certificate of Vote of the Acquiring Fund, attached
hereto as Appendix B.
The Acquiring Fund intends to maintain a Discounted Value for its
portfolio at least equal to the APS Basic Maintenance Amount and, in addition,
so long as S&P is rating the APS, the Fund intends to maintain a Minimum
Liquidity Level. Moody's and S&P have each established separate guidelines for
determining Discounted Value. To the extent any particular portfolio holding
does not satisfy the applicable rating agency's guidelines, all or a portion of
such holding's value will not be included in the calculation of Discounted Value
(as defined by such rating agency). The Moody's and S&P guidelines do not impose
any limitations on the percentage of Fund assets that may be invested in
holdings not eligible for inclusion in the calculation of the Discounted Value
of the Fund's portfolio. The amount of such assets included in the portfolio at
any time may vary depending upon the rating, diversification and other
characteristics of the Eligible Assets included in the portfolio, although it is
not anticipated that in the normal course of business the value of such assets
would exceed 20% of the Acquiring Fund's total assets.
In managing the Acquiring Fund's portfolio, the Adviser will not alter the
composition of the Acquiring Fund's portfolio if, in the reasonable belief of
the Adviser, the effect of any such alteration would be to cause the Acquiring
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
Acquiring Fund's Eligible Assets exceeded the APS Basic Maintenance Amount by
five percent or less, the Adviser will not alter the composition of the
Acquiring Fund's portfolio in a manner reasonably expected to reduce the
aggregate Discounted Value of the Acquiring Fund's Eligible Assets unless the
Acquiring Fund shall have confirmed that, after giving effect to such
alteration, the aggregate Discounted Value of the Acquiring Fund's Eligible
Assets would exceed the APS Basic Maintenance Amount.
Upon any failure to maintain the required Discounted Value, the Acquiring
Fund will seek to alter the composition of its portfolio to reattain the APS
Basic Maintenance Amount on or prior to the APS Basic Maintenance Cure Date,
thereby incurring additional transaction costs and possible losses and/or gains
on dispositions of portfolio securities. To the extent any such failure is not
cured in a timely manner, APS will be subject to redemption if either Moody's or
S&P is rating such shares. The APS Basic Maintenance Amount includes the sum of
(i) the aggregate liquidation value of APS then outstanding and (ii) certain
accrued and projected payment obligations of the Acquiring Fund.
The Acquiring Fund may, but is not required to, adopt any modifications to
these guidelines that may hereafter be established by Moody's and S&P. Failure
to adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the APS may, at any time, change or withdraw any
such rating. As set forth in the APS Provisions, the Board of Trustees may,
without shareholder approval, modify certain definitions or policies which have
been adopted by the Acquiring Fund pursuant to the rating agency guidelines,
provided the Board of Trustees has obtained written confirmation from Moody's
and S&P, as appropriate, that any such change would not impair the ratings then
assigned by Moody's and S&P to the APS. A rating agency's guidelines will apply
to the APS only so long as such rating agency is rating such shares.
As recently described by Moody's and S&P, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings on the APS are not recommendations to purchase, hold or
sell APS, inasmuch as the ratings do not comment as to market price or
suitability for a particular investor nor do the rating agency guidelines
described above address the likelihood that a holder of APS will be able to sell
such shares in an Auction. The ratings are based on current information
furnished to Moody's and S&P by the Acquiring Fund and the Adviser, and
information obtained from other sources. The ratings may be changed, suspended
or withdrawn as a result of changes in, or the unavailability of, such
information. The Acquiring Fund's Common Shares have not been rated by a
nationally recognized statistical rating organization.
S&P AAA Rating Guidelines. For purposes of calculating the Discounted
Value of the Acquiring Fund's portfolio under current S&P guidelines, the fair
market value of New Jersey municipal securities eligible for consideration under
such guidelines ("S&P Eligible Assets") must be discounted by certain discount
factors set forth in the table below ("S&P Discount Factors"). The Discounted
Value of a New Jersey municipal security under S&P guidelines is the fair market
S-6
value thereof divided by the S&P Discount Factor. The S&P Discount Factor used
to discount a particular New Jersey municipal security will be determined by
reference to the "S&P Exposure Period" (currently, three Business Days) and the
S&P rating on such New Jersey municipal security. S&P Discount Factors for a
range of exposure periods are set forth below:
S&P Discount Factors
Rating Category
-----------------------------------------
Exposure Period AAA AA A BBB
40 Business Days............ 205% 210% 225% 265%
22 Business Days............ 185 190 205 245
10 Business Days............ 170 175 190 230
7 Business Days............. 165 170 185 225
3 Business Days............. 145 150 165 205
Since the S&P Exposure Period currently applicable to the Acquiring Fund
is three Business Days, the S&P Discount Factors currently applicable to S&P
Eligible Assets will be determined by reference to the factors set forth
opposite the line entitled "3 Business Days." Notwithstanding the foregoing, (i)
the S&P Discount Factor for short-term New Jersey municipal securities will be
115%, so long as such New Jersey 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 New Jersey 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 New Jersey 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 New Jersey municipal securities may
comprise no more than 50% of short-term New Jersey 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 New Jersey Municipal Securities Sold. For purposes
of the foregoing, Anticipation Notes rated SP-l+ 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, will be
considered to be short-term New Jersey municipal securities. "Receivables for
New Jersey Municipal Securities Sold," for purposes of calculating S&P Eligible
Assets as of any Valuation Date, means the book value of receivables for New
Jersey municipal securities sold as of or prior to such Valuation Date if such
receivables are due within five business days of such Valuation Date.
The S&P guidelines impose certain minimum issue size, issuer, geographical
diversification and other requirements for purposes of determining S&P Eligible
Assets:
(1) In order to be considered S&P Eligible Assets, New Jersey municipal
securities owned by the Acquiring Fund must:
(a) Be interest bearing and pay interest at least semi-annually;
(b) Be payable with respect to principal and interest in U.S.
dollars;
(c) Be publicly rated BBB or higher by S&P or, if not rated by S&P
but rated by Moody's, be rated at least A by Moody's; provided
that such Moody's-rated New Jersey municipal securities will
be included in S&P Eligible Assets only to the extent the fair
market value of such New Jersey municipal securities does not
exceed 50% of the aggregate fair market value of S&P Eligible
Assets. For purposes of determining the S&P Discount Factors
applicable to such Moody's-rated New Jersey municipal
securities, any such New Jersey
S-7
municipal security will be deemed to have an S&P rating which
is one full rating category lower than its Moody's rating;
(d) Not be private placements; and
(e) Be part of an issue with an original issue size of at least
$10 million or, if of an issue with an original issue size
below $10 million (but in no event lower than $5 million), be
issued by an issuer with a total of at least $50 million of
securities outstanding.
(2) New Jersey municipal securities of any one issuer or guarantor
(excluding bond insurers) will be considered S&P Eligible Assets only to the
extent the fair market value of such New Jersey municipal securities does not
exceed 10% of the aggregate fair 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
fair market value of such New Jersey municipal securities exceeds 5% of the
aggregate fair market value of S&P Eligible Assets.
(3) New Jersey municipal securities guaranteed or insured by any one bond
insurer will be considered S&P Eligible Assets only to the extent the fair
market value of such New Jersey municipal securities does not exceed 25% of the
aggregate fair market value of S&P Eligible Assets.
(4) New Jersey municipal securities of any one issue type category will be
considered S&P Eligible Assets only to the extent the fair market value of such
New Jersey municipal securities does not exceed 20% of the aggregate fair market
value of S&P Eligible Assets. For purposes of this requirement, New Jersey
municipal securities will be classified into one of the following categories:
health care issues, housing issues, educational issues, facilities issues,
student loan issues, transportation issues, industrial development bond issues,
public power utilities issues, water and sewer utilities issues, special
utilities issues, general obligation issues, lease obligations, escrowed bonds
and other issues not falling within one of the aforementioned categories.
Furthermore, special utilities issues that are not rated by S&P will not be
considered S&P Eligible Assets.
In the event any of the S&P Eligible Assets in the Acquiring Fund's
portfolio consist of municipal securities other than New Jersey municipal
securities, then such municipal securities shall be S&P Eligible Assets only to
the extent the fair market value of such municipal securities does not exceed
20% of the aggregate fair market value of the S&P Eligible Assets and to the
extent the Fund shall have received written confirmation from S&P that such
municipal securities held by the Acquiring Fund would not adversely affect the
then current rating on the APS.
For so long as any APS are Outstanding and S&P is rating such APS, the
Acquiring 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 S&P to the
APS engage in any one or more of the following transactions: reverse repurchase
agreement transactions; 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; 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; lend portfolio securities; merge
or consolidate with any corporation; 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
deposit, or bankers acceptances in which the counter-party or its affiliates
have securities rated A-1+ by S&P with respect to such underlying security;
short sale transactions; in addition, the Fund will not purchase or sell futures
contracts or options thereon or write uncovered put or uncovered call options on
portfolio securities except that (i) 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 (ii) the Fund may engage in S&P Hedging
Transactions based on Treasury Bonds, pro-
S-8
vided 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 long as any APS
are rated by S&P, the Acquiring Fund will engage in Closing Transactions to
close out any outstanding futures contract which the Fund owns or has sold or
any outstanding option thereon owned by the Fund in the event (i) 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 (ii) the Acquiring Fund is required to pay Variation Margin on the second
such Valuation Date. For so long as any APS are rated by S&P, the Acquiring 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
any APS are rated by S&P, when the Acquiring 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.
Moody's "aaa" Rating Guidelines. For purposes of calculating the
Discounted Value of the Acquiring Fund's portfolio under current Moody's
guidelines, the fair market value of New Jersey municipal securities eligible
for consideration under such guidelines ("Moody's Eligible Assets") must be
discounted by certain discount factors set forth in the table below ("Moody's
Discount Factors"). The Discounted Value of a New Jersey municipal security
under Moody's guidelines is the fair market value thereof divided by the Moody's
Discount Factor. The Moody's Discount Factor used to discount a particular New
Jersey municipal security will be determined by reference to the "Moody's
Exposure Period" (currently, the period commencing on a given Valuation Date and
ending 47 days thereafter) and the Moody's rating on such New Jersey municipal
securities. Moody's Discount Factors for a range of exposure periods are set
forth below:
Moody's Discount Factors
Rating Category
--------------------------------------------------------------
VMIG-1 SP-1+
Exposure Aaa(1) Aa(1) A(1) Baa(1) Other(2) (1)(3)(4) (3)(4)
- -------- ------ ----- ---- ------ -------- --------- ------
7 weeks ................... 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but greater
than 7 weeks ............ 154 164 173 205 235 137 149
9 weeks or less but greater
than 8 weeks ............ 158 169 179 209 242 138 150
- --------------
(1) Moody's rating.
(2) New Jersey municipal securities not rated by Moody's but rated BBB or BBB+
by SP.
(3) New Jersey 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.
Since the Moody's Exposure Period currently applicable to the Fund is 47
days, the Moody's Discount Factors currently applicable to Moody's Eligible
Assets will be determined by reference to the factors set forth opposite the
line entitled "7 weeks." Notwithstanding the foregoing, (i) no Moody's Discount
Factor will be applied to short-term New Jersey municipal securities so long as
such New Jersey 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 New Jersey
municipal securities will be 125% as long as such New Jersey municipal
securities are rated at
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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 New Jersey Municipal
Securities Sold. "Receivables for New Jersey Municipal Securities Sold," for
purposes of calculating Moody's Eligible Assets as of any Valuation Date, means
no more than the aggregate of the following: (i) the book value of receivables
for New Jersey 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 New
Jersey 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 conditions (x) or (y).
The Moody's guidelines impose certain minimum issue size, issuer,
geographical diversification and other requirements for purposes of determining
Moody's Eligible Assets, as set forth in the table below:
Minimum Maximum Maximum Maximum
Rating Issue Size Underlying Issue Type County
(Millions) Obligor(2) Concentration(2) Concentration(2),(3)
---------- ---------- ---------------- --------------------
Aaa................... $10 100% 100% 100%
Aa.................... 10 20 60 60
A..................... 10 10 40 40
Baa................... 10 6 20 20
Other(1).............. 10 4 12 12
- ---------------
(1) New Jersey municipal securities not rated by Moody's but rated at least
BBB by S&P.
(2) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(3) Applies to general obligation New Jersey municipal securities only.
For purposes of the maximum underlying obligor requirement described
above, which requirement will apply except with respect to general obligation
New Jersey municipal securities, any New Jersey municipal security backed by the
guaranty, letter of credit or insurance issued by a third party will 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 New Jersey municipal security. For
purposes of the issue type concentration requirement described above, New Jersey
municipal securities will be classified within one of the following categories:
health care issues (teaching and non-teaching hospitals, public and private),
housing issues (single- and multi-family), educational facilities issues (public
and private schools), student loan issues, resource recovery issues,
transportation issues (mass transit, airport and highway bonds), industrial
development bond issues, utility issues (water, sewer and electricity), general
obligation issues, lease obligations, escrowed bonds and other issues ("Other
Issues") (includes special obligations to crossover, excise and sales tax
revenue, recreation revenue, special assessment and telephone revenue bonds
only) not falling within one of the aforementioned categories. In no event shall
(a) more than 10% of Moody's Eligible Assets consist of student loan issues, (b)
more than 10% of Moody's Eligible Assets consist of resource recovery issues or
(c) more than 10% of Moody's Eligible Assets consist of Other Issues. In the
event any of the Moody's Eligible Assets in the Fund's portfolio consist of
municipal securities of issuers other than New Jersey municipal securities, then
such municipal securities shall be subject to the following requirements
regarding the maximum percentage of Moody's Eligible Assets that may be invested
in municipal securities of issuers located in a particular state or United
States territory: such municipal securities rated BBB or BBB+ by S&P may
comprise no more than 12% of total Moody's Eligible Assets; such BBB or BBB+
rated municipal securities, if any, together with any such municipal securities
rated Baa by Moody's or A by S&P, may comprise no more than 20% of total Moody's
Eligible Assets; such BBB, BBB+, Baa and A-rated municipal securities, if any
together with any such municipal securities rated A by Moody's or AA by S&P, may
comprise no more than 40% of total Moody's Eligible Assets; such BBB, BBB+, Baa
A and AA-rated municipal securities, if any, together with any such municipal
securities rated Aa by Moody's or AAA by S&P, may comprise no more than 60% of
total Moody's Eligible Assets; and such municipal securities rated Aaa by
Moody's may comprise 100% of Moody's
S-10
Eligible Assets; provided, however, that notwithstanding the foregoing no more
than an aggregate of 10% of the Moody's Eligible Assets may consist of municipal
securities of issuers located in United States territories, other than Puerto
Rico.
Current Moody's guidelines also require that New Jersey municipal
securities constituting Moody's Eligible Assets pay interest in cash, be
publicly rated Baa or higher by Moody's or, if not rated by Moody's but rated by
S&P, that they be rated at least BBB by S&P, and that they not have suspended
ratings. For purposes of determining the Moody's Discount Factors applicable to
such S&P-rated municipal securities, any such municipal securities (excluding
short-term municipal securities) will be deemed to have a Moody's rating which
is one full rating category lower than its S&P rating. For purposes of
calculation of Minimum Issue Size, Maximum Underlying Obligor, Maximum Issue
Type Concentration and Maximum County 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-l+ 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, New Jersey 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 New Jersey 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 (A) (i) through (A) (vii) 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 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
the Adviser, the Administrator, State Street Bank and Trust Company or the
Auction Agent and (d) Liens by virtue of any repurchase agreement.
For so long as any APS are Outstanding and the APS are rated by Moody's,
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: (1) incur any
indebtedness; (2) 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 (3), except as
necessary to effect Closing Transactions, engage in 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; (B) the Fund may write covered call options; and (C) the Fund
may write put options on securities. For purposes of valuation of Moody's
Eligible Assets (i) if the Fund writes a call option, the underlying asset will
be valued as follows: (A) 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 (B) otherwise, it has no value;
(ii) if the Fund writes a put option, the underlying asset will be valued as
follows: the lesser of (A) exercise price and (B) the Discounted Value of the
underlying security; and (iii) call or put option contracts which the Fund buys
have no value. For so long as any APS are rated by Moody's; (1) the Fund will
not engage in options and futures transactions for leveraging or speculative
purposes; (2) the Fund will not write any anticipatory call options or sell any
anticipatory contracts pursuant to which the Fund hedges the anticipated
purchase of an asset prior to completion of such purchase; (3) 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; (4)
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; (5) for
purposes of the APS Basic Maintenance Amount (i) assets in margin accounts are
not Moody's Eligible Assets, (ii) 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
S-11
liabilities of the Fund and (iii) if the Fund writes call options on futures
contracts and does not own the underlying futures contract, 105% of the fair
market value of the underlying futures contract will constitute a liability of
the Fund; (6) the Fund shall enter into only exchange-traded futures and shall
write only exchange-traded options on exchanges approved by Moody's; (7) 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; (8) the Fund will not
engage in forward contracts; (9) the Fund will enter into futures contracts as
seller only if it owns the underlying security; and (10) there shall be a
quarterly audit made of the Fund's futures and options transaction by the Fund's
independent accountants to confirm that the Fund is in compliance with these
standards.
The Auction
General. The APS Provisions provide that the Applicable Rate per annum for
each Subsequent Dividend Period after the Initial Dividend Period for the
Acquiring Fund APS to be issued in connection with the Reorganization shall be
equal to the rate per annum that the Auction Agent advises has resulted on the
Business Day preceding the first day of such Subsequent Dividend Period from
implementation of the auction procedures (the "Auction Procedures") set forth in
the APS Provisions, in which persons determine to hold or offer to sell or,
based on dividend rates bid by them, offer to purchase or sell shares of APS.
Each periodic implementation of the Auction Procedures is referred to herein as
an "Auction."
As used herein with respect to the APS, (i) "Applicable Rate" means the
rate per annum at which dividends are payable on APS for any Dividend Period
thereof, (ii) "Business Day" means a day on which the New York Stock Exchange is
open for trading and is not a Saturday, Sunday or other day on which banks in
New York City are authorized by law to close, (iii) "Date of Original Issue"
means the date on which the Fund initially issued APS, (iv) "Dividend Payment
Date" means any date on which dividends on APS are payable as provided under
"Description of APS-Dividends-General," (v) "Dividend Period" means the period
from and including the Date of Original Issue of such shares to but excluding
the initial Dividend Payment Date for such shares and any period thereafter from
and including one Dividend Payment Date for such shares to but excluding the
next succeeding Dividend Payment Date for such shares, (vi) "Initial Dividend
Period" means the period from and including the Date of Original Issue to but
excluding the first Dividend Payment Date which occurs in a month which contains
the first scheduled Auction Date for the APS, (vii) "Rate Period" means the
Initial Dividend Period and any Subsequent Dividend Period, (viii) "Subsequent
Dividend Period" means any period from and including the first day following the
Initial Dividend Period to but excluding the next Dividend Payment Date which
follows a scheduled Auction and any period thereafter from and including one
Dividend Payment Date which follows a scheduled Auction to but excluding the
next succeeding Dividend Payment Date which follows a scheduled Auction,
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, (ix) "Minimum Dividend Period" means any Rate Period consisting
of 28 Rate Period Days, subject to certain exceptions, and (x) "Special Dividend
Period" means any Subsequent Dividend Period commencing on the date designated
by the Fund, as set forth under "Description of APS-Dividends- Designation of
Special Dividend Periods," and ending on the last day of the last Dividend
Period thereof.
Auction Agency Agreement. The Acquiring Fund has entered into an agreement
(the "Auction Agency Agreement") with Bankers Trust Company (together with any
successor bank or trust company or other entity entering into a similar
agreement with the Fund, 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 APS so long as the Applicable Rate is to
be based on the results of an Auction.
Broker-Dealer Agreements. Each Auction requires the participation of one
or more broker-dealers. The Auction Agent has entered into agreements with
[insert current broker-dealers] and may enter into similar agreements
(collectively, the "Broker-Dealer Agreements") with one or more additional
broker-dealers (collectively, the "Broker-Dealers") selected by the Acquiring
Fund, which provide for the participation of Broker-Dealers in Auctions.
As used herein, "Existing Holder" of APS means a person who is listed as
the beneficial owner of such APS in the records of the Auction Agent. The
Auction Agent may rely upon, as evidence of the identities of the Existing
Holders of
S-12
APS, a list of the initial owners of the APS provided by the Fund, the results
of Auctions and notices from any Existing Holder, the Agent Member of such
Existing Holder or the Broker-Dealer of such Existing Holder with respect to
transfers described in the next sentence. The Auction Agent will be required to
register a transfer of APS from an Existing Holder to another person only if (i)
such transfer is pursuant to an Auction or (ii) the Auction Agent has been
notified in writing (A) by such Existing Holder, the Agent Member of such
Existing Holder or the Broker-Dealer of such Existing Holder of such transfer or
(B) by the Broker-Dealer of any person that purchased or sold APS in an Auction
of the failure of such APS to be transferred as a result of such Auction. The
Auction Agent is not required to accept any such notice for an Auction unless it
is received by the Auction Agent by 3:00 P.M., New York City time, on the
Business Day preceding such Auction.
Securities Depository. DTC acts as the Securities Depository for the Agent
Members with respect to the APS. One certificate for all of the shares of the
Acquiring Fund APS offered hereby will be registered in the name of Cede & Co.
("Cede"), as nominee of the Securities Depository. Such certificate will bear a
legend to the effect that such certificate is issued subject to the provisions
restricting transfers of APS contained in the APS Provisions. The Fund will also
issue stop-transfer instructions to the transfer agent for the APS. Cede will be
the holder of record of all APS and beneficial owners of APS will not receive
certificates representing their ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs services
for its participants (including the Agent Members), some of whom (and/or their
representatives) own DTC. DTC maintains lists of its participants and will
maintain the positions (ownership interests) held by each Agent Member in APS,
whether for its own account or as a nominee for another person.
Auction Dates; Advance Notice of Allocation of Taxable Income
An Auction to determine the Applicable Rate with respect to Acquiring Fund
APS issued in connection with the Reorganization for each Rate Period after the
Initial Dividend Period thereof will be held on the first Business Day preceding
the first day of such Rate Period (the date of each Auction being referred to
herein as an "Auction Date"). The first Auction for Acquiring Fund APS offered
hereby will be held on [ ], 2001. Thereafter, Auctions will normally be held
each [ ], unless the then-current Rate Period is a Special Dividend Period or,
in certain circumstances, the day that would normally be the Auction Date or the
first day of such Subsequent Dividend Period is not a Business Day. The Auction
Date and the first day of the related Rate Period (also a Dividend Payment Date)
must be Business Days but need not be consecutive days.
In normal circumstances, whenever the Acquiring Fund intends to include
any net capital gains or other income that is taxable for federal income tax
purposes in any dividend on 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.
Orders by Existing Holders and Potential Holders
Prior to the Submission Deadline (as defined under "Submission of Orders
by Broker-Dealers to Auction Agent" below) on each Auction Date with respect to
the APS:
(a) each Existing Holder of APS may submit to a Broker-Dealer by
telephone or otherwise a:
(i) "Hold Order"--indicating the number of outstanding shares, if
any, of APS that such Existing Holder desires to continue to hold without regard
to the Applicable Rate for the next Rate Period;
(ii) "Bid"--indicating the number of outstanding shares, if any, of
APS that such Existing Holder desires to sell if the Applicable Rate for the
next Rate Period shall be less than the rate per annum then specified by such
Existing Holder, and/or
S-13
(iii) "Sell Order"--indicating the number of outstanding shares, if
any, of APS that such Existing Holder offers to sell without regard to the
Applicable Rate for the next Rate Period;
and
(b) Broker-Dealers shall contact prospective purchasers of APS (each such
prospective purchaser is herein referred to as a "Potential Holder," and the
term Potential Holder includes an Existing Holder with respect to an offer by
such Existing Holder to purchase additional shares) by telephone or otherwise to
determine whether such Potential Holders desire to submit Bids, in which
Potential Holders will indicate the number of APS that they offer to purchase if
the Applicable Rate for the next Rate Period is not less than the rate per annum
specified in such Bids.
The communication to a Broker-Dealer of the foregoing information is herein
referred to as an "Order" and collectively as "Orders." An Existing Holder or a
Potential Holder placing an Order is herein referred to as a "Bidder" and
collectively as "Bidders."
An Existing Holder may submit different types of Orders in an Auction with
respect to APS then held by such Existing Holder. An Existing Holder that offers
to purchase additional APS is, for purposes of such offer, treated as a
Potential Holder. For information concerning the priority given to different
types of Orders placed by Existing Holders, see "Submission of Orders by
Broker-Dealers to Auction Agent" below.
Any Bid specifying a rate higher than the Maximum Rate (as defined below)
will (i) be treated as a Sell Order if submitted by an Existing Holder and (ii)
not be accepted if submitted by a Potential Holder. Accordingly, the Auction
Procedures establish the Maximum Rate as a maximum rate per annum that can
result from an Auction. See "Determination of Sufficient Clearing Bids, Winning
Bid Rate and Applicable Rate" and "Acceptance and Rejection of Submitted Bids
and Submitted Sell Orders and Allocation of Shares" below.
As used herein, "Maximum Rate," when used with respect to APS on an
Auction Date, means:
(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, the
product of (1) the "AA" Composite Commercial Paper Rate on such Auction Date for
the next Rate Period and (2) the Applicable Percentage on such Auction Date,
unless the APS has or had a Special Dividend Period (other than a Special
Dividend Period of 28 days or less) and an Auction at which Sufficient Clearing
Bids existed has not yet occurred for a Minimum Dividend Period after such
Special Dividend Period, in which case the higher of:
(A) the dividend rate on the APS for the then-ending Rate Period,
and
(B) the product of (x) the higher of (I) the "AA" Composite
Commercial Paper Rate on such Auction Date for the then-ending Rate
Period, 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 (II) the "AA" Composite Commercial Paper
Rate on such Auction Date for such Special Dividend Period, 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 (y) 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
days, the product of (1) the highest of (x) the "AA" Composite Commercial Paper
Rate on such Auction Date for the then-ending Rate Period, 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, (y) 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 (z) the "AA" Composite Commercial Paper Rate on such
Auction Date for the Minimum Dividend Period and (2) the Applicable Percentage
on such Auction Date.
S-14
The applicable "AA" Composite Commercial Paper Rates and Treasury Rates
will be the rates announced on such Auction Date for the Business Day
immediately prior to such Auction Date.
The "Applicable Percentage," for APS on any Auction Date, will be a
percentage, determined as set forth below, based on the prevailing rating of APS
in effect at the close of business on the Business Day next preceding such
Auction Date:
Applicable
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 Acquiring 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
greater of (i) the quantity 1 minus the maximum marginal regular federal
individual income tax rate applicable to ordinary income or (ii) the maximum
marginal regular federal corporate income tax rate, provided that the Applicable
Percentage shall be divided in the foregoing manner only to the extent that the
portion of the dividend on the APS for such Rate Period that represents the
allocation of taxable income to such APS. If the APS are rated by only one
rating agency, such rating will be the prevailing rating.
For purposes of this determination, the "prevailing rating" of APS shall
be (i) "aa3"/AA- or higher if the 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 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 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 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 shall be determined without reference to the
rating of any other rating agency. The Acquiring Fund will take all reasonable
action necessary to enable either S&P or Moody's to provide a rating for the
APS. If neither S&P nor Moody's shall make such a rating available, the
Broker-Dealers shall select at least one nationally recognized statistical
rating organization (as that term is used in the rules and regulations of the
SEC under the Securities and Exchange Act of 1934) to act as a substitute rating
agency in respect of the APS, and the Acquiring Fund shall take all reasonable
action to enable such rating agency to provide a rating for the APS.
If any Order or Orders covering all of the Outstanding APS held by any
Existing Holder is not submitted to the Auction Agent prior to the Submission
Deadline, either because a Broker-Dealer failed to contact such Existing Holder
or otherwise, the Auction Agent shall deem a Hold Order to have been submitted
on behalf of such Existing Holder covering the number of outstanding APS held by
such Existing Holder and not subject to Orders submitted to the Auction Agent.
Neither the Acquiring 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.
Submission of Orders by Broker-Dealers to Auction Agent
Prior to 1:30 p.m., New York City time, on each Auction Date, or such
other time on the Auction Date specified by the Auction Agent (the "Submission
Deadline"), each Broker-Dealer will submit to the Auction Agent in writing all
Orders
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obtained by it for the Auction to be conducted on such Auction Date. Any Order
submitted by a Broker-Dealer to the Auction Agent prior to the Submission
Deadline on any Auction Date shall be irrevocable.
If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate to the next
highest one-thousandth (.001) of 1%.
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 APS subject to such Auction held by such Existing Holder, such
Orders will be considered valid in the following order of priority:
(a) all Hold Orders will be considered valid, but only up to and
including in the aggregate the number of APS held by such Existing
Holder;
(b) (i) any Bid will be considered valid up to and including the excess
of the number of Outstanding APS held by such Existing Holder over
the number of APS subject to any Hold Orders referred to in clause
(a) above;
(ii) subject to subclause (i), if more than one Bid with the same
rate is submitted on behalf of such Existing Holder and the number
of APS subject to such Bids is greater than such excess, such Bids
will be considered valid up to and including the amount of such
excess, and the number of APS subject to each Bid with the same rate
will be reduced pro rata to cover the number of APS equal to such
excess;
(iii) subject to subclauses (i) and (ii), if more than one Bid 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
(iv) in any such event, the number, if any, of such shares subject
to Bids not valid under this clause (b) will be treated as the
subject of a Bid by a Potential Holder at the rate specified
therein; and
(c) all Sell Orders will be considered valid up to and including the
excess of the number of Outstanding APS held by such Existing Holder over
the sum of APS subject to valid Hold Orders referred to in clause (a)
above and valid Bids by such Existing Holder referred to in clause (b)
above.
If more than one Bid is submitted on behalf of any Potential Holder, each
Bid submitted will be a separate Bid with the rate and number of shares therein
specified.
Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate
Not earlier than the Submission Deadline on each Auction Date, the Auction
Agent will assemble all valid Orders submitted or deemed submitted to it by the
Broker-Dealers (each such Hold Order, Bid or Sell Order as submitted or deemed
submitted by a Broker-Dealer being herein referred to as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as
a "Submitted Order") and will determine the excess of the number of Outstanding
APS over the number of Outstanding APS subject to Submitted Hold Orders (such
excess being herein referred to as the "Available APS") and whether Sufficient
Clearing Bids have been made in the Auction. "Sufficient Clearing Bids" will
have been made if the number of Outstanding APS that are the subject of
Submitted Bids by Potential Holders specifying rates not higher than the Maximum
Rate equals or exceeds the number of Outstanding shares that are the subject of
Submitted Sell Orders (including the number of shares subject to Bids by
Existing Holders specifying rates higher than the Maximum Rate).
If Sufficient Clearing Bids have been made, the Auction Agent will
determine the lowest rate specified in the Submitted Bids (the "Winning Bid
Rate") which, taking into account the rates in the Submitted Bids of Existing
Holders, would result in Existing Holders continuing to hold an aggregate number
of Outstanding APS which, when added to the number of Outstanding APS to be
purchased by Potential Holders, based on the rates in their Submitted Bids,
would equal
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not less than the Available APS. In such event, the Winning Bid Rate will be the
Applicable Rate for the next Rate Period for all the APS.
If Sufficient Clearing Bids have not been made (other than because all of
the Outstanding APS are subject to Submitted Hold Orders), the Applicable Rate
for the next Rate Period, which shall be a Minimum Dividend Period, for all the
APS will be equal to the Maximum Rate. If Sufficient Clearing Bids have not been
made, Existing Holders that have submitted Sell Orders may not be able to sell
in the Auction all APS subject to such Submitted Sell Orders but will continue
to own APS for the next Rate Period, dividends for which may include taxable
income. See "The Auction-Auction Dates; Advance Notice of Allocation of Taxable
Income" above and "The Auction-Acceptance and Rejection of Submitted Bids and
Submitted Sell Orders and Allocation of Shares" below.
If all of the Outstanding APS are subject to Submitted Hold Orders, the
Applicable Rate for the next Rate Period for all APS will be the product of (i)
(1) the "AA" Composite Commercial Paper Rate on such Auction Date for such Rate
Period, if such Rate Period is less than one year or (2) the Treasury Rate on
such Auction Date for such Rate Period, if such Rate Period is one year or
greater and (ii) 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 APS in such
Rate Period any net capital gains or other income that is taxable for federal
income tax purposes, the Applicable Rate in respect of that portion of the
dividend on APS for such Rate Period that represents the allocation of net
capital gains or other income that is taxable for federal income tax purposes
will be the rate described in the preceding clause (i) (1) or (2), as
applicable, without being multiplied by the factor set forth in the preceding
clause (ii). In calculating the "AA" Composite Commercial Paper Rate and the
Treasury Rate for such purpose, the rates used will be the rates or yields
specified in the applicable definitions of "AA" Composite Commercial Paper Rate
and "Treasury Rate" set forth under "Description of APS--Dividends-Determination
of Dividend Rate."
Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares
Based on the determinations made under "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" above and, subject to the
discretion of the Auction Agent to round and allocate certain shares as
described below, Submitted Bids and Submitted Sell Orders will be accepted or
rejected in the order of priority set forth in the Auction Procedures, with the
result that Existing Holders and Potential Holders of APS will sell, continue to
hold and/or purchase APS as set forth below. Existing Holders that submitted or
were deemed to have submitted Hold Orders will continue to hold the APS subject
to such Hold Orders.
If Sufficient Clearing Bids have been made:
(a) Each Existing Holder that placed a Submitted Sell Order or Submitted
Bid specifying any rate higher than the Winning Bid Rate will sell the
Outstanding APS subject to such Submitted Sell Order or Submitted Bid;
(b) Each Existing Holder that placed a Submitted Bid specifying a rate
lower than the Winning Bid Rate will continue to hold the Outstanding APS
subject to such Submitted Bid;
(c) Each Potential Holder that placed a Submitted Bid specifying a rate
lower than the Winning Bid Rate will purchase the number of Outstanding APS
subject to such Submitted Bid;
(d) Each Existing Holder that placed a Submitted Bid specifying a rate
equal to the Winning Bid Rate will continue to hold the APS subject to such
Submitted Bid, unless the number of Outstanding APS subject to all such
Submitted Bids is greater than the number of APS in excess of the Available APS
over the number of APS accounted for in clauses (b) and (c) above, in which
event each Existing Holder with such a Submitted Bid will continue to hold a
number of Outstanding APS subject to such Submitted Bid determined on a pro rata
basis based on the number of Outstanding APS subject to all such Submitted Bids
by such Existing Holders; and
(e) Each Potential Holder that placed a Submitted Bid specifying a rate
equal to the Winning Bid Rate will
S-17
purchase any Available APS not accounted for in clauses (b) through (d) above on
a pro rata basis based on the Outstanding APS subject to all such Submitted
Bids.
If Sufficient Clearing Bids have not been made (unless this results
because all Outstanding APS are subject to Submitted Hold Orders):
(a) Each Existing Holder that placed a Submitted Bid specifying a rate
equal to or lower than the Maximum Rate will continue to hold the Outstanding
APS subject to such Submitted Bid;
(b) Each Potential Holder that placed a Submitted Bid specifying a rate
equal to or lower than the Maximum Rate will purchase the number of Outstanding
APS subject to such Submitted Bid; and
(c) Each Existing Holder that placed a Submitted Bid specifying a rate
higher than the Maximum Rate or a Submitted Sell Order will sell a number of APS
determined on a pro rata basis based on the number of Outstanding APS subject to
all such Submitted Bids and Submitted Sell Orders.
If, as a result of the pro rata allocation described in clauses (d) or (e)
of the second preceding paragraph or clause (c) of the next preceding paragraph,
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,
the Auction Agent will, in such manner as, in its sole discretion, determine,
round up or down to the nearest whole share the number of APS being sold or
purchased on such Auction Date so that the number of shares sold or purchased by
each Existing Holder or Potential Holder will be whole shares of APS. If as a
result of the pro rata allocation described in clause (e) of the second
preceding paragraph, any Potential Holder would be entitled or required to
purchase less than a whole share of APS, the Auction Agent, in such manner as,
in its sole discretion, will determine, allocate APS for purchase among
Potential Holders so that only whole shares of APS are purchased by any such
Potential Holder, even if such allocation results in one or more of such
Potential Holders not purchasing APS.
Notification of Results; Settlement
The Auction Agent will advise each Broker-Dealer that submitted an Order
of the Applicable Rate for the next Rate Period and, if the Order was a Bid or
Sell Order, whether such Bid or Sell Order was accepted or rejected, in whole or
in part, by telephone by approximately 3:00 P.M., New York City time, on each
Auction Date. Each Broker-Dealer that submitted an Order on behalf of a Bidder
will then advise such Bidder of the Applicable Rate for the next Rate Period
and, if such Order was a Bid or a Sell Order, whether such Bid or Sell Order was
accepted or rejected, in whole or in part, will confirm purchases and sales with
each Bidder purchasing or selling APS as a result of the Auction and will advise
each Bidder purchasing or selling APS as a result of the Auction to give
instructions to its Agent Member of the Securities Depository to pay the
purchase price against delivery of such shares or to deliver such shares against
payment therefor, as appropriate. The Auction Agent will record each transfer of
APS on the registry of Existing Holders to be maintained by the Auction Agent.
See "-- General" above.
In accordance with the Securities Depository's normal procedures, on the
Business Day after the Auction Date, the transactions described above will be
executed through the Securities Depository and the accounts of the respective
Agent Members at the Securities Depository will be debited and credited and
shares delivered as necessary to effect the purchases and sales of APS as
determined in the Auction. Purchasers will make payment through their Agent
Members in same-day funds to the Securities Depository against delivery through
their Agent Members; the Securities Depository will make payment in accordance
with its normal procedures, which now provide for payment against delivery by
their Agent Members in same-day funds.
If any Existing Holder selling APS in an Auction fails to deliver such
shares, the Broker-Dealer of any person that was to have purchased APS in such
Auction may deliver to such person a number of whole shares of APS that is less
than the number of shares that otherwise was to be purchased by such person. In
such event, the number of APS to be so delivered shall be determined by such
Broker-Dealer. Delivery of such lesser number of shares shall constitute good
delivery.
S-18
Concerning the Auction Agent
The Auction Agent is acting as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the Auction
Agency Agreement and will not be liable for any error of judgment made in good
faith unless the Auction Agent will have been negligent in ascertaining the
pertinent facts.
The Auction Agent may terminate the Auction Agency Agreement upon notice
to the Fund on a date no earlier than 100 days after such notice. If the Auction
Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent provided that prior to such removal the Fund shall have entered into such
an agreement with a successor Auction Agent.
Broker-Dealers
The Auction Agent after each Auction for APS will pay to each
Broker-Dealer, from funds provided by the Acquiring Fund, a service charge at
the annual rate of .25 of 1% in the case of any Auction immediately preceding a
Rate Period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of APS placed by such Broker-Dealer at
such Auction. For the purposes of the preceding sentence, APS will be placed by
a Broker-Dealer if such shares were (i) the subject of Hold Orders deemed to
have been made by Existing Holders and were acquired by such Existing Holders
through such Broker-Dealer or (ii) the subject of an Order submitted by such
Broker-Dealer that is (A) a Submitted Bid of an Existing Holder that resulted in
such Existing Holder continuing to hold such shares as a result of the Auction
or (B) a Submitted Bid of a Potential Holder that resulted in such Potential
Holder purchasing such shares as a result of the Auction or (C) a valid Hold
Order.
The Acquiring Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
The Broker-Dealer Agreements provide that a Broker-Dealer (other than an
affiliate of the Fund) may submit Orders in Auctions for its own account, unless
the Fund notifies all Broker-Dealers that they may no longer do so, in which
case Broker-Dealers may continue to submit Hold Orders and Sell Orders for their
own accounts. Any Broker-Dealer that is an affiliate of the Fund may submit
Orders in Auctions, but only if such Orders are not for its own account. If a
Broker-Dealer submits an Order for its own account in any Auction, it might have
an advantage over other Bidders because it would have knowledge of Orders placed
through it in that Auction; such Broker-Dealer, however, would not have
knowledge of Orders submitted by other Broker-Dealers in that Auction.
The Broker-Dealers may maintain a secondary trading market in the APS
outside of Auctions. They have no obligation to do so, however, and there can be
no assurance that a secondary market for the APS will develop or, if it does
develop, that it will provide holders with liquidity of investment. The APS will
not be registered on any stock exchange or on the National Association of
Securities Dealers Automated Quotation system.
Dividends
General. The holders of APS will be entitled to receive, when, as and if
declared by the Board of Trustees of the Acquiring Fund, out of funds legally
available therefor, cumulative cash dividends at the Applicable Rate per annum
thereof, determined as set forth below under "Determination of Dividend Rate,"
and no more (except as otherwise provided below under "Additional Dividends"),
payable on the respective dates determined as set forth below.
Dividends on the APS shall accumulate at the Applicable Rate per annum
from the Date of Original Issue and, except as provided below, shall be payable
on [ ] and 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, subject to certain exceptions. After the Initial Dividend Period,
the Fund,
S-19
subject to certain conditions, may designate any Subsequent Dividend Period as a
Special Dividend Period which shall be such number of consecutive days or whole
years as the Board of Trustees shall specify, subject to certain conditions. The
APS are redeemable by the Fund as described herein.
If the Acquiring Fund designates any Subsequent Dividend Period as a
Special Dividend Period, dividends will be payable: (i) with respect to a
Special Dividend Period of less than 35 days, the day after the last day thereof
and (ii) 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 APS shall be payable,
except as described below, as provided in the second preceding paragraph above,
subject to the option of the Fund to further designate from time to time any
Subsequent Dividend Period thereof as a Special Dividend Period.
In the case of dividends that would be payable as set forth above, 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 Day, then dividends shall be payable on the first Business Day
that falls prior to such Wednesday, Thursday, Friday or Saturday.
Each dividend on the APS will be paid on the Dividend Payment Date
therefor to the Securities Depository to pay to the holders of record as their
names appear on the registry of Existing Holders of the Securities Depository 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 of
the Acquiring Fund.
The Securities Depository, in accordance with its current procedures, is
expected to credit on each Dividend Payment Date dividends received from the
Fund to the accounts of the respective Agent Members in next-day funds. Each of
the initial Broker-Dealers, however, has represented to the Fund that such
Broker-Dealer (or if such Broker-Dealer does not act as Agent Member, one of its
affiliates) will make such dividend payments available in same-day funds on each
Dividend Payment Date to customers that use such Broker-Dealer or affiliate as
Agent Member. A holder of APS that does not use one of the initial
Broker-Dealers or an affiliate thereof as its Agent Member should contact the
Agent Member used by such holder to determine whether such Agent Member will
make dividend payments available to such holder in next-day or same-day funds.
If any Agent Member does not make such dividends available in same-day funds to
a holder, such holder who uses such Agent Member would not have same-day funds
available to it until the next Business Day, which, in the case of dividends
payable on a Friday, would be the following Monday if it is a Business Day.
Determination of Dividend Rate. The dividend rate on 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 will be equal to the rate per annum set
forth on the inside cover page of this Prospectus. For each Subsequent Dividend
Period of APS Outstanding thereafter, the dividend rate will be equal to the
rate per annum, except as provided below, that results from an Auction on the
Auction Date next preceding such Subsequent Dividend Period.
If an Auction for any Subsequent Dividend Period of APS is not held for
any reason or if the Acquiring Fund fails to pay in a timely manner to the
Auction Agent the full amount of any dividend on, or Redemption Price of, any
APS and such failure has not been cured as set forth below prior to any
succeeding Subsequent Dividend Period thereof, the dividend rate for any such
Subsequent Dividend Period will be, subject to the next succeeding paragraph,
the Maximum Rate for the APS on the Auction Date for such Subsequent Dividend
Period.
If the Acquiring Fund fails to pay in a timely manner to the Auction Agent
the full amount of any dividend on, or the Redemption Price of, any APS during
any Rate Period thereof, and, prior to 12:00 Noon on the third Business Day next
succeeding the date on which such failure occurred, such failure shall not have
been cured in accordance with the next suc-
S-20
ceeding paragraph or the Fund shall not have paid to the Auction Agent a late
charge equal to the sum of (1) if such failure consisted of the failure timely
to pay to the Auction Agent the full amount of dividends with respect to any
Dividend Period on the APS, 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 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 has not been cured in accordance with the
second succeeding paragraph (including the day such failure occurs and excluding
the day such failure is cured) and the denominator of which shall be 365, and
applying the rate obtained against the aggregate liquidation preference of the
Outstanding APS and (2) if such failure consisted of the failure timely to pay
to the Auction Agent the Redemption Price of the APS, if any, for which notice
of redemption has been given by the Fund, 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 occurs on the
redemption date by (y) a fraction, the numerator of which shall be the number of
days for which such failure is not cured in accordance with the second
succeeding paragraph (including the day such failure occurs and excluding the
day such failure is cured) and the denominator of which shall be 365, and
applying the rate obtained against the aggregate liquidation preference of the
Outstanding APS to be redeemed, then Auctions will be suspended until such
failure is so cured and the dividend rate for APS for each Subsequent Dividend
Period thereof commencing after such failure to and including the Subsequent
Dividend Period, if any, during which such failure is so cured shall be a rate
per annum equal to the Maximum Rate on the Auction Date for each 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-").
Any such failure with respect to APS shall have been cured (if such
failure 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 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 (i) all accumulated and unpaid dividends on the APS and (ii)
without duplication, the Redemption Price for the APS, if any, for which notice
of redemption has been given by the Fund.
For the purposes of the foregoing, "'AA' Composite Commercial Paper Rate,"
on any date for any Rate Period, means:
(i) (A) in the case of any Minimum Dividend Period or any Rate
Period of 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 if 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
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
commer-
S-21
cial paper matures and the denominator of which shall be 360. As used herein,
"Commercial Paper Dealers" means Goldman Sachs Money Markets, L.P., Lehman
Commercial Paper Incorporated, Merrill Lynch, Pierce Fenner & Smith Incorporated
and Smith Barney, Harris Upham & Co. Incorporated or, in lieu of any thereof,
their respective affiliates or successors, if such entity is a commercial paper
dealer. As used herein, "Substitute Commercial Paper Dealer" means The First
Boston Company and 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.
For the purposes of the foregoing, "Treasury Rate," on any date for any
Rate Period, means:
(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 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. As used herein, "U.S. Government Securities
Dealer" means Goldman, Sachs & Co., Smith Barney, Harris Upham & Co.
Incorporated and Morgan Guaranty Trust Company of New York or their respective
affiliates or successors, if such entity is a U.S. Government securities dealer.
As used herein, "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.
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
of beneficial interest 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 APS through its most recent
Dividend Payment Date. 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 of beneficial interest 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 of beneficial interest 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 of
beneficial interest 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 capital shares, in excess of full cumulative dividends, as
herein provided, on the APS. No interest, or sum of money in lieu of interest,
will be payable in respect of any dividend payment or payments on the APS which
may be in arrears, and, except as otherwise provided herein, no additional sum
of money will be payable in respect of any such arrearage.
The amount of dividends per share payable on APS on any date on which
dividends shall be payable on APS shall be computed by multiplying the
respective Applicable Rate 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
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Period or Dividend Periods or part thereof and the denominator of which shall be
365 if such Dividend Period is a Rate Period of less than 1 year and 360 for all
other Rate Periods, and applying the rate obtained against $50,000. Any dividend
payment made on the APS shall first be credited against the earliest accumulated
but unpaid dividends due with respect to such APS.
Designation of Special Dividend Periods. The Acquiring Fund, at its
option, may designate any succeeding Subsequent Dividend Period of APS as a
Special Dividend Period which shall consist of such number of days or whole
years as the Board of Trustees shall specify; provided, however, that such
designation shall be effective only if (i) notice thereof shall have been given
as provided herein, (ii) any failure to pay in a timely manner to the Auction
Agent the full amount of any dividend on, or the Redemption Price of, APS shall
have been cured as set forth above under "Dividends-Determination of Dividend
Rate," (iii) Sufficient Clearing Bids shall have existed in an Auction held on
the Auction Date immediately preceding the first day of such proposed Special
Dividend Period, (iv) if the Fund shall have mailed a notice of redemption with
respect to any shares, as described under "Redemption-Notice of Redemption"
below, the Redemption Price with respect to such shares shall have been
deposited with the Auction Agent, and (v) in the event the Fund wishes to
designate any succeeding Subsequent Dividend Period as a Special Dividend Period
consisting of more than 28 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.
If the Acquiring Fund proposes to designate any succeeding Subsequent
Dividend Period of APS as a Special Dividend Period of more than 28 days, 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 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, who will promptly notify the Broker-Dealers, 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.
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 deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers, either:
(i) a notice stating (A) that the Fund has determined to designate
the next succeeding Rate Period 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, (D)
that such Special Dividend Period shall not commence if (1) on such
Auction Date Sufficient Clearing Bids shall not exist (in which case
the succeeding Rate Period shall be a Minimum Dividend Period) or
(2) the Fund shall have failed to pay in a timely manner to the
Auction Agent the full amount of any dividend on, or the Redemption
Price of, APS, as set forth above under "Dividends-Determination of
Dividend Rate," prior to the first day of such Special Dividend
Period with respect to the APS and (E) the scheduled Dividend
Payment Dates during such Special Dividend Period; provided, that,
if the proposed Special Dividend Period consists of more than 28
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 purposes of calculating Moody's Eligible Assets in
connection with an APS Basic Maintenance Report required to be
prepared pursuant to the APS Provisions, a Moody's Exposure Period
of "eight weeks or less but greater than seven weeks" (if Moody's is
then rating the APS) and (2) S&P Eligible Assets (if S&P is then
rating the APS) each at least equal to 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
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(ii) a notice stating that the Fund has determined not to exercise
its option to designate a Special Dividend Period and that the next
succeeding Rate Period 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) above.
Restrictions on Dividends and Other Payments. Under the 1940 Act, the
Acquiring Fund may not declare dividends (other than dividends payable in Common
Shares) or other distributions with respect to Common Shares or purchase any
such shares if, at the time of the declaration or purchase, as applicable (and
after giving effect thereto), asset coverage (as defined in and determined
pursuant to the 1940 Act) with respect to the outstanding Preferred Shares,
including the APS, would be less than 200% (or such other percentage as may in
the future be required by law). Based upon the Acquiring Fund's portfolio as of
[ ] and assuming the issuance of the APS in connection with the
Reorganization, asset coverage with respect to the Acquiring Fund APS would be
approximately [ ]%.
In addition, for so long as any of the APS are outstanding, except as
otherwise set forth herein, (A) the Fund may 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 of beneficial interest, if any,
ranking junior to the APS as to the payment of dividends and the distribution of
assets upon liquidation) in respect of Common Shares or any other shares of
beneficial interest 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 liquidation, or
call for redemption, redeem, purchase or otherwise acquire for consideration any
Common Shares or any other such junior shares of beneficial interest (except by
conversion into or exchange for shares of beneficial interest of the Fund
ranking junior to the APS as to the payment of dividends and the distribution of
assets upon liquidation), or any such parity shares of beneficial interest
(except by conversion into or exchange for capital shares of the Fund ranking
junior to or on a parity with the APS as to payment of dividends and the
distribution of assets upon liquidation), unless (1) full cumulative dividends
on the 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 (2) the Fund has redeemed the full number
of APS required to be redeemed by any provision for mandatory redemption
contained in the APS Provisions, and (B) if either Moody's or S&P is rating the
APS, the Fund may 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 liquidation) in respect of 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 liquidation, or call for
redemption, redeem, purchase or otherwise acquire for consideration any shares
of Common Shares or any other such junior shares of beneficial interest (except
by conversion into or exchange for shares of beneficial interest of the Fund
ranking junior to the APS as to the payment of dividends or the distribution of
assets upon liquidation), unless immediately after such transaction the
Discounted Value of the Fund's assets would at least equal the APS Basic
Maintenance Amount. See "Investment Objective and Policies-Rating Agency
Guidelines," "Asset Maintenance" and "Redemption."
Under the Code, the Acquiring Fund must, among other things, distribute at
least 90% of its investment company taxable income and 90% of its net tax-exempt
income each year in order to maintain its qualification for tax treatment as a
regulated investment company. The foregoing limitations on dividends,
distributions and purchases may in certain circumstances impair the Fund's
ability to maintain such qualification. The Fund currently intends, however, to
exercise its optional redemption rights to redeem a portion of the APS when
necessary to preserve such qualification. See "Taxation."
Additional Dividends. If the Acquiring 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 Auction Agent as
described above under "The Auction-Auction Dates; Advance Notice of Allocation
of Taxable Income" 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 is
referred to herein as a "Retroactive Taxable Allocation"), the Fund will
simultaneously, if practicable, with such allocation
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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 APS (initially Cede & Co. as nominee of DTC
during such taxable year at such holder's address as the same appears or last
appeared on the share books of the Fund. The Fund will, within 30 days after
such notice is given to the Auction Agent, pay to the Auction Agent (who will
then distribute to such holders of shares of APS), out of funds legally
available therefor, an amount equal to the aggregate Additional Dividends (as
defined below) with respect to all Retroactive Taxable Allocations made to such
holders during the taxable year in question. See "Taxation."
"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 as described below) 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. State taxes imposed on the
Additional Dividends, however, may reduce the amount of after tax cash a holder
would have had if there were no Retroactive Taxable Allocation. 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.
Asset Maintenance
1940 Act APS Asset Coverage. The Fund will be required under the APS
Provisions to maintain, with respect to the APS, as of the last Business Day of
each month in which any APS are outstanding, asset coverage of at least 200%
with respect to senior securities which are stock, including 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).
If the Fund fails to maintain such asset coverage in accordance with the
requirements of the rating agency or agencies then rating the APS ("1940 Act APS
Asset Coverage") and such failure is not cured as of the last Business Day of
the following month (the "1940 Act Cure Date"), the Fund will be required in
certain circumstances to redeem certain of the APS. See "Redemption" below.
APS Basic Maintenance Amount. So long as any APS are Outstanding, the Fund
will be required under the APS Provisions to maintain as of each Business Day (a
"Valuation Date") assets having in the aggregate a Discounted Value at least
equal to the APS Basic Maintenance Amount established by the rating agency or
agencies then rating the APS. If the Fund fails to meet such requirement on any
Valuation Date and such failure is not cured on or before the third Business Day
after such Valuation Date (the "APS Basic Maintenance Cure Date"), the Fund will
be required in certain circumstances to redeem certain of the shares of APS. See
"Redemption" below.
The "APS Basic Maintenance Amount" as of any Valuation Date is defined as
the dollar amount equal to the sum of:
(A) (i) the product of the number of APS Outstanding on such date
multiplied by $25,000;
(ii) 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 Date for each of
the APS Outstanding that follow such Valuation Date;
(iii) the amount equal to the Projected Dividend Amount (based on
the number of APS Outstanding on such date);
(iv) the amount of anticipated Fund expenses for the 90 days
subsequent to such Valuation Date;
(v) the amount of the Fund's Maximum Potential Additional Dividends
Liability as of such Valuation Date;
S-25
(vi) the amount of any premium payable pursuant to a Premium Call
Period; and
(vii) any current liabilities as of such Valuation Date to the
extent not reflected in any of (A) (i) through (A) (vi) (including,
without limitation, any amounts described below as required to be
treated as liabilities in connection with the Fund's transactions in
futures and options and including any payables for municipal
securities purchased as of such Valuation Date) less
(B) either (i) the face value of any Fund assets irrevocably
deposited by the Fund for the payment of any of (A) (i) through (A)
(vii) 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-l+ or A-1) or (ii) the Discounted Value of such
assets.
For purposes of the foregoing, "Maximum Potential Additional Dividends
Liability," as of any Valuation Date, means the aggregate amount of Additional
Dividends that would be due if the Fund were to make Retroactive Taxable
Allocations, with respect to any taxable 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.
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
operations, 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.
The Discount Factors and guidelines for determining the market value of
the Fund's portfolio holdings have been based on criteria established in
connection with rating each series of APS. These factors include, but are not
limited to, the sensitivity of the market value of the relevant asset to changes
in interest rates, the liquidity and depth of the market for the relevant asset,
the credit quality of the relevant asset (for example, the lower the rating of a
debt obligation, the higher the related discount factor) and the frequency with
which the relevant asset is marked to market. In no event shall the Discounted
Value of any asset of the Fund exceed its unpaid principal balance or face
amount as of the date of calculation. The Discount Factors relating to any asset
of the Fund and the APS Basic Maintenance Amount, the assets eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio and
certain definitions and methods of calculation relating thereto may be changed
from time to time by the Fund without Shareholder approval, but only in the
event the Fund receives written confirmation from the appropriate rating agency
that any such change would not impair the rating then assigned to the APS by
such rating agency. A rating agency's Discount Factors and guidelines will apply
to the APS so long as such rating agency is rating the APS.
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 meet 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 is required to deliver to the
Auction Agent (so long as either Moody's or S&P is rating the APS) a report with
respect to the calculation of the APS Basic Maintenance Amount and the value of
its portfolio holdings as of the date of such failure or such cure date, as the
case may be (a "APS Basic Maintenance Report"). The Fund will also deliver a 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 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. Within ten Business
Days after delivery of such report
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relating to the last Business Day of each fiscal quarter of the Fund, commencing
July 31, 1992, the Fund will deliver a letter prepared by the Fund's independent
accountants regarding the accuracy of the calculations made by the Fund in its
most recent APS Basic Maintenance Report. If any such letter prepared by the
Fund's independent accountants shows that an error was made in the most recent
APS Basic Maintenance Report, the calculation or determination made by the
Fund's independent accountants will be conclusive and binding on the Fund.
Minimum Liquidity Level
Pursuant to S&P guidelines, so long as S&P is rating the APS, the
Acquiring Fund will be required under the APS Provisions to have, as of each
Valuation Date, Deposit Securities with maturity or tender dates not later than
the days preceding the first respective Dividend Payment Dates (collectively
"Dividend Coverage Assets") for each share of each series of APS Outstanding
that follow such Valuation Date and having a value not less than the Dividend
Coverage Amount (the "Minimum Liquidity Level"). So long as S&P is rating the
APS, if, as of each Valuation Date, the Fund does not have the required Dividend
Coverage Assets, the Fund will, as soon as practicable, adjust its portfolio in
order to meet the Minimum Liquidity Level. The "Dividend Coverage Amount," as of
any Valuation Date, means (A) the aggregate amount of dividends that will
accumulate on each share of APS to (but not including) the first Dividend
Payment Date for each share of APS Outstanding that follows such Valuation Date
plus any liabilities that will become payable prior to or on such payment date;
less (B) the combined value of Deposit Securities irrevocably deposited for the
payment of dividends on the APS. "Deposit Securities" generally means cash and
municipal securities rated at least A-1+ or SP-1 by S&P and Receivables for New
Jersey Municipal Securities Sold which become due prior to the Dividend Payment
Date and interest with respect to municipal securities which is payable to the
Fund prior to the Dividend Payment Date. The definitions of "Deposit
Securities," "Dividend Coverage Assets" and "Dividend Coverage Amount" may be
changed from time to time by the Fund without Shareholder approval, but only in
the event the Fund receives written confirmation from S&P that any such change
would not impair the rating then assigned by S&P to the APS.
Redemption
Optional Redemption. Upon giving a notice of redemption, as provided
below, the Fund at its option may redeem the APS, in whole or in part, on the
Second Business Day next preceding any Dividend Payment Date applicable to those
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 none of the APS will be subject to optional redemption during any
Non-Call Period. Also, the APS may not be redeemed in part if after such partial
redemption fewer that 250 shares remain outstanding.
If fewer than all of the outstanding APS are to be redeemed as set forth
above, the number of shares to be redeemed shall be determined by the Board of
Trustees of the Fund, and such shares shall be redeemed pro rata from the
holders of record (initially Cede & Co. as nominee of the Securities Depository)
in proportion to the number of such shares held by such holders. Since the
nominee of the Securities Depository is the only record holder of APS, the
Securities Depository will determine the number of shares to be redeemed from
the account of the Agent Member of each beneficial owner. An Agent Member may
determine to redeem shares from some beneficial owners (which may include an
Agent Member holding shares for its own account) without redeeming shares from
the accounts of other beneficial owners.
The Fund may not give a notice of redemption relating to an optional
redemption as described above unless, on the date on which the Fund intends to
give such notice, (a) the Fund has available certain 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 any
applicable premium) due to holders of APS by reason of the redemption of such
APS on such redemption date and (b) the Fund would have assets with an aggregate
Discounted Value 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.
Mandatory Redemption. The Acquiring Fund will be required to redeem, at
the Mandatory Redemption Price, certain of the APS to the extent permitted under
the 1940 Act and Massachusetts law, if the Fund fails to maintain the APS Basic
Maintenance Amount or the 1940 Act APS Asset Coverage and such failure is not
cured on or before the APS Basic
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Maintenance Cure Date or the 1940 Act Cure Date (herein respectively referred to
as a "Cure Date"), as the case may be. The number of APS to be redeemed will be
equal to the lesser of (a) 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 of the APS and
Preferred Shares then outstanding will be redeemed), and (b) 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 will 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 the APS and other Preferred Shares subject to redemption
provisions similar to those contained in this paragraph.
The Acquiring Fund is required to effect such a mandatory 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
mandatory redemption or the Fund otherwise is unable to effect such redemption
on or prior to 40 days after such Cure Date, the Fund will 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 APS are to be redeemed pursuant to a mandatory redemption, the
number of shares to be redeemed shall be redeemed pro rata from the holders of
such shares in proportion to the number of such shares held by such holders, in
the same manner as described above in respect of optional redemptions of fewer
than all outstanding APS.
Notice of Redemption. The Acquiring 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, which is not
assured, 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 held by any Holder are
to be redeemed, the Notice of Redemption mailed to such Holder shall also
specify the number of shares to be redeemed from such Holder.
Other Redemption Procedures. 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 will be made as soon as
practicable to the extent such funds become available. Failure to redeem APS
will 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 with the Auction Agent the Optional Redemption Price or Mandatory
Redemption Price, as the case may be, 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 APS and will include those APS for which
notice of redemption has been given.
Upon the deposit of funds sufficient to redeem APS with the Auction Agent
and the giving of notice of redemption, dividends on such APS shares will cease
to accumulate and such shares will no longer be deemed outstanding for any
purpose, and all rights of the holders of the APS so called for redemption will
cease and terminate, except the right of the holders thereof to receive the
Optional Redemption Price or Mandatory Redemption Price, as the case may be, but
without any
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interest or other additional amount, except as otherwise provided above under
"Dividends-Additional Dividends." Upon surrender in accordance with the notice
of redemption of the certificates for any APS so redeemed (properly endorsed or
assigned for transfer, if the Board of Trustees of the Fund shall so require and
the notice shall 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 APS subject to redemption. In the case that fewer than all of the APS
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 will 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 or Mandatory Redemption Price, as
the case may be, of the APS called for redemption on such date and (ii) all
other amounts to which holders of APS called for redemption may be entitled. Any
funds so deposited that are unclaimed at the end of 90 days from such redemption
date will, to the extent permitted by law, be repaid to the Fund, after which
time the holders of 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 will
be entitled to receive, from time to time after the date fixed for redemption,
any interest on the funds so deposited.
Notwithstanding the foregoing, if any dividends on the APS are in arrears,
no APS shall be redeemed unless all outstanding APS are simultaneously redeemed,
and the Fund shall not purchase or otherwise acquire any APS; provided, however,
that the foregoing shall not prevent the purchase or acquisition of all
outstanding 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 APS.
Except as described above with respect to redemptions and under "The
Auction-Orders by Existing Holders and Potential Holders," the APS Provisions do
not prohibit the Fund or any affiliate of the Fund from purchasing or otherwise
acquiring any APS.
The Fund has the right to arrange for others to purchase from the holders
thereof APS which are to be redeemed as described above.
Liquidation
Upon a liquidation of the Fund, whether voluntary or involuntary, the
holders of APS then outstanding will 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 beneficial interest of the Fund ranking junior to the APS
upon liquidation, an amount equal to the liquidation preference with respect to
the APS. The liquidation preference for the APS shall be $25,000 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 applicable Additional Dividends in connection with the
liquidation of the Acquiring Fund. After the payment to the holders of the APS
of the full preferential amounts provided for as described herein, the holders
of APS as such shall have no right or claim to any of the remaining assets of
the Fund. In the event the assets of the Fund, available for distribution to the
holders of the APS upon any liquidation of the Fund, whether voluntary or
involuntary, shall be insufficient to pay in full all amounts to which such
holders are entitled, 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 upon such liquidation 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 liquidation. Subject to the rights of the holders of shares of any
series or class or classes of shares of beneficiary interest ranking on a parity
with the APS with respect to the distribution of assets upon liquidation of the
Fund, after payment shall have been made in full to the holders of the APS as
described herein, but not prior thereto, any other series or class or classes of
shares of beneficiary interest ranking junior to the APS with respect to the
distribution of assets upon liquidation 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.
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
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shall be a liquidation, whether voluntary or involuntary, for the purposes of
the foregoing paragraph.
FINANCIAL STATEMENTS
Incorporated herein by reference in their respective entireties are (i)
the audited financial statements of the Acquiring Fund for the fiscal year ended
October 31, 2000, as included in Appendix C hereto, (ii) the audited financial
statements of the Target Fund for fiscal year ended October 31, 2000, as
included in Appendix D hereto.
PRO FORMA FINANCIAL STATEMENTS
Set forth in Appendix E 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 October
31, 2000, (ii) Pro Forma Condensed Statement of Operations for the one year
period ended [ ], 2000 and (iii) Pro Forma Portfolio of Investments at
[ ], 2000.
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APPENDIX A
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 New Jersey Value Municipal Income Trust, a
registered closed-end investment company, File No. 811-49534 (the "Target Fund")
and Van Kampen Trust for Investment Grade New Jersey Municipals (the "Acquiring
Fund"), a registered closed-end investment company, File No. 811-6536, 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 1940 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 October 31, 2000, and the audited
financial statements appearing therein, having been audited by Deloitte & Touche
LLP, independent public auditors, 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 Exchange Date 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 laws relating to or
affecting creditors' rights generally and court decisions with respect thereto.
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(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, 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 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 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 each Acquired 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 with respect to the transactions
contemplated herein and the prospectus of the Acquiring Fund relating to the
Acquiring Fund Common Shares and the Acquiring Fund APS to be issued pursuant to
this Agreement, (the "Proxy Statement and 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
Exchange 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 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 Proxy Statement and 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 as provided in Section 8(e) of this
Agreement.
(l) The Acquiring Fund is authorized to issue an unlimited number of common
shares of beneficial interest, par value $.01 per share, and 100,000,000
preferred shares of beneficial interest, par value $.01 per share. The Board of
Trustees of the Acquiring Fund has designated [ ] preferred shares as Auction
Preferred Shares ("APS"). Each outstanding Common Share of beneficial interest
and each Auction Preferred Share of the Acquiring Fund is fully paid and
non-assessable, 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
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be legally and validly issued and will be fully paid and 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 Exchange Date, the Acquiring Fund Common Shares to be
transferred to the Target Fund for distribution to the shareholders of the
Target Fund on the Exchange 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 Exchange Date, the Acquiring Fund APS to be transferred
to the Target Fund on the Exchange 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 Exchange 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.
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.
(b) The Target Fund is duly registered under the 1940 Act as a non-diversified,
closed-end management investment company (File No. 811-7726), 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 October 31, 2000, and the audited
financial statements appearing therein, having been audited by Deloitte & Touche
LLP, independent public accountants, 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
Exchange 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 pre-
A-3
sent 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 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 since October 31, 2000 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 Exchange 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 Exchange Date
occurs.
(l) At both the Valuation Time and the Exchange Date, the Target Fund will have
full right, power and authority to sell, assign, transfer and deliver the Target
Fund Investments. At the Exchange 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 referred to in Section 5(a) of this Agreement and on the
Exchange 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 Proxy Statement and Prospectus included therein
did not or will not contain any untrue statement of a material fact
A-4
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 as provided in
Section 5(e) of this Agreement.
(o) The Target Fund is authorized to issue an unlimited number of common shares
of beneficial interest, par value $.01 per share, and 100,000,000 preferred
shares of beneficial interest, par value $.01 per share. The Board of Trustees
of the Target Fund has designated [ ] preferred shares as Auction Preferred
Shares. Each outstanding common share of beneficial interest and each
outstanding Auction Preferred Share of the Target Fund is fully paid and
nonassessable and has full voting rights.
(p) All of the issued and outstanding Target Fund Common Shares and Target Fund
APS 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.
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 Exchange 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 solely for that number of Target Fund Common Shares
and Target Fund APS provided in Section 4 of this Agreement;
Pursuant to this Agreement, as soon as practicable after the Exchange
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 APS. 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) Prior to the Exchange 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 Exchange 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 Exchange Date. In this
regard and in connection with the Reorganization, the last dividend period for
the Target Fund APS prior to the Exchange Date may be shorter than the dividend
period for such Target Fund APS determined as set forth in the applicable
Certificate of Vote pertaining to such Target Fund APS.
(c) The Target Fund will pay or cause to be paid to the Acquiring Fund any
interest the Target Fund receives on or after the Exchange Date with respect to
any of the Target Fund Investments transferred to the Acquiring Fund hereunder.
(d) The Valuation Time shall be 4:00 p.m., Eastern time, on [ ], 2001, or such
earlier or later day and time as may be mutually agreed upon in writing (the
"Valuation Time").
A-5
(e) 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.
(f) The Target Fund will be terminated following the Exchange 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.
(g) 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 APS in the
Reorganization.
Acquiring Fund Common Shares and Acquiring Fund APS of an aggregate net
asset value or 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, plus cash in lieu of fractional shares. 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 APS, determined as
set forth below.
The net asset value of each of the Funds and the liquidation preference
and value of the APS of each of the Funds shall be determined as of the
Valuation Time in accordance with the procedures described in (i) the prospectus
of the Acquiring Fund, dated April 2, 1992, relating to the Acquiring Fund
Common Shares and (ii) the prospectus of the Acquiring Fund, dated June 5, 1992,
relating to the Acquiring Fund APS, 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 by the Acquiring Fund
pursuant to the procedures utilized by the Acquiring Fund in valuing its own
assets and determining its own liabilities for purposes of the Reorganization.
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 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 shares of APS of that
Fund is divided by the total number of Common Shares of that Fund outstanding at
such time.
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 APS by redelivering the
certificates or share deposit receipts evidencing ownership of (i) the Acquiring
Fund Common Shares to State Street Bank and Trust Company, 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 Common Shares of the Target
Fund and (ii) the Acquiring Fund APS to Bankers Trust Company, as the transfer
agent and registrar for the Acquiring Fund APS for distribution to the holders
of Target Fund APS on the basis of such holder's proportionate interest in the
aggregate liquidation preference and value of the APS of the Target Fund. With
respect to any Target Fund shareholder holding certificates evidencing ownership
of Target Fund Common Shares as of the
A-6
Exchange 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 APS 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 APS, 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. In lieu thereof, the Acquiring Funds
transfer agent, State Street Bank and Trust Company, will aggregate all
fractional shares of Acquiring Fund Common Shares 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 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.
7. 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 declines in total operating expenses, 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, 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 this
Proxy Statement and 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.
8. Covenants of the Funds.
(a) Each Fund covenants to operate its business as presently conducted between
the date hereof and the Exchange 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 Exchange 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 fur-
A-7
nish 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 Exchange 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.
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 Exchange 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 Exchange Date and for all prior taxable periods.
Any information obtained under this subsection shall be kept confidential except
as otherwise may be necessary in connection with the filing of returns or claims
for refund or in conducting an audit or other proceeding. After the Exchange
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 Exchange 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 Van Kampen or an affiliate thereof.
(g) The Target Fund agrees to mail to its shareholders of record entitled to
vote at the annual 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
stay in existence and continue its business as a non-diversified, closed-end
management investment company registered under the 1940 Act.
9. Exchange 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 "Exchange Date." To the extent that any Target Fund
Investments, for any reason, are not transferable on the Exchange 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 Exchange Date
confirmation or other adequate evidence as to the tax basis of the Target Fund
Investments delivered to the Acquiring Fund hereunder, certified by Deloitte &
Touche LLP.
(c) As soon as practicable after the close of business on the Exchange 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
Exchange Date and the number of shares of Target Fund Common Shares and Target
Fund APS 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.
A-8
10. 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 affirmative vote of the Board of Trustees of the
Target Fund and by the affirmative vote of the holders of (i) a majority of the
outstanding Target Fund Common Shares and a majority of the outstanding
Acquiring Fund APS, each voting separately as a class.
(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) and its Treasurer, and a certificate
signed by the Fund's President (or any Vice President) and its Treasurer, dated
as of the Exchange Date, certifying that as of the Valuation Time and as of the
Exchange 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 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) and
its Treasurer, dated as of the Exchange Date, certifying that, as of the
Valuation Time and as of the Exchange 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, Arps, Slate,
Meagher & Flom LLP and/or its affiliate Skadden, Arps, Slate, Meagher & Flom
(Illinois) (collectively, "Skadden, Arps"), counsel for the Acquiring Fund,
dated as of the Exchange 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 Acquiring Fund and this Agreement has been duly executed and
delivered by the Acquiring Fund and (assuming the Agreement is a valid and
binding obligation of the other parties thereto) 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 thereby 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; (vi) 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 and fully paid; and (vii) to their knowledge and subject to the
qualifications set forth below, the execution and delivery by the Acquiring Fund
of the Agreement and the consummation of the transactions therein 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 (a) which may be required as a result of the involvement of other parties
to the Agreement in the transactions contemplated by the Agreement because of
their legal or regulatory status or because of any other facts specifically
pertaining to them; (b) the absence of which does not deprive the Target Fund of
any material benefit under the Agreement; or (c) which can be readily obtained
without significant delay or expense to the Target Fund, without loss to the
Target Fund of any material benefit under the Agreement and without any material
adverse effect on the Target Fund during the period such consent, approval,
authorization, registration, qualifi-
A-9
cation or order was obtained. The foregoing opinion relates only to consents,
approvals, authorizations, registrations, qualifications, orders or filings
under (a) laws which are specifically referred to in this opinion, (b) laws of
its state of organization or any state in which the Acquiring Fund is qualified
to do business and the federal laws of the United States which, in counsel's
experience, are normally applicable to transactions of the type provided for in
the Agreement and (c) court orders and judgments disclosed to counsel by the
Acquiring Fund in connection with the opinion. In addition, although counsel
need not have specifically considered the possible applicability to the
Acquiring Fund of any other laws, orders or judgments, nothing has come to their
attention in connection with their representation of the Acquiring Fund in this
transaction that has caused them to conclude that any other consent, approval,
authorization, registration, qualification, order or filing is required.
(g) 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 Code.
(h) 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.
(i) 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.
11. 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 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 shareholders of the Target Fund
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) and its
Treasurer, and a certificate signed by such Fund's President (or any Vice
President) and its Treasurer, dated as of the Exchange Date, certifying that as
of the Valuation Time and as of the Exchange 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) and its
Treasurer, dated the Exchange Date, certifying that as of the Valuation Time and
as of the Exchange 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, Arps,
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
reorga-
A-10
nization 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 the Agreement
is a valid and binding obligation of the other parties thereto) 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 thereby 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
Trust on behalf of the Target Fund of the Agreement and the consummation of the
transactions therein 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) which may be
required as a result of the involvement of other parties to the Agreement in the
transactions contemplated by the Agreement because of their legal or regulatory
status or because of any other facts specifically pertaining to them; (b) the
absence of which does not deprive the Acquiring Fund of any material benefit
under such agreements; or (c) which can be readily obtained without significant
delay or expense to the Acquiring Fund, without loss to the Acquiring Fund of
any material benefit under the Agreement and without any material adverse effect
on them during the period such consent, approval, authorization, registration,
qualification or order was obtained. The foregoing opinion relates only to
consents, approvals, authorizations, registrations, qualifications, orders or
filings under (a) laws which are specifically referred to in the opinion, (b)
laws of its state of organization or any state in which the Target Fund is
qualified to do business and the federal laws of the United States which, in our
experience, are normally applicable to transactions of the type provided for in
the Agreement and (c) court orders and judgments disclosed to them by the Target
Fund in connection with the opinion. In addition, although counsel need not have
specifically considered the possible applicability to the Target Fund of any
other laws, orders or judgments, nothing has come to their attention in
connection with their representation of the Target Fund in this transaction that
has caused them to conclude that any other consent, approval, authorization,
registration, qualification, order or filing is required.
(f) That the Acquiring Fund shall have obtained an opinion from Skadden, Arps,
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 any Acquired 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 Exchange Date the Acquired 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 Exchange 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 Exchange Date. In this
regard, the last dividend period for the Target Fund APS may be shorter than the
dividend period for such APS determined as set forth in the applicable
Certificate of Vote.
12. 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 Exchange Date, or the Exchange Date may be postponed, (i) by mutual
consent of the Boards of Trustees of the Funds, (ii) by the Board of Trustees of
the Target Fund if any condition of the Target Fund's obligations set forth in
Section 10 of this Agreement has not been fulfilled or waived by such Board; or
(iii) by the Board
A-11
of Trustees of the Acquiring Fund if any condition of the Acquiring Fund's
obligations set forth in Section 11 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, 2001, 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 Exchange 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. In addition,
the Boards of Trustees of the Funds have delegated to the Adviser the ability to
make non-material changes to the transaction if it deems it to be in the best
interests of the Funds to do so.
(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 Exchange 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 Exchange 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.
13. 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 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,
A-12
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.
14. Other Matters.
(a) Pursuant to Rule 145 under the 1933 Act, and in connection with the issuance
of any shares to any person who at the time of the Reorganization is, to its
knowledge, an affiliate of a party to the Reorganization pursuant to Rule
145(c), the Acquiring Fund will cause to be affixed upon the certificate(s)
issued to such person (if any) a legend as follows:
THESE SHARES ARE SUBJECT TO RESTRICTIONS ON TRANSFER UNDER THE SECURITIES
ACT OF 1933 AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT TO THE VAN
KAMPEN TRUST FOR INVESTMENT GRADE NEW JERSEY MUNICIPALS (OR ITS STATUTORY
SUCCESSOR), OR ITS PRINCIPAL UNDERWRITER UNLESS (I) A REGISTRATION
STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT OF 1933
OR (II) IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE FUND, SUCH
REGISTRATION IS NOT REQUIRED.
and, further, that stop transfer instructions will be issued to the Acquiring
Fund's transfer agent with respect to such shares. The Target Fund will provide
the Acquiring Fund on the Exchange Date with the name of any shareholder of the
Target Fund who is to the knowledge of the Target Fund an affiliate of the
Target Fund on such date.
(b) 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.
(c) 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 Investment Advisory Corp., 1 Parkview Plaza, Oakbrook
Terrace, Illinois 60181-5555, 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 Investment Advisory Corp., 1 Parkview Plaza, Oakbrook Terrace,
Illinois 60181, 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.
(d) This Agreement supersedes all previous correspondence and oral
communications between the parties
A-13
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.
(e) 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.
VAN KAMPEN NEW JERSEY VALUE MUNICIPAL
INCOME TRUST
---------------------------------------------
Richard Powers III
President
Attest:
Sara L. Badler
Assistant Secretary
VAN KAMPEN TRUST FOR INVESTMENT
GRADE NEW JERSEY MUNICIPALS
---------------------------------------------
Richard Powers III
President
Attest:
Sara L. Badler
Assistant Secretary
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APPENDIX B
Federal Identification
No. 36-6981631
THE COMMONWEALTH OF MASSACHUSETTS
Office of the Massachusetts Secretary of State
Michael Joseph Connolly, Secretary
One Ashburton Place, Boston, Mass. 02108
AMENDED AND RESTATED
CERTIFICATE OF VOTE OF TRUSTEES ESTABLISHING
PREFERRED SHARES
I, Ronald A. Nyberg, Secretary, of Van Kampen Merritt Trust For
Investment Grade New Jersey Municipals (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 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 800 shares of its authorized preferred shares of
beneficial interest, par value $.01 per share ("Preferred Shares"), liquidation
preference of $50,000 per share, designated Auction Preferred Shares (the
"APS").
Second: The preferences, voting powers, qualifications, and special
or relative rights or privileges of the preferred shares of beneficial interest
are as follows:
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DESIGNATION
APS: The 800 preferred shares of beneficial interest, $.01 par
value, liquidation preference $50,000 per share, are hereby designated "Auction
Preferred Shares". Each share of APS 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 7, 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 shall constitute a separate
series of Preferred Shares of the Fund, and each share of APS shall be identical
except as provided in Section 3 of Part I of this Certificate of Vote.
No holder of APS shall have, solely by reason of being such a holder
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).
1. Number of Shares; Ranking. (a) No fractional APS shall be issued.
(b) Any 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.
(c) The 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 any of the 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 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 any of the 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 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 is scheduled to occur, dividends shall be payable on the first
Business Day next succeeding such Auction Date, subject to certain exceptions,
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 such 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
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calendar month in which an Auction Date for such APS is scheduled to occur,
dividends shall be payable on the first Business Day next succeeding such
Auction Date, subject in each case to the options of the Fund to further
designate from time to time any Subsequent Dividend Period thereof as a Special
Dividend Period.
(ii) In the case of dividends that would otherwise be
payable on a Sunday, Monday, 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 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 the APS, 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 APS 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.
(b) (i) The dividend rate on the 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 APS under "Designation," above. For each Subsequent
Dividend Period of any of the APS outstanding thereafter, the dividend rate on
such APS shall be equal to the rate per annum that results from an Auction for
such APS on the Auction Date next preceding such Subsequent Dividend Period;
provided, however, that if an Auction for any Subsequent Dividend Period of any
of the 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 APS for any such Subsequent Dividend Period shall be the
Maximum Rate (as defined herein) for such APS on the Auction Date for such
Subsequent Dividend Period; provided, further, however, that if any Failure to
Deposit shall have occurred with respect to any of the 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
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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 APS, 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 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 APS and (2) if such Failure to Deposit consisted of the failure
timely to pay to the Auction Agent the Redemption Price of 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, 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 be the number of days for which
such Failure to Deposit is not 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 APS to be redeemed. A Failure to Deposit with respect to
the 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 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 the
APS on any date on which dividends shall be payable on the APS shall be computed
by multiplying the respective Applicable Rate for such APS 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 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 APS through the most recent
Dividend Payment Date for such APS. 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
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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 any of the 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 any of the APS
may not be redeemed in part if after such partial redemption fewer than 250
shares of such APS remain outstanding.
(ii) If fewer than all of the outstanding APS are to be
redeemed pursuant to subparagraph (a)(i) of this Section 3, the number of APS to
be redeemed shall be determined by the Board of Trustees, and such shares shall
be redeemed pro rata from the Holders of such APS 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
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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 the 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 APS are to be
redeemed pursuant to this Section 3(a)(iv), the number of APS to be redeemed
shall be 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
of the APS held by any Holder are to be redeemed, the Notice of Redemption
mailed to such Holder shall also specify the number of APS to be redeemed from
such Holder.
(c) Notwithstanding the provisions of paragraph (a) of this
Section 3, if any dividends on APS are in arrears, none of the APS shall be
redeemed unless all outstanding APS are simultaneously redeemed, and the Fund
shall not purchase or otherwise acquire any shares of such APS; provided,
however, that the foregoing shall not prevent the purchase or acquisition of all
outstanding APS pursuant to the successful completion of an otherwise lawful
purchase or exchange offer made on
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the same terms to, and accepted by, Holders of all outstanding 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 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.
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4. Designation of Special Dividend Periods. (a) The Fund, at its
option, may designate any succeeding Subsequent Dividend Period of the 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 clause (i) of paragraph (c) of this Section 4, (B) any Failure
to Deposit that shall have occurred with respect to the APS 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 APS 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 of the 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 APS 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
APS.
(b) If the Fund proposes to designate any succeeding
Subsequent Dividend Period of any of the 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 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 deliver to the Auction Agent either:
(i) a notice stating (A) that the Fund has determined to
designate the next succeeding Dividend Period 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, (D) that such Special Dividend Period
shall not commence if (1) on such Auction Date Sufficient Clearing Bids 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 and (E) the scheduled Dividend Payment Dates for
such APS during such Special Dividend Period; 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
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Moody's is then rating such APS) and (2) S&P Eligible Assets (if S&P is then
rating such APS) each at least equal 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 APS and
that the next succeeding Dividend Period 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 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
B-9
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 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
B-10
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
preference, 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 (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 New Jersey 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 Minimum 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 New Jersey 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
B-11
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 New Jersey
Municipal Securities Sold
S&P Discount Factor
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 APS, voting as a separate class, is required with respect to any
matter that materially affects the APS 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
B-12
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.
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 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
B-13
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 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
B-14
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 satisfy 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.
(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 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.
B-15
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 the 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 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 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 Auction 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
B-16
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; and (C)
the Fund may write put options on securities. 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, and (iii) 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 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
(a) For so long as any of the APS is Outstanding and S&P is
rating such
B-17
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
(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 A1+ 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 contract 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 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
B-18
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:
(a) "'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
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.
B-19
(b) "Accountant's Confirmation" shall have the meaning set
forth in paragraph (c) of Section 9 of this Part I.
(c) "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 and New
Jersey 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. State taxes imposed on the
Additional Dividends, however, may reduce the amount of after tax cash a holder
would have had if there were no Retroactive Taxable Allocation. 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 combined federal and New
Jersey individual income tax rate applicable to ordinary income or net capital
gains, as applicable (taking into account the federal income tax deductibility
of state and local taxes paid or incurred), or the maximum marginal regular
federal corporate income tax rate, whichever is greater, in effect during the
taxable year in question.
(d) "Anticipation Notes" means the following New Jersey
municipal securities: tax anticipation notes, revenue anticipation notes and tax
and revenue anticipation notes.
(e) "Applicable Rate" shall have the meaning specified in
subparagraph (c)(i) of Section 2 of this Part I.
(f) "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 the Fund's transactions in futures and options
and including any payables for New Jersey 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
B-20
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.
(g) "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.
(h) "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.
(i) "Auction" shall mean each periodic implementation of the
Auction Procedures.
(j) "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 the APS so long as the Applicable Rate for such APS is
to be based on the results of an Auction.
(k) "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.
(l) "Auction Date," with respect to any Rate Period, shall
mean the Business Day next preceding the first day of such Rate Period
initially, Thursday, January 7, 1993 and thereafter each July 7 and January 7,
subject to change as set forth herein.
(m) "Auction Procedures" shall mean the procedures for
conducting Auctions set forth in Part II hereof.
(n) "Board of Trustees" shall mean the Board of Trustees of
the Fund or any duly authorized committee thereof.
(o) "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.
(p) "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.
(q) "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.
B-21
(r) "Common Shares" shall mean the common shares of beneficial
interest, par value $.01 per share, of the Fund.
(s) "Cure Date" shall mean the APS Basic Maintenance Cure Date
or the 1940 Act Cure Date, as the case may be.
(t) "Date of Original Issue," with respect to the APS, shall
mean the date on which the Fund initially issued such APS.
(u) "Deposit Securities" shall mean cash and New Jersey
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 New Jersey municipal
securities shall be considered "Deposit Securities" only if they are also rated
P-1, MIG-1 or VMIG-1 by Moody's.
(v) "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.
(w) "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 New Jersey Municipal Securities
Sold which become due prior to the Dividend Payment Date and interest with
respect to New Jersey municipal securities which is payable to the Fund prior to
the Dividend Payment Date.
(x) "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.
(y) "Dividend Payment Date," with respect to the APS, shall
mean any date on which dividends on such APS are payable pursuant to the
provisions of paragraph (b) of Section 2 of this Part I.
(z) "Dividend Period," with respect to the APS, shall mean the
period from and including the Date of Original Issue of such APS to but
excluding the initial Dividend Payment Date for such APS and any period
thereafter from and including one Dividend Payment Date for such APS to but
excluding the next succeeding Dividend Payment Date for such APS.
(aa) "Fund" shall mean Van Kampen Merritt Trust For Investment
Grade New Jersey Municipals, a Massachusetts business trust, which is the issuer
of the APS.
(bb) "Failure to Deposit," with respect to the 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 APS, 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
B-22
Payment Date on any of the APS or (B) on the Business Day next preceding any
redemption date in funds available on such redemption date for such APS in The
City of New York, New York, the Redemption Price to be paid on such redemption
date for the APS after notice of redemption is given pursuant to paragraph (b)
of Section 3 of this Part I.
(cc) "Holder," with respect to the APS, shall mean the
registered holder of such APS as the same appears on the share books of the
Fund.
(dd) "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.
(ee) "Initial Dividend Period," with respect to the 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 the APS.
(ff) "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.
(gg) "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.
(hh) "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.
(ii) "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).
(jj) "Master Purchaser's Letter" has the meaning specified in
Section 1 of Part II hereof.
(kk) "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.
B-23
(ll) "Minimum Liquidity Level" shall have meaning set forth in
Section 10 of this Part I.
(mm) "Minimum Dividend Period" shall mean with respect to the
APS, any Rate Period consisting of 28 Rate Period Days.
(nn) "Moody's" shall mean Moody's Investors Service, Inc., a
Delaware corporation, and its successors.
(oo) "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 Aaa(1) Aa(1) A(1) Baa(1) Other(2) (V)MIG-1(1,3,4) SP-1+(3,4)
- --------------- ------ ----- ---- ------ -------- --------------- ----------
7 weeks ................... 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but greater
than seven weeks ........ 154 164 173 205 235 137 149
9 weeks or less but greater
than eight weeks ........ 158 169 179 209 242 138 150
- ----------
(1) Moody's rating.
(2) New Jersey municipal securities not rated by Moody's but rated BBB or BBB+
by S&P.
(3) New Jersey 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 New Jersey municipal securities so long as such New
Jersey 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 New Jersey municipal
securities will be 125% as long as such New Jersey 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 New Jersey Municipal
Securities Sold.
(pp) "Moody's Eligible Asset" shall mean cash, Receivables for
New Jersey Municipal Securities Sold or a New Jersey 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 New Jersey 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 New
B-24
Jersey municipal securities of at least $10,000,000. New Jersey municipal
securities issued by any one issuer and rated BBB by S&P may comprise no more
than 4% of total Moody's Eligible Assets; such BBB-rated New Jersey municipal
securities, if any, together with any New Jersey 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 New Jersey
municipal securities, if any, together with any New Jersey 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 New Jersey municipal securities, if any, together with any New Jersey
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 New Jersey 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 New Jersey municipal
security. New Jersey municipal securities classified within one issue type
concentration and rated BBB by S&P may comprise no more than 12% of Moody's
Eligible Assets; such BBB-rated New Jersey municipal securities, if any,
together with any New Jersey municipal securities in the same issue type and
rated Baa by Moody's or A by S&P may comprise no more than 20% of Moody's
Eligible Assets; such BBB, Baa and A-rated New Jersey municipal securities, if
any, together with any New Jersey municipal securities in the same issue type
and rated A by Moody's or AA by S&P may comprise no more than 40% of Moody's
Eligible Assets and such BBB, Baa, A and AA-rated New Jersey municipal
securities, if any, together with any New Jersey municipal securities in the
same issue type and rated Aa by Moody's or AAA by S&P, may comprise no more than
60% of Moody's Eligible Assets. For purposes of the issue type concentration
requirement described above, New Jersey municipal securities will be classified
within one of the following categories: health care issues (teaching and
non-teaching hospitals, public and private), housing issues (single-and
multi-family), educational facilities issues (public and private schools),
student loan issues, resource recovery issues, transportation issues (mass
transit, airport and highway bonds), industrial development bond issues, utility
issues (water, sewer and electricity), general obligation issues, lease
obligations, escrowed bonds and other issues ("Other Issues") (includes special
obligations to crossover, excise and sales tax revenue, recreation revenue,
special assessment and telephone revenue bonds only) not falling within one of
the aforementioned categories. In no event shall (a) more than 10% of Moody's
Eligible Assets consist of student loan issues, (b) more than 10% of Moody's
Eligible Assets consist of resource recovery issues or (c) more than 10% of
Moody's Eligible Assets consist of Other Issues. New Jersey municipal securities
issued by issuers located within a single county and rated BBB by S&P may
comprise no more than 12% of total Moody's Eligible Assets; such BBB-rated New
Jersey municipal securities, if any, together with any New Jersey municipal
securities issued by issuers located within the same county 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 New Jersey municipal securities, if any,
together with any New Jersey municipal securities issued by issuers located
within the same county 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 New
Jersey municipal securities, if any, together with any New Jersey municipal
securities issued by issuers located within the same county and rated Aa by
Moody's or AAA by S&P, may comprise no more than 60% of total Moody's Eligible
Assets. The single county limitations set forth in the immediately preceding
sentence apply to general obligation bonds only. For purposes of applying the
foregoing requirements, a New Jersey municipal security shall be deemed to be
rated BBB by S&P if rated BBB or BBB+ by S&P. For purposes of minimum issue
size, maximum underlying obligor, maximum issue type concentration and maximum
county concentration, Moody's Eligible Assets shall be calculated without
including cash and New Jersey 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
B-25
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, New Jersey
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 New
Jersey 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 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.
(qq) "Moody's Exposure Period" shall mean the period
commencing on a given Valuation Date and ending 46 days thereafter.
(qq) 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.
(ss) "Municipal Index" shall mean The Bond Buyer Municipal
Bond Index.
(tt) "1940 Act" shall mean the Investment Company Act of 1940,
as amended from time to time.
(uu) "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).
(vv) "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.
(ww) "Non-call Period" shall have the meaning set forth below
under "Specific Redemption Provisions."
(xx) "Notice of Redemption" shall mean any notice with respect
to the redemption of the APS pursuant to Section 3 of this Part I.
B-26
(yy) "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).
(zz) "Preferred Shares" shall mean the authorized preferred
shares of beneficial interest, par value $.01 per share, of the Fund, and
includes the APS.
(aaa) "Premium Call Period" shall have the meaning set forth
below under "Specific Redemption Provisions."
(bbb) "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).
(ccc) "Projected Dividend Amount" means, with respect to the
the 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 designed to take into account increases in
dividend rates over such period.
(ddd) "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.
(eee) "Rate Period," with respect to the APS, shall mean the
Initial Dividend Period thereof and any Subsequent Dividend Period, including
any Special Dividend Period, for such APS.
(fff) "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.
(ggg) "Receivables for New Jersey 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 New Jersey 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 New Jersey 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 New Jersey municipal
securities sold as of or prior to such Valuation Date if such receivables are
due within five business days of such Valuation Date.
B-27
(hhh) "Redemption Price" shall mean the Optional Redemption
Price or the Mandatory Redemption Price, as applicable.
(iii) "Retroactive Taxable Allocation" shall have the meaning
set forth in Section 12 hereof.
(jjj) "S&P" shall mean Standard & Poor's Fund, a New York
corporation, and its successors.
(kkk) "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................. 202% 207% 222% 262%
22 Business Days................. 182 187 202 242
10 Business Days................. 167 172 187 227
7 Business Days................. 162 167 182 222
3 Business Days................. 142 147 162 202
- ----------
* S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for
short-term New Jersey municipal securities will be 115%, so long as such New
Jersey 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 New Jersey
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 New Jersey
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 New Jersey
municipal securities may comprise no more than 50% of short-term New Jersey
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 New Jersey
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 New Jersey
municipal securities.
(lll) "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 New Jersey Municipal
Securities Sold or a New Jersey 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
B-28
New Jersey municipal securities will be included in S&P Eligible Assets only to
the extent the Market Value of such New Jersey 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 such Moody's-rated New Jersey municipal security, such New Jersey 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 New Jersey municipal
securities with an original issue size of at least $10 million or, if an issue
with an original issue size below $10 million (but in no event below $5
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 "New
Jersey municipal securities" means any obligation the interest on which is
exempt from regular Federal income taxation and which 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:
(i) New Jersey 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 New Jersey 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 New Jersey municipal securities exceeds 5% of the aggregate Market
Value of S&P Eligible Assets;
(i) New Jersey 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 New Jersey municipal securities does not
exceed 25% of the aggregate Market Value of S&P Eligible Assets; and
(iii) New Jersey municipal securities of any one issue
type category will be considered S&P Eligible Assets only to the extent the fair
market value of such New Jersey municipal securities does not exceed 20% of the
aggregate fair market value of S&P Eligible Assets. For purposes of this
requirement, New Jersey municipal securities will be classified into one of the
following categories: health care issues, housing issues, educational issues,
facilities issues, student loan issues, transportation issues, industrial
development bond issues, public power utilities issues, water and sewer
utilities issues, special utilities issues, general obligation issues, lease
obligations, escrowed bonds and other issues not falling within one of the
aforementioned categories. Furthermore, special utilities issues that are not
rated by S&P will not be considered S&P Eligible Assets.
(mmm) "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).
(nnn) "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.
B-29
(ooo) "Special Dividend Period," with respect to the 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.
(ppp) "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 APS, 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.
(qqq) "Subsequent Dividend Period," with respect to the 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 APS and any period thereafter from and
including one Dividend Payment Date which follows a scheduled Auction for such
APS to but excluding the next succeeding Dividend Payment Date which follows a
scheduled Auction for such APS; 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.
(rrr) "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.
(sss) "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.
(ttt) "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.
(uuu) "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 non-callable direct obligations of the U.S. Government
(excluding "flower" bonds) with a remaining
B-30
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.
(vvv) "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.
(www) "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.
(xxx) "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.
(yyy) "Voting Period" shall have the meaning set forth in
paragraph (b) of Section 5 of this Part I.
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:
(a) "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.
(b) "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.
(c) "Applicable Percentage" for the APS on any Auction Date
shall mean the percentage, determined as set forth below, based on the
prevailing rating of such APS in effect at the close of business on the Business
Day next preceding such Auction Date.
B-31
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 combined regular federal and New Jersey individual
income tax rate applicable to ordinary income (taking into account the federal
income tax deductibility of state and local taxes paid or incurred) 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 the APS
shall be (i) "aa3"/AA- or higher if such 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 such 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 such 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 such 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 the APS. If neither S&P
nor Moody's shall make such a rating available, Goldman, Sachs & 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 such APS.
(d) "Available APS" shall have the meaning specified in
paragraph (a) of Section 4 of this Part II.
(e) "Bid" and "Bids" shall have the respective meanings
specified in paragraph (a) of Section 2 of this Part II.
(f) "Bidder" and "Bidders" shall have the respective meanings
specified in paragraph (a) of Section 2 of this Part II.
B-32
(g) "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.
(h) "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.
(i) "Existing Holder," when used with respect to the APS,
shall mean a Person who has signed a Master Purchaser's Letter and is listed as
the beneficial owner of such APS in the records of the Auction Agent.
(j) "Hold Order" and "Hold Orders" shall have the respective
meanings specified in paragraph (a) of Section 2 of this Part II.
(k) "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.
(l) "Maximum Rate," for the APS on any Auction Date, shall
mean:
(ii) 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 APS and (B) the Applicable
Percentage on such Auction Date, unless such APS have or have 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 existed has not yet
occurred for a Minimum Dividend Period after such Special Dividend Period, in
which case the higher of:
(A) the dividend rate on the APS 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 APS, 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 APS, 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
B-33
Rate Period of such APS, 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.
(m) "Order" and "Orders" shall have the respective meanings
specified in paragraph (a) of Section 2 of this Part II.
(n) "Outstanding" shall mean, as of any Auction Date with
respect to the APS, the number of such APS theretofore issued by the Fund
except, without duplication, (i) any 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 APS as to which
the Fund or any Affiliate thereof shall be an Existing Holder and (iii) any APS
represented by any certificate in lieu of which a new certificate has been
executed and delivered by the Fund.
(o) "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.
(p) "Potential Holder," when used with respect to the APS,
shall mean any Person, including any Existing Holder of such APS, (i) who shall
have executed a Master Purchaser's Letter and (ii) who may be interested in
acquiring such APS (or, in the case of an Existing Holder of APS, additional
APS).
(q) "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.
(r) "Sell Order" and "Sell Orders" shall have the respective
meanings specified in paragraph (a) of Section 2 of this Part II.
(s) "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.
(t) "Submitted Bid" and "Submitted Bids" shall have the
respective meanings specified in paragraph (a) of Section 4 of this Part II.
(u) "Submitted Hold Order" and "Submitted Hold Orders" shall
have the respective meanings specified in paragraph (a) of Section 4 of this
Part II.
(v) "Submitted Order" and "Submitted Orders" shall have the
respective meanings specified in paragraph (a) of Section 4 of this Part II.
(w) "Submitted Sell Order" and "Submitted Sell Orders" shall
have the
B-34
respective meanings specified in paragraph (a) of Section 4 of this Part II.
(x) "Sufficient Clearing Bids" shall have the meaning
specified in paragraph (a) of Section 4 of this Part II.
(y) "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 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 APS, if any, held by
such Existing Holder which such Existing Holder desires to continue
to hold without regard to the Applicable Rate for such APS for the
next succeeding Rate Period of such APS;
(B) the number of Outstanding APS, if any, which
such Existing Holder offers to sell if the Applicable Rate for such
APS for the next succeeding Rate Period of such APS shall be less
than the rate per annum specified by such Existing Holder; and/or
(C) the number of Outstanding APS, if any, held by
such Existing Holder which such Existing Holder offers to sell
without regard to the Applicable Rate for such APS for the next
succeeding Rate Period of such APS;
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 APS, if any, which each such
Potential Holder offers to purchase if the Applicable Rate for such APS for the
next succeeding Rate Period of such APS 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-35
(a) (i) A bid by an Existing Holder of APS subject to an
Auction on any Auction Date shall constitute an irrevocable offer to sell:
(A) the number of Outstanding APS specified in
such Bid if the Applicable Rate for such APS determined on such
Auction Date shall be less than the rate specified therein;
(B) such number or a lesser number of Outstanding
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 APS
determined on such Auction Date shall be equal to the rate specified
therein; or
(C) the number of Outstanding APS specified in
such Bid if the rate specified therein shall be higher than the
Maximum Rate for such APS, or such number or a lesser number of
Outstanding 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 APS and
Sufficient Clearing Bids for such APS do not exist.
(i) A Sell Order by an Existing Holder of APS subject to
an Auction on any Auction Date shall constitute an irrevocable offer to sell:
(A) the number of Outstanding APS specified in
such Sell Order; or
(B) such number or a lesser number of Outstanding
APS as set forth in clause (iii) of paragraph (b) of Section 5 of
this Part II if Sufficient Clearing Bids for such APS do not exist.
(ii) A Bid by a Potential Holder of APS subject to an
Auction on any Auction Date shall constitute an irrevocable offer to purchase:
(A) the number of Outstanding APS specified in
such Bid if the Applicable Rate for such APS determined on such
Auction Date shall be higher than the rate specified therein; or
(B) such number or a lesser number of Outstanding
APS as set forth in clause (v) of paragraph (a) of Section 5 of this
Part II if the Applicable Rate for such APS determined on such
Auction Date shall be equal to the rate specified therein.
(b) No Order for any number 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 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:
B-36
(i) the name of the Bidder placing such Order;
(ii) the aggregate number of APS that are the subject of
such Order;
(iii) to the extent that such Bidder is an Existing
Holder of APS:
(A) the number of APS, if any, subject to any Hold
Order placed by such Existing Holder;
(B) the number of APS, if any, subject to any Bid
placed by such Existing Holder and the rate specified in such Bid;
and
(C) the number of APS, if any, subject to any Sell
Order placed by such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder of
APS, the rate and number of such APS specified in such Potential Holder's Bid.
(a) 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%.
(b) If an Order or Orders covering all of the Outstanding 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
APS held by such Existing Holder and not subject to Orders submitted to the
Auction Agent.
(c) 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 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 APS shall be considered valid,
but only up to and including in the aggregate the number of Outstanding APS held
by such Existing Holder, and if the number of APS subject to such Hold Orders
exceeds the number of Outstanding 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 APS held by such Existing Holder;
(ii) (A) any Bid for APS shall be considered valid up to
and including the excess of the number of Outstanding APS held by such Existing
Holder over the number of APS subject to any Hold Orders referred to in clause
(i) above;
(B) subject to subclause (A), if more than one Bid
for APS with the same rate is submitted on behalf of such Existing
Holder and the number of Outstanding 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 APS
subject to each Bid with the same rate shall be reduced pro rata to
cover the number of APS equal to such excess;
B-37
(C) subject to subclauses (A) and (B), if more
than one Bid for 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 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 APS by a Potential Holder at the rate therein
specified; and
(iii) all Sell Orders for APS shall be considered valid
up to and including the excess of the number of Outstanding 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.
(d) If more than one Bid for one or more of the 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.
(e) 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 the APS for which an Auction is being held
determine:
(i) the excess of the number of Outstanding APS over the
number of Outstanding APS subject to Submitted Hold Orders (such excess being
hereinafter referred to as the "Available APS.");
(ii) from the Submitted Orders for such APS whether:
(A) the number of Outstanding APS subject to
Submitted Bids by Potential Holders specifying one or more rates
equal to or lower than the Maximum Rate for such APS
exceeds or is equal to the sum of
(B) the number of Outstanding APS subject to
Submitted Bids by Existing Holders specifying one or more rates
higher than the Maximum Rate for such APS; and
(C) the number of Outstanding APS subject to
Submitted Sell Orders
B-38
(in the event such excess or such equality exists (other than
because the number of APS in subclauses (B) and (C) above is zero
because all of the Outstanding 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 APS); and
(iii) if Sufficient Clearing Bids for such APS exists, the
lowest rate specified in such Submitted Bids (the "Winning Bid Rate" for such
APS) 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 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 APS which, when added to
the number of Outstanding APS to be purchased by such Potential Holders
described in subclause (B) above, would equal not less than the Available APS.
(a) 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 the APS for which an Auction is
being held on the Auction Date and, based on such determination, the Applicable
Rate for such APS for the next succeeding Rate Period thereof as follows:
(i) if Sufficient Clearing Bids for such APS exists,
that the Applicable Rate for such APS for the next succeeding Rate Period
thereof shall be equal to the Winning Bid Rate for such APS to be determined;
(ii) if Sufficient Clearing Bids for such APS do not
exist (other than because all of the Outstanding APS are subject to Submitted
Hold Orders), that the Applicable Rate for such APS for the next succeeding Rate
Period, which shall be a Minimum Dividend Period, thereof shall be equal to the
Maximum Rate for such APS; or
(iii) if all of the Outstanding APS are subject to
Submitted Hold Orders, that the Applicable Rate for such APS 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 combined regular federal and New Jersey individual
income tax rate applicable to ordinary income (taking into account the federal
income tax deductibility of state and local taxes paid or incurred) 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
B-39
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 of the 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 APS shall be rejected:
(i) Existing Holders' Submitted Bids for such APS
specifying any rate that is higher than the Winning Bid Rate for such APS shall
be accepted, thus requiring each such Existing Holder to sell the APS subject to
such Submitted Bids;
(ii) Existing Holders' Submitted Bids for the APS
specifying any rate that is lower than the Winning Bid Rate for such APS shall
be rejected, thus entitling each such Existing Holder to continue to hold the
APS subject to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for the APS
specifying any rate that is lower than the Winning Bid Rate shall be accepted;
(iv) each Existing Holder's Submitted Bid for the APS
specifying a rate that is equal to the Winning Bid Rate for such APS shall be
rejected, thus entitling such Existing Holder to continue to hold the APS
subject to such Submitted Bid, unless the number of Outstanding of APS subject
to all such Submitted Bids shall be greater than the number of APS ("remaining
shares") in the excess of the Available APS 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 APS
obtained by multiplying the number of remaining shares by a fraction, the
numerator of which shall be the number of Outstanding APS held by such Existing
Holder subject to such Submitted Bid and the denominator of which shall be the
aggregate number of Outstanding APS subject to such Submitted Bids made by all
such Existing Holders that specified a rate equal to the Winning Bid Rate for
such APS; and
(v) each Potential Holder's Submitted Bid for the APS
specifying a rate that is equal to the Winning Bid Rate for such APS shall be
accepted but only in an amount equal to the number of APS obtained by
multiplying the number of shares in the excess of the Available APS 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 APS subject to such Submitted Bid and the denominator of
which shall be the aggregate number of Outstanding APS subject to such Submitted
Bids made by all such Potential Holders that specified a rate equal to the
Winning Bid Rate for such APS; and
(b) If Sufficient Clearing Bids for any of the APS have not
been made (other
B-40
than because all of the Outstanding APS are subject to Submitted Hold Orders),
subject to the provisions of paragraph (d) of this Section 5, Submitted Orders
for such APS shall be accepted or rejected as follows in the following order of
priority and all other Submitted Bids for such APS shall be rejected:
(i) Existing Holders' Submitted Bids for the APS
specifying any rate that is equal to or lower than the Maximum Rate for such APS
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 the APS
specifying any rate that is equal to or lower than the Maximum Rate for such APS
shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for the APS
specifying any rate that is higher than the Maximum Rate of such APS and the
Submitted Sell Orders for such 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 APS subject to such Submitted Bid or Submitted
Sell Order, but in both cases only in an amount equal to the number of APS
obtained by multiplying the number 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 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 APS subject to all such Submitted Bids and
Submitted Sell Orders.
(c) If all of the Outstanding APS are subject to Submitted
Hold Orders, all Submitted Bids for such APS 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 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 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 APS 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 APS on any Auction Date, the
Auction Agent shall, in such manner as it shall determine in its sole
discretion, allocate shares of such APS for purchase among Potential Holders so
that only whole shares 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 the APS, the
Auction Agent shall determine the aggregate number of APS to be purchased and
the aggregate number 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 APS such Broker-Dealer shall deliver, or from which other
Broker-Dealer or Broker-Dealers acting for one or more sellers of APS such
Broker-Dealer shall receive, as the case may be, shares of such APS.
B-41
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 the APS prior to the
issuance of such APS.
(b) 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.
(c) All of the APS outstanding from time to time shall be
represented by one global certificate registered in the name of the Securities
Depository or its nominee.
(d) 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.
B-42
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 Trust For
Investment Grade New Jersey Municipals.
Before me,
----------------
Notary public
My commission Expires: _______
B-43
THIS PAGE INTENTIONALLY LEFT BLANK.
B-44
APPENDIX C
Acquiring Fund Annual Report
dated October 31, 2000
C-1
Table of Contents
OVERVIEW
LETTER TO SHAREHOLDERS 1
ECONOMIC SNAPSHOT 2
PERFORMANCE SUMMARY
RETURN HIGHLIGHTS 4
PORTFOLIO AT A GLANCE
CREDIT QUALITY 5
TWELVE-MONTH DIVIDEND HISTORY 5
TOP FIVE SECTORS 6
NET ASSET VALUE AND MARKET PRICE 6
Q&A WITH YOUR PORTFOLIO MANAGERS 7
GLOSSARY OF TERMS 11
BY THE NUMBERS
YOUR TRUST'S INVESTMENTS 12
FINANCIAL STATEMENTS 17
NOTES TO FINANCIAL STATEMENTS 22
REPORT OF INDEPENDENT AUDITORS 26
DIVIDEND REINVESTMENT PLAN 27
TRUST OFFICERS AND IMPORTANT ADDRESSES 29
RESULTS OF SHAREHOLDER VOTES 30
Our generations of money- management experience may help you pursue life's true
wealth.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
OVERVIEW
LETTER TO SHAREHOLDERS
November 20, 2000
Dear Shareholder,
The first three quarters of 2000 proved to be especially volatile, with all of
the major markets declining in the spring and spending the following months
trying to recover. To manage one's portfolio during such unpredictable times
requires investment-management experience, and the following pages should give
you some insight into how we have performed in this difficult environment.
In this report, the portfolio managers will explain how your investment
performed during the reporting period and describe the strategies they used to
manage your trust during that span. The report will also show you how your
investment has performed over time. Helpful charts summarize the trust's largest
investments, and you can examine the complete portfolio to see all of your
trust's holdings as of the end of your trust's reporting period.
At Van Kampen, we place a high priority on providing you and
your financial advisor with the information you need to help
you monitor your investments during all types of markets. With
nearly four generations of investment-management experience,
we've been around long enough to understand that by investing
with Van Kampen you're entrusting us with much more than your
money. Your investments may help make it possible to afford your next house,
keep up with rising college costs, or enjoy a comfortable retirement.
No matter what your reasons for investing, we're thankful that you've chosen to
place your investments with Van Kampen. We will continue to apply our
generations of money-management experience to helping you pursue life's true
wealth.
Sincerely,
[SIG]
Richard F. Powers, III
President and CEO
Van Kampen Investments
1
ECONOMIC SNAPSHOT
ECONOMIC GROWTH
ECONOMIC GROWTH REMAINED RELATIVELY STRONG DURING THE REPORTING PERIOD,
UNDERPINNED BY LOW UNEMPLOYMENT AND RISING PRODUCTIVITY, YET THERE WERE SIGNS
THAT A HEALTHY SLOWDOWN WAS UNDERWAY. GROSS DOMESTIC PRODUCT, THE PRIMARY
MEASURE OF ECONOMIC GROWTH, INCREASED AT A 2.4 PERCENT ANNUALIZED RATE FOR THE
THIRD QUARTER OF 2000. FOLLOWING RELATIVELY MILD FIRST- AND SECOND-QUARTER DATA,
THIS THIRD-QUARTER FIGURE OFFERS FURTHER EVIDENCE THAT GROWTH MIGHT BE SETTLING
BACK TO A MORE MODERATE AND SUSTAINABLE PACE THAN ITS RAPID RATE IN LATE 1999.
CONSUMER SPENDING AND EMPLOYMENT
CONCERNS ABOUT INFLATION REMAINED AT BAY DUE IN PART TO A GRADUAL SLOWDOWN IN
CONSUMER SPENDING. RISING INTEREST RATES, HIGHER ENERGY COSTS, AND A
DISAPPOINTING STOCK MARKET BEGAN TO TEMPER RETAIL SALES, WHICH LEVELED OFF FROM
THE BLISTERING PACE OF LATE 1999 AND EARLY 2000. AND WHILE CONSUMER SPENDING WAS
BRISK, THE OVERALL TREND HAS BEEN DOWNWARD THIS YEAR.
THE JOBLESS RATE CONTINUED TO BE EXTREMELY LOW BY HISTORICAL STANDARDS, BUT A
RECENT DECLINE IN NEW JOB CREATION SUPPORTS THE POPULAR BELIEF THAT THE ECONOMY
IS MODERATING. ALTHOUGH EMPLOYER COSTS SUCH AS WAGES AND BENEFITS WERE RISING AT
THE END OF 1999 AND THE BEGINNING OF 2000, OVER THE PAST SIX MONTHS THE
EMPLOYMENT COST INDEX HAS SHOWN MARKED DECELERATION, WHICH SHOULD HELP EASE
INFLATION CONCERNS.
INTEREST RATES AND INFLATION
THE FEDERAL RESERVE BOARD (THE FED) RAISED INTEREST RATES FOUR TIMES DURING THE
LAST 12 MONTHS IN AN EFFORT TO WARD OFF INFLATION BY CURBING ECONOMIC GROWTH.
OVER THE SAME PERIOD, THE CONSUMER PRICE INDEX ROSE 3.5 PERCENT, WHICH INDICATED
THAT INFLATION GENERALLY REMAINS UNDER CONTROL.
THE FED HAS ACKNOWLEDGED THE RISK OF RISING INFLATION AND WILL STAY ON GUARD, AS
RISING ENERGY COSTS AND LOW UNEMPLOYMENT THREATEN TO PROPEL THIS FIGURE UPWARD
IN THE COMING MONTHS. AS LONG AS INFLATION IS CONTAINED AND THE PACE OF ECONOMIC
GROWTH REMAINS FAVORABLE, THE FED IS LIKELY TO HOLD INTEREST RATES STEADY IN THE
SHORT TERM, WHICH COULD HELP STABILIZE THE STOCK AND BOND MARKETS.
2
U.S. GROSS DOMESTIC PRODUCT
SEASONALLY ADJUSTED ANNUALIZED RATES
(September 30, 1998--September 30, 2000)
[BAR GRAPH]
U.S. GROSS DOMESTIC PRODUCT
---------------------------
Sep 98 3.80
Dec 98 5.90
Mar 99 3.50
Jun 99 2.50
Sep 99 5.70
Dec 99 8.30
Mar 00 4.80
Jun 00 5.60
Sep 00 2.40
Source: Bureau of Economic Analysis
INTEREST RATES AND INFLATION
(October 31, 1998--October 31, 2000)
[LINE GRAPH]
INTEREST RATES INFLATION
-------------- ---------
Oct 98 5.00 1.50
4.75 1.50
4.75 1.60
Jan 99 4.75 1.70
4.75 1.60
4.75 1.70
Apr 99 4.75 2.30
4.75 2.10
5.00 2.00
Jul 99 5.00 2.10
5.25 2.30
5.25 2.60
Oct 99 5.25 2.60
5.50 2.60
5.50 2.70
Jan 00 5.50 2.70
5.75 3.20
6.00 3.70
Apr 00 6.00 3.00
6.50 3.10
6.50 3.70
Jul 00 6.50 3.70
6.50 3.30
6.50 3.50
Oct 00 6.50 3.50
Interest rates are represented by the closing midline federal funds target rate
on the last day of each month. Inflation is indicated by the annual percent
change of the Consumer Price Index for all urban consumers at the end of each
month.
3
PERFORMANCE SUMMARY
RETURN HIGHLIGHTS
(as of October 31, 2000)
- -----------------------------------------------------------------------
NYSE Ticker Symbol VTJ
- -----------------------------------------------------------------------
One-year total return based on market price(1) -8.98%
- -----------------------------------------------------------------------
One-year total return based on NAV(2) 9.12%
- -----------------------------------------------------------------------
Distribution rate as a % of closing common stock
price(3) 6.34%
- -----------------------------------------------------------------------
Taxable-equivalent distribution rate as a % of closing
common stock price(4) 10.58%
- -----------------------------------------------------------------------
Net asset value $16.59
- -----------------------------------------------------------------------
Closing common stock price $13.8125
- -----------------------------------------------------------------------
One-year high common stock price (11/04/99) $16.2500
- -----------------------------------------------------------------------
One-year low common stock price (12/30/99) $13.7500
- -----------------------------------------------------------------------
Preferred share rate(5) 4.000%
- -----------------------------------------------------------------------
(1) Total return based on market price assumes an investment at the 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 stock price at the end of the
period indicated.
(2) Total return based on net asset value (NAV) assumes an investment at the
beginning of the period indicated, reinvestment of all distributions for the
period, and sale of all shares at the end of the period, all at NAV.
(3) Distribution rate represents the monthly annualized distributions of the
Trust at the end of the period and not the earnings of the Trust.
(4) The taxable-equivalent distribution rate is calculated assuming a 40.1%
combined federal and state income tax rate, which takes into consideration
the deductibility of individual state taxes paid.
(5) See "Notes to Financial Statements" footnote #5, for more information
concerning Preferred Share reset periods.
A portion of the interest income may be taxable for those investors subject
to the federal alternative minimum tax (AMT).
Past performance is no guarantee of future results. Investment return, stock
price and net asset value will fluctuate with market conditions. Trust
shares, when sold, may be worth more or less than their original cost.
4
PORTFOLIO AT A GLANCE
CREDIT QUALITY
(as a percentage of long-term investments)
As of October 31, 2000
- - AAA/Aaa............ 56.1%
- - AA/Aa.............. 29.8%
- - A/A................ 8.5%
- - BBB/Baa............ 5.6%
[PIE CHART]
As of October 31, 1999
- - AAA/Aaa............ 69.8%
- - AA/Aa.............. 19.8%
- - A/A................ 5.6%
- - BBB/Baa............ 4.8%
[PIE CHART]
Based upon the highest credit quality ratings as issued by Standard & Poor's or
Moody's, respectively.
TWELVE-MONTH DIVIDEND HISTORY
(for the period ended October 31, 2000, for common shares)
[BAR GRAPH]
DIVIDENDS
---------
11/99 0.079
12/99 0.079
1/00 0.079
2/00 0.079
3/00 0.081
4/00 0.081
5/00 0.081
6/00 0.081
7/00 0.081
8/00 0.081
9/00 0.073
10/00 0.073
The dividend history represents past performance of the trust and is no
guarantee of the trust's future dividends.
5
TOP FIVE SECTORS
(as a percentage of long-term investments)
[INVESTMENT PERFORMANCE GRAPH]
OCTOBER 31, 2000 OCTOBER 31, 1999
---------------- ----------------
General Purpose 28.90 29.70
Water & Sewer 15.50 14.90
Transportation 12.50 13.30
Health Care 10.00 15.00
Waste Disposal 9.70 9.00
NET ASSET VALUE AND MARKET PRICE
(based upon quarter-end values--March 1992 through October 2000)
[INVESTMENT PERFORMANCE GRAPH]
NET ASSET VALUE MARKET PRICE
--------------- ------------
3/92 14.8500 14.8900
15.2000 15.0000
15.5200 15.2500
15.6700 15.1250
3/93 16.7900 16.0000
17.5000 16.3750
16.3100 16.8750
16.1700 16.2500
3/94 15.8000 14.5000
15.6800 14.2500
15.4300 13.2500
14.8800 13.1250
3/95 16.2400 14.5000
16.3600 14.5000
16.8100 14.7500
17.5800 15.5000
3/96 16.8400 14.8750
16.4400 15.1250
16.7800 15.2500
17.0100 15.0000
3/97 16.5900 15.5000
17.0700 16.1250
17.5300 16.7500
17.8700 17.0625
3/98 17.8000 16.9370
17.8500 16.4375
18.3500 17.8125
18.0200 18.3125
3/99 17.7700 17.5625
16.9100 16.4375
16.4700 16.5000
15.9500 13.9375
3/00 16.2100 14.2500
16.3400 14.2500
16.4400 14.6250
10/00 16.5900 13.8125
The solid line above represents the trust's net asset value (NAV), which
indicates overall changes in value among the trust's underlying securities. The
trust's market price is represented by the dashed line, which indicates the
price the market is willing to pay for shares of the trust at a given time.
Market price is influenced by a range of factors, including supply and demand
and market conditions.
6
[PHOTO]
Q&A WITH YOUR PORTFOLIO MANAGERS
WE RECENTLY SPOKE WITH THE PORTFOLIO MANAGER OF THE VAN KAMPEN TRUST FOR
INVESTMENT GRADE NEW JERSEY MUNICIPALS ABOUT THE KEY EVENTS AND ECONOMIC FORCES
THAT SHAPED THE MARKETS AND INFLUENCED THE TRUST'S RETURN DURING THE 12 MONTHS
ENDED OCTOBER 31, 2000. TIMOTHY D. HANEY, PORTFOLIO MANAGER, HAS MANAGED THE
TRUST SINCE 1995 AND HAS WORKED IN THE INVESTMENT INDUSTRY SINCE 1988. THE
FOLLOWING DISCUSSION REFLECTS HIS VIEWS ON THE TRUST'S PERFORMANCE.
Q WHAT WERE THE MOST IMPORTANT
DEVELOPMENTS IN THE FIXED-INCOME MARKETS AND HOW DID THE TRUST PERFORM
DURING THE REPORTING PERIOD?
A The key factor in the market's
behavior during the past fiscal year has been generally rising interest rates,
especially at the short end of the maturity spectrum. This rate environment
stemmed from the Federal Reserve Board's commitment to keeping inflation in
check by ratcheting up short-term interest rates whenever the economy threatened
to overheat and push the prices of goods and services higher. In fact, the Fed
increased short-term rates four times during the reporting period, with the last
hike occurring in May 2000.
The strength of the economy, and the accompanying Federal Reserve activity,
caused interest rates to rise across the board for the first half of the
reporting period. In the spring of 2000, the bond market rallied as investors
began to anticipate an end to the Fed's rate-tightening cycle. By the end of
October, short-term rates remained high, but rates in the intermediate to long
maturity segments of the market had actually declined from the levels we had
seen at the start of the reporting period.
Because the trust is leveraged, higher short-term rates placed pressure on
the trust's dividend, as the increased cost of borrowing cut into the fund's
earnings. However, the relatively high long-term rates that prevailed for part
of the reporting period allowed the trust to add new holdings at attractive
yields, partially offsetting the decline in income that occurred as short-term
rates climbed.
After the steady increase in short-term interest rates over the past year,
we have seen a more stable environment in recent months, as the Fed has reacted
to slower economic growth, more efficient workforce output, and moderate price
gains by keeping target lending rates unchanged. The inflation rate, as measured
by the consumer price index, peaked in March 2000 at 3.8 percent and has since
dropped back below the 3 percent level.
7
At the state level, New Jersey's economic base continues to expand, posting
moderate growth along with high wealth and income levels. Job gains have been
seen across nearly all sectors of the economy, except for a moderate decline in
manufacturing. Increasing financial reserves have resulted in a solid financial
position.
Supply in the New Jersey municipal market was down for the fiscal year, as
higher interest rates have made it unattractive for municipalities to retire
existing debt. At the same time, strong economic activity has allowed many
municipalities to generate a budget surplus, enabling them to cover spending
that would normally require municipal bond financing. In the state budget, for
example, the opening cash balance as of July 1, 2000, was $2.1 billion, well
above the $1.3 billion envisioned a year ago, which will aid cash flow this
year.
Because demand has remained strong, the lack of new issuance in the primary
market helped support bond prices, although the somewhat limited selection of
available securities required us to be very selective in choosing new bonds for
the trust's portfolio. In many cases, we found attractive values in the
secondary market, buying and selling bonds that have been in the market for a
while.
The trust continued to provide shareholders with an attractive level of
income. Its monthly dividend was increased in March 2000 and reduced in
September 2000. It now stands at $0.073 per share (down slightly from $0.079 per
share at the start of the period), which translates to a distribution rate of
6.34 percent based on the trust's closing market price on October 31, 2000.
Because income from the trust is exempt from federal and state income taxes,
this distribution rate is equivalent to a yield of 10.58 percent for an investor
in the 40.1 percent combined federal and state income tax bracket.
For the 12 months through October 31, 2000, the trust produced a total
return of -8.98 percent based on market price. At the same time, the trust's
market price decreased from $16.1875 per share on October 31, 1999, to $13.8125
per share on October 31, 2000. Of course, past performance is no guarantee of
future results. As a result of recent market activity, current performance may
vary from the figures shown. By comparison, the Lehman Brothers New Jersey
Municipal Bond Index posted a total return of 7.90 percent for the same period.
This broad-based, unmanaged index, which reflects the general performance of New
Jersey municipal securities with maturities greater than five years, does not
reflect any commissions or fees that would be paid by an investor purchasing the
securities it represents. Such costs would lower the performance of the index.
It is not possible to invest directly in an index. For additional performance
results, please refer to the chart and footnotes on page 4.
Q HOW DID YOU REACT TO THE
MARKET CONDITIONS YOU ENCOUNTERED IN MANAGING THE TRUST?
A Much of the activity in the trust's
portfolio during the reporting period was guided by a strategic direction we
8
adopted in February of 2000 and had largely implemented by the end of March. It
was our goal to lengthen the duration of the portfolio (a measure of its
sensitivity to changes in interest rates) so that it more closely mirrored the
benchmark indicators we use to gauge the trust's performance. At the time, we
felt the market had solid upside potential, and a longer duration would allow
the trust to more fully participate in the gains of the market if it rallied
over time.
As we began implementing this strategy, we caught the market at a good time.
Early in the year, the market presented us with attractive yields on
long-duration securities, particularly those priced at deep discounts. We
purchased some of these bonds and sold prerefunded securities and bonds with
short calls--many of which were scheduled to be called or refunded within the
next year or two. In effect, this strategy helped capture additional par value
and the potential for capital appreciation, all while achieving the desired
effect of extending the portfolio's duration. This strategy was a positive in
terms of the trust's performance, especially during the market rally that
occurred in the second and third quarters of 2000.
Q HOW DID THIS STRATEGY AFFECT THE
COMPOSITION OF THE PORTFOLIO?
A As we extended the trust's
duration, we sold short-duration, high-coupon bonds and bought long-duration
discount bonds. The net effect was to make the trust more responsive to changes
in interest rates. At the same time, we took advantage of wide spreads in the
high-yield sector to selectively add to the trust's BBB position. Bonds in the
high-yield sector had lagged the high-grade market in 2000, increasing their
yield advantage to the highest levels seen in several years.
Over the course of the reporting period, the portfolio composition came to
reflect these activities, as the trust's weighted average maturity increased by
1.6 years, to 14.1 years, and its BBB allocation increased by nearly 1 percent
(to 5.6 percent). The most notable industry allocation changes included a 5
percent decline in the health-care sector.
Q THE TRUST'S DIVIDEND WAS
REDUCED DURING THE REPORTING PERIOD. CAN YOU EXPLAIN WHY?
A A combination of factors made it
necessary to cut the trust's dividend during the period. First, as a leveraged
portfolio, the trust must pay interest on money borrowed at short-term rates,
while investing these funds in longer-term securities. As short-term rates rose
more significantly than longer-term rates, the cost of this leverage increased
during the reporting period and reduced the trust's income stream.
Second, as we took advantage of higher rates in long-maturity bonds, we
tended to sell older, higher-yielding bonds that had strengthened the trust's
income stream but were susceptible to being called out of the portfolio in the
near future. Essentially, we exchanged their near-term contribution to the
trust's income for an improvement in the portfolio's overall structure and
long-term income potential.
9
Q WHAT DO YOU SEE AHEAD FOR
THE ECONOMY AND THE MUNICIPAL MARKET?
A The outlook for the municipal
bond market will be closely tied to the prospects of the U.S. economy and the
Fed's reaction to key economic indicators. While interest rates have been fairly
steady of late, the Fed's next move will be based on whether inflation shows
signs of heating up. We believe inflation appears to be under control at this
time, but the Fed will be watching economic growth statistics, the labor market,
and the prices of key commodities, such as crude oil, for signs of inflationary
pressures.
Clearly, the direction of interest rates will be determined by the Fed's
reaction to inflationary signals, so we feel it would be imprudent to make a bet
on the direction of interest rates in terms of how we position the trust.
Consequently, we will seek to maintain a neutral stance with respect to the
portfolio's duration in the near term.
We believe the demand for municipal securities should remain healthy. This
will hopefully bode well for the trust, although it will be competing with a
range of investment options, such as individual bonds, mutual funds, and managed
accounts, for investor assets. Also, the stock market may continue to attract
assets away from bonds, depending on its return prospects and price volatility.
Bond supply should remain tight, helping to support prices, as
municipalities continue to operate with budget surpluses that can be used for
construction projects, education funding, road improvements, and other
expenditures typically financed by new bond issuance.
The outlook for the state economy is stable, due primarily to strong job
growth and a solid fiscal standing. Debt levels are expected to rise as the
state addresses funding needs in education, transportation, and open-space
procurement, but an increasing reliance on "pay-as-you-go" funding will help
slow the rate of increase. The enacted fiscal 2001 budget assumes continued
strong financial performance, with state revenues projected to grow 6.7 percent.
We will continue to search for securities that have the potential to enhance
the trust's long-term performance. If our analysis indicates that it would be
advantageous to sell certain bonds--or as bonds are prerefunded, mature
according to schedule, or are called from the portfolio--we will strive to
replace them with bonds that offer the best relative value available at the
time.
10
GLOSSARY OF TERMS
A HELPFUL GUIDE TO SOME OF THE COMMON TERMS YOU'RE LIKELY TO SEE IN THIS REPORT
AND OTHER FINANCIAL PUBLICATIONS.
CALL FEATURE: Allows a bond issuer to buy back a bond on specific dates at set
prices before the bond's maturity date. These dates and prices are set when the
bond is issued. To compensate the bondholder for the potential loss of income
and ownership, a bond's call price is usually higher than the face value of the
bond. Bonds are usually called when interest rates drop so significantly that
the issuer can save money by issuing new bonds at lower rates.
DISCOUNT BOND: A bond whose market price is lower than its face value (or "par
value"). Because bonds usually mature at face value, a discount bond has more
potential to appreciate in price than a par bond does.
DURATION: A measure of the sensitivity of a bond's price to changes in interest
rates, expressed in years. Each year of duration represents an expected 1
percent change in the price of a bond for every 1 percent change in interest
rates. The longer a bond's duration, the greater the effect of interest-rate
movements on its price. Typically, funds with shorter durations perform better
in rising-rate environments, while funds with longer durations perform better
when rates decline.
MATURITY LENGTH: The time it takes for a bond to mature. A bond issued in 1999
and maturing in 2009 is a 10-year bond. Typically, short-term bonds mature in
five years or less, intermediate-term bonds mature in five to ten years, and
long-term bonds mature after ten years.
PREREFUNDING: The process of issuing new bonds to refinance an outstanding bond
issue prior to its maturity or call date. The proceeds from the new bonds are
generally invested in U.S. government securities. Prerefunding typically occurs
when interest rates decline and an issuer replaces its higher-yielding bonds
with current lower-yielding issues.
SECONDARY MARKET: A market where securities are traded after they are initially
offered.
YIELD SPREAD: The additional yield investors can earn by either investing in
bonds with longer maturities or by investing in bonds with lower credit ratings.
The spread is the difference in yield between bonds with short versus long
maturities or the difference in yield between high-quality bonds and
lower-quality bonds.
11
BY THE NUMBERS
YOUR TRUST'S INVESTMENTS
October 31, 2000
THE FOLLOWING PAGES DETAIL YOUR TRUST'S PORTFOLIO OF INVESTMENTS AT THE END OF
THE REPORTING PERIOD.
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
MUNICIPAL BONDS 98.7%
NEW JERSEY 83.9%
$1,695 Atlantic City, NJ Muni Util (AMBAC Insd).... 5.000% 06/01/29 $ 1,562,298
1,965 Bayonne, NJ Muni Util Auth Wtr Sys Rev (MBIA
Insd)....................................... 5.000 01/01/28 1,820,081
2,000 Bergen Cnty, NJ Util Auth Wtr Pollutn Ctl
Rev Ser A (Prerefunded @ 06/15/02) (FGIC
Insd)....................................... 6.500 12/15/12 2,103,020
1,500 Brick Twp, NJ Muni Util Auth Rev
(Prerefunded @ 12/01/02) (AMBAC Insd)....... 6.500 12/01/12 1,590,150
2,000 Camden Cnty, NJ Muni Util Auth Swr Rev Cap
Apprec Ser B (FGIC Insd).................... * 09/01/14 960,240
2,500 Camden Cnty, NJ Muni Util Auth Swr Rev Cap
Apprec Ser B (FGIC Insd).................... * 09/01/15 1,126,825
4,095 Camden, NJ (FSA Insd)....................... * 02/15/11 2,415,927
1,845 East Orange, NJ Brd Ed/Ctfs Partn Cap Apprec
(FSA Insd).................................. * 08/01/19 641,894
2,850 East Orange, NJ Brd Ed/Ctfs Partn Cap Apprec
(FSA Insd).................................. * 02/01/28 597,531
2,330 Edgewater, NJ Muni Util Auth Rev Swr Rfdg
(MBIA Insd)................................. * 11/01/12 1,259,132
840 Essex Cnty, NJ Impt Auth Lease Jail & Youth
House Proj (Prerefunded @ 12/01/04) (AMBAC
Insd)....................................... 6.600 12/01/07 919,262
3,000 Essex Cnty, NJ Impt Auth Rev Irvington Twp
Sch Dist (Prerefunded @ 10/01/02) (FSA
Insd)....................................... 6.625 10/01/17 3,177,900
1,000 Essex County NJ Impt Auth Lease Rev Gtd City
of Newark (AMBAC Insd)...................... 5.125 04/01/29 941,980
See Notes to Financial Statements
12
YOUR TRUST'S INVESTMENTS
October 31, 2000
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
NEW JERSEY (CONTINUED)
$4,875 Hudson Cnty, NJ Ctfs Partn Correctional Fac
Rfdg (MBIA Insd)............................ 6.600% 12/01/21 $ 5,082,821
2,000 Mercer Cnty, NJ Impt Auth Rev Ewing Brd Edl
Lease Proj (Prerefunded @ 05/15/02) (MBIA
Insd)....................................... 6.400 05/15/11 2,097,020
2,300 Mercer Cnty, NJ Impt Auth Rev Gtd Site &
Disp Fac Proj Solid Waste Rfdg.............. * 04/01/08 1,605,630
6,500 Mercer Cnty, NJ Impt Auth Rev Gtd Site &
Disp Fac Proj Solid Waste Rfdg.............. * 04/01/10 4,077,060
7,055 Mercer Cnty, NJ Impt Auth Rev Gtd Site &
Disp Fac Proj Solid Waste Rfdg.............. * 04/01/12 3,919,617
1,560 Middlesex Cnty, NJ Impt Auth Util Sys Rev
Perth Amboy Franchise Proj Ser A (AMBAC
Insd)....................................... 5.000 09/01/29 1,432,361
450 New Jersey Econ Dev Auth Econ Dev Rev Ser F
(LOC: Banque Nationale Paris)............... 6.600 06/01/12 469,166
375 New Jersey Econ Dev Auth Econ Dev Rev Ser Y
(LOC: Banque Nationale Paris)............... 6.600 06/01/12 390,848
1,000 New Jersey Econ Dev Auth Mkt Transition Fac
Rev Sr Lien Ser A (MBIA Insd)............... 5.800 07/01/08 1,054,320
1,500 New Jersey Econ Dev Auth Mkt Transition Fac
Rev Sr Lien Ser A (MBIA Insd)............... 5.800 07/01/09 1,578,870
2,000 New Jersey Econ Dev Auth Rev Transition Proj
Sublease Ser A (FSA Insd)................... 5.000 05/01/18 1,920,000
10,000 New Jersey Econ Dev Auth St Contract Econ
Rec (MBIA Insd)............................. 5.900 03/15/21 10,659,900
4,575 New Jersey Hlthcare Fac Fin Auth Rev
Atlantic City Med Cent Ser C Rfdg........... 6.800 07/01/11 4,782,202
2,200 New Jersey Hlthcare Fac Fin Auth Rev Genl
Hosp Cent at Passaic (FSA Insd)............. 6.500 07/01/11 2,441,032
2,000 New Jersey Hlthcare Fac Fin Auth Rev Genl
Hosp Cent at Passaic (FSA Insd)............. 6.750 07/01/19 2,292,060
See Notes to Financial Statements
13
YOUR TRUST'S INVESTMENTS
October 31, 2000
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
NEW JERSEY (CONTINUED)
$1,000 New Jersey Hlthcare Fac Fin Auth Rev
Palisades Med Cent Oblig Group (ACA Insd)... 5.250% 07/01/28 $ 878,560
2,200 New Jersey Hlthcare Fac Hlth Sys Catholic
Hlth East Ser E............................. 4.750 11/15/29 1,882,034
1,150 New Jersey St............................... 6.800 07/15/06 1,250,567
915 New Jersey St Edl Facs Auth Seton Hall Univ
Proj Rfdg (AMBAC Insd)...................... 5.000 07/01/18 877,210
4,200 New Jersey St Hwy Auth Garden St Pkwy Genl
Rev Sr Pkwy................................. 6.250 01/01/14 4,352,544
1,175 New Jersey St Edl Facs Auth Rev Beth Medrash
Govoha America Ser G........................ 5.875 10/01/12 1,176,739
2,000 North Bergen Twp, NJ (FSA Insd)............. * 08/15/09 1,306,380
2,675 Passaic Vly, NJ Wtr Comm Wtr Supply Rev Cap
Apprec Ser A (FGIC Insd).................... * 12/15/09 1,714,702
2,000 Passaic Vly, NJ Wtr Comm Wtr Supply Rev Cap
Apprec Ser A (FGIC Insd).................... * 12/15/10 1,213,800
2,850 Port Auth NY & NJ Cons Ser 78............... 6.500 04/15/11 2,948,724
2,000 Rockaway Vly, NJ Regl Swr Auth Swr Rev Rfdg
(MBIA Insd)................................. * 12/15/09 1,282,020
1,225 Rutgers St Univ of NJ Ser A Rfdg............ 6.500 05/01/18 1,275,605
2,000 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev
Pub Svc Elec & Gas Ser D Rfdg (MBIA Insd)... 6.550 10/01/29 2,126,220
165 Union City, NJ (FSA Insd)................... 6.375 11/01/10 186,780
1,500 Union City, NJ (Prerefunded @ 09/01/02)
(MBIA Insd)................................. 6.700 09/01/12 1,588,395
500 Union Cnty, NJ Util Auth Cnty Deficiency Ser
C2.......................................... 5.000 06/15/28 461,405
1,000 Univ Medicine & Dentistry Ser A (MBIA
Insd)....................................... 5.000 09/01/17 961,510
------------
88,402,342
------------
See Notes to Financial Statements
14
YOUR TRUST'S INVESTMENTS
October 31, 2000
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
GUAM 6.3%
$2,000 Guam Arpt Auth Rev Ser B.................... 6.700% 10/01/23 $ 2,073,940
1,800 Guam Govt Ltd Oblig Hwy Ser A Rfdg (FSA
Insd)....................................... 6.300 05/01/12 1,875,870
1,500 Guam Govt Ser A............................. 5.625 09/01/02 1,503,345
1,250 Guam Pwr Auth Rev Ser A (AMBAC Insd)........ 5.125 10/01/29 1,179,188
------------
6,632,343
------------
PUERTO RICO 6.6%
1,750 Puerto Rico Comwlth Hwy & Tran Auth Hwy Rev
Ser T (Prerefunded @ 07/01/02).............. 6.500 07/01/22 1,843,012
1,700 Puerto Rico Comwlth Pub Impt (Prerefunded @
07/01/02)................................... 6.800 07/01/21 1,798,141
2,500 Puerto Rico Elec Pwr Auth Pwr Rev Ser EE
Rfdg........................................ 4.750 07/01/24 2,208,400
1,000 Puerto Rico Pub Bldgs Auth Rev Gtd Ser K
(Prerefunded @ 07/01/02).................... 6.875 07/01/21 1,058,880
------------
6,908,433
------------
U. S. VIRGIN ISLANDS 1.9%
1,000 Virgin Islands Pub Fin Auth Rev Gross Rcpts
Taxes Ln Nt Ser A........................... 6.375 10/01/19 1,028,040
1,000 Virgin Islands Pub Fin Auth Rev Sr Lien Fd
Ln Ser A Rfdg (ACA Insd).................... 5.625 10/01/25 949,910
------------
1,977,950
------------
TOTAL LONG-TERM INVESTMENTS 98.7%
(Cost $96,697,493).................................................... 103,921,068
SHORT-TERM INVESTMENTS 0.4%
(Cost $400,000)....................................................... 400,000
------------
TOTAL INVESTMENTS 99.1%
(Cost $97,097,493).................................................... 104,321,068
OTHER ASSETS IN EXCESS OF LIABILITIES 0.9%............................. 979,682
------------
NET ASSETS 100.0%...................................................... $105,300,750
============
See Notes to Financial Statements
15
YOUR TRUST'S INVESTMENTS
October 31, 2000
* Zero coupon bond
ACA--American Capital Access
AMBAC--AMBAC Indemnity Corp.
FGIC--Financial Guaranty Insurance Company
FSA--Financial Security Assurance Inc.
LOC--Letter of Credit
MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements
16
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
October 31, 2000
ASSETS:
Total Investments (Cost $97,097,493)........................ $104,321,068
Cash........................................................ 11,647
Interest Receivable......................................... 1,340,537
Other....................................................... 2,553
------------
Total Assets............................................ 105,675,805
------------
LIABILITIES:
Payables:
Income Distributions--Preferred Shares.................... 96,435
Investment Advisory Fee................................... 57,709
Administrative Fee........................................ 17,756
Affiliates................................................ 5,153
Trustees' Deferred Compensation and Retirement Plans........ 113,784
Accrued Expenses............................................ 84,218
------------
Total Liabilities....................................... 375,055
------------
NET ASSETS.................................................. $105,300,750
============
NET ASSETS CONSIST OF:
Preferred Shares (Par value of $.01 per share, 100,000,000
shares authorized, 1,600 issued with liquidation
preference of $25,000 per share).......................... $ 40,000,000
------------
Common Shares (Par value of $.01 per share with an unlimited
number of shares authorized, 3,935,130 shares issued and
outstanding).............................................. 39,351
Paid in Surplus............................................. 57,680,107
Net Unrealized Appreciation................................. 7,223,575
Accumulated Undistributed Net Investment Income............. 194,360
Accumulated Net Realized Gain............................... 163,357
------------
Net Assets Applicable to Common Shares.................. 65,300,750
------------
NET ASSETS.................................................. $105,300,750
============
NET ASSET VALUE PER COMMON SHARE ($65,300,750 divided by
3,935,130 shares outstanding)............................. $ 16.59
============
See Notes to Financial Statements
17
Statement of Operations
For the Year Ended October 31, 2000
INVESTMENT INCOME:
Interest.................................................... $6,101,974
----------
EXPENSES:
Investment Advisory Fee..................................... 673,158
Administrative Fee.......................................... 207,126
Preferred Share Maintenance................................. 112,304
Trustees' Fees and Related Expenses......................... 20,327
Legal....................................................... 13,822
Custody..................................................... 7,913
Other....................................................... 139,153
----------
Total Expenses.......................................... 1,173,803
Less Credits Earned on Cash Balances.................... 553
----------
Net Expenses............................................ 1,173,250
----------
NET INVESTMENT INCOME....................................... $4,928,724
==========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain........................................... $ 318,894
----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 5,356,363
End of the Period......................................... 7,223,575
----------
Net Unrealized Appreciation During the Period............... 1,867,212
----------
NET REALIZED AND UNREALIZED GAIN............................ $2,186,106
==========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $7,114,830
==========
See Notes to Financial Statements
18
Statement of Changes in Net Assets
For the Years Ended October 31, 2000 and 1999
YEAR ENDED YEAR ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
------------------------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............................... $ 4,928,724 $ 4,915,375
Net Realized Gain/Loss.............................. 318,894 (155,537)
Net Unrealized Appreciation/Depreciation During the
Period............................................ 1,867,212 (7,543,396)
------------ ------------
Change in Net Assets from Operations................ 7,114,830 (2,783,558)
------------ ------------
Distributions from Net Investment Income:
Common Shares..................................... (3,730,084) (3,725,678)
Preferred Shares.................................. (1,520,333) (1,196,005)
------------ ------------
(5,250,417) (4,921,683)
------------ ------------
Distributions from Net Realized Gain/Loss:
Common Shares..................................... -0- (259,917)
Preferred Shares.................................. -0- (100,228)
------------ ------------
-0- (360,145)
------------ ------------
Total Distributions................................. (5,250,417) (5,281,828)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES........................................ 1,864,413 (8,065,386)
FROM CAPITAL TRANSACTIONS:
Value of Common Shares Issued Through Dividend
Reinvestment...................................... 32,804 135,861
------------ ------------
TOTAL INCREASE/DECREASE IN NET ASSETS............... 1,897,217 (7,929,525)
NET ASSETS:
Beginning of the Period............................. 103,403,533 111,333,058
------------ ------------
End of the period (Including accumulated
undistributed net investment income of $194,360
and $516,053, respectively)....................... $105,300,750 $103,403,533
============ ============
See Notes to Financial Statements
19
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE COMMON SHARE OF THE
TRUST OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
-----------------------------------------
2000 1999 1998 1997
-----------------------------------------
NET ASSET VALUE, BEGINNING OF THE
PERIOD (A)................................. $ 16.12 $ 18.17 $ 17.57 $ 16.95
-------- -------- -------- --------
Net Investment Income...................... 1.25 1.25 1.26 1.29
Net Realized and Unrealized Gain/Loss...... .55 (1.96) .64 .65
-------- -------- -------- --------
Total from Investment Operations............. 1.80 (.71) 1.90 1.94
-------- -------- -------- --------
Less:
Distributions from Net Investment Income:
Paid to Common Shareholders.............. .95 .95 .95 .95
Common Share Equivalent of Distributions
Paid to Preferred Shareholders......... .38 .30 .35 .36
Distributions from Net Realized Gain:
Paid to Common Shareholders.............. -0- .07 -0- .01
Common Share Equivalent of Distributions
Paid to Preferred Shareholders......... -0- .02 -0- -0-
-------- -------- -------- --------
Total Distributions.......................... 1.33 1.34 1.30 1.32
-------- -------- -------- --------
NET ASSET VALUE, END OF THE PERIOD........... $ 16.59 $ 16.12 $ 18.17 $ 17.57
======== ======== ======== ========
Market Price Per Share at End of the
Period..................................... $13.8125 $16.1875 $17.6250 $16.5625
Total Investment Return at Market Price
(b)........................................ -8.98% -2.61% 12.37% 14.32%
Total Return at Net Asset Value (c).......... 9.12% -5.97% 9.04% 9.61%
Net Assets at End of the Period (In
millions).................................. $ 105.3 $ 103.4 $ 111.3 $ 109.0
Ratio of Expenses to Average Net Assets
Applicable to Common Shares**.............. 1.85% 1.75% 1.73% 1.74%
Ratio of Net Investment Income to Average Net
Assets Applicable to Common Shares (d)..... 5.36% 5.45% 5.08% 5.44%
Portfolio Turnover........................... 19% 6% 10% 6%
* Non-Annualized
** Ratio of Expenses to Average Net Assets
Including Preferred Shares................ 1.13% 1.10% 1.10% 1.09%
(a) Net Asset Value at March 27, 1992, is adjusted for common and preferred
share offering costs of $.322 per common share.
(b) Total return based on market price assumes an investment at the 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 stock price at the end of the
period indicated.
(c) Total return based on net asset value (NAV) assumes an investment at the
beginning of the period indicated, reinvestment of all distributions for the
period, and sale of all shares at the end of the period, all at NAV.
(d) Net Investment Income is adjusted for the common share equivalent of
distributions paid to preferred shareholders.
20
MARCH 27, 1992
(COMMENCEMENT
YEAR ENDED OCTOBER 31 OF INVESTMENT
- ------------------------------------------ OPERATIONS) TO
1996 1995 1994 1993 OCTOBER 31, 1992
- -------------------------------------------------------------
16.91 $ 14.80 $ 18.18 $ 14.88 $ 14.68
$
------- ------- ------- ------- -------
1.29 1.29 1.29 1.31 .58
.08 2.13 (3.37) 3.31 .15
------- ------- ------- ------- -------
1.37 3.42 (2.08) 4.62 .73
------- ------- ------- ------- -------
.94 .92 .93 .92 .39
.36 .39 .29 .28 .14
.02 -0- .06 .09 -0-
.01 -0- .02 .03 -0-
------- ------- ------- ------- -------
1.33 1.31 1.30 1.32 .53
------- ------- ------- ------- -------
$ 16.95 $ 16.91 $ 14.80 $ 18.18 $ 14.88
======= ======= ======= ======= =======
$15.375 $14.750 $13.125 $16.750 $14.750
10.91% 19.79% -16.32% 20.92% .83%*
6.09% 21.03% -13.59% 29.84% 1.62%*
$ 106.5 $ 106.4 $ 98.1 $ 111.4 $ 98.4
1.80% 1.89% 1.85% 1.80% 1.77%
5.63% 5.99% 6.15% 4.83%
5.50%
11% 14% 12% 19% 28%*
1.12% 1.15% 1.15% 1.12% 1.23%
See Notes to Financial Statements
21
NOTES TO
FINANCIAL STATEMENTS
October 31, 2000
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Trust for Investment Grade New Jersey Municipals (the "Trust") is
registered as a diversified, closed-end management investment company under the
Investment Company Act of 1940, as amended. The Trust's investment objective is
to provide a high level of current income exempt from federal income taxes and
New Jersey gross income taxes, consistent with preservation of capital. The
Trust will invest substantially all of its assets in New Jersey municipal
securities rated investment grade at the time of investment. The Trust commenced
investment operations on March 27, 1992.
The following is a summary of significant accounting policies consistently
followed by the Trust 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 are valued at fair value
using procedures established in good faith by the Board of Trustees. 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
Trust 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 Trust will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when-issued or delayed delivery
purchase commitments until payment is made. At October 31, 2000, there were no
when-issued and delayed delivery purchase commitments.
C. INVESTMENT INCOME Interest income is recorded on an accrual basis. Bond
premium is amortized and original issue discount is accreted over the expected
life of each applicable security.
22
NOTES TO
FINANCIAL STATEMENTS
October 31, 2000
D. FEDERAL INCOME TAXES It is the Trust's policy to comply with the requirements
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.
At October 31, 2000, for federal income tax purposes, cost of long- and
short-term investments is $97,097,493; the aggregate gross unrealized
appreciation is $7,351,291 and the aggregate gross unrealized depreciation is
$127,716, resulting in net unrealized appreciation on long- and short-term
investments of $7,223,575.
E. DISTRIBUTION OF INCOME AND GAINS The Trust declares and pays dividends
monthly 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.
F. EXPENSE REDUCTIONS During the year ended October 31, 2000, the Trust's
custody fee was reduced by $553 as a result of credits earned on overnight cash
balances.
2. INVESTMENT ADVISORY AGREEMENT AND
OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Trust's Investment Advisory Agreement, Van Kampen
Investment Advisory Corp. (the "Adviser") will provide investment advice and
facilities to the Trust for an annual fee payable monthly of .65% of the average
net assets of the Trust. In addition, the Trust will pay a monthly
administrative fee to Van Kampen Funds Inc. or its affiliates (collectively "Van
Kampen"), the Trust's Administrator, at an annual rate of .20% of the average
net assets of the Trust. The administrative services provided by the
Administrator include record keeping and reporting responsibilities with respect
to the Trust's portfolio and preferred shares and providing certain services to
shareholders.
For the year ended October 31, 2000, the Trust recognized expenses of
approximately $1,900 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Trust, of which a trustee of
the Trust is an affiliated person.
Under separate Accounting Services and Legal Services agreements, the
Adviser provides accounting and legal services to the Trust. The Adviser
allocates the cost of such services to each Trust. For the year ended October
31, 2000, the Trust recognized expenses of approximately $26,900 representing
Van Kampen's cost of providing accounting and legal services to the Trust, which
are reported as part of other and legal expenses, respectively, in the statement
of operations.
23
NOTES TO
FINANCIAL STATEMENTS
October 31, 2000
Certain officers and trustees of the Trust are also officers and directors
of Van Kampen. The Trust does not compensate its officers or trustees who are
officers of Van Kampen.
The Trust provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable for a ten-year period
and are based upon each trustee's years of service to the Trust. The maximum
annual benefit per trustee under the plan is $2,500.
3. CAPITAL TRANSACTIONS
At October 31, 2000 and October 31, 1999, paid in surplus related to common
shares aggregated $57,680,107 and $57,647,323, respectively.
Transactions in common shares were as follows:
YEAR ENDED YEAR ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
Beginning Shares................................. 3,933,095 3,925,373
Shares Issued Through Dividend Reinvestment...... 2,035 7,722
--------- ---------
Ending Shares.................................... 3,935,130 3,933,095
========= =========
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $19,643,043 and $21,028,207,
respectively.
5. PREFERRED SHARES
The Trust has outstanding 1,600 Auction Preferred Shares ("APS"). Dividends are
cumulative and the dividend rate is reset through an auction process every 28
days. The rate in effect on October 31, 2000, was 4.000%. During the year ended
October 31, 2000, the rates ranged from 2.650% to 4.390%.
The Trust pays annual fees equivalent to .25% of the preferred share
liquidation value for the remarketing efforts associated with the preferred
auctions. These fees are included as a component of Preferred Share Maintenance
expense.
The APS are redeemable at the option of the Trust in whole or in part at the
liquidation value of $25,000 per share plus accumulated and unpaid dividends.
The Trust is subject to certain asset coverage tests and the APS are subject to
mandatory redemption if the tests are not met.
24
NOTES TO
FINANCIAL STATEMENTS
October 31, 2000
6. SUBSEQUENT EVENT
On November 20, 2000, the Trustees of Van Kampen New Jersey Value Municipal
Trust ("Target Fund") announced its intention to merge the Target Fund into the
Van Kampen Trust for Investment Grade New Jersey Municipals ("Acquiring Fund").
The Trustees of each of the funds have approved in principle an agreement and
plan of reorganization between the funds providing for a transfer of assets and
liabilities of the Target Fund to the Acquiring Fund in exchange for shares of
beneficial interest of the Acquiring Fund (the "Reorganization"). The
Reorganization is subject to the approval by the shareholders of the Target
Fund.
25
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders
of Van Kampen Trust for Investment Grade New Jersey Municipals
We have audited the accompanying statement of assets and liabilities of Van
Kampen Trust for Investment Grade New Jersey Municipals (the "Trust"), including
the portfolio of investments, as of October 31, 2000, and the related statements
of operations, changes in net assets and the financial highlights for the year
then ended. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The Trust's financial statements and financial highlights for the periods
ended prior to October 31, 2000 were audited by other auditors whose report,
dated December 13, 1999, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2000, by correspondence with the Trust's
custodian. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen Trust for Investment Grade New Jersey Municipals as of October 31, 2000,
the results of its operations, the changes in its net assets and the financial
highlights for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Chicago, Illinois
December 6, 2000
26
DIVIDEND REINVESTMENT PLAN
The Trust offers a dividend reinvestment plan (the "Plan") pursuant to which
Common Shareholders may elect to have dividends and capital gains distributions
reinvested in Common Shares of the Trust. The Trust declares dividends out of
net investment income, and will distribute annually net realized capital gains,
if any. Common Shareholders may join or withdraw from the Plan at any time.
If you decide to participate in the Plan, State Street Bank and Trust
Company, as your Plan Agent, will automatically invest your dividends and
capital gains distributions in Common Shares of the Trust for your account.
HOW TO PARTICIPATE
If you wish to participate and your shares are held in your own name, call
1-800-341-2929 for more information and a Plan brochure. If your shares are held
in the name of a brokerage firm, bank, or other nominee, you should contact your
nominee to see if it would participate in the Plan on your behalf. If you wish
to participate in the Plan, but your brokerage firm, bank or nominee is unable
to participate on your behalf, you should request that your shares be
re-registered in your own name which will enable your participation in the Plan.
HOW THE PLAN WORKS
Participants in the Plan will receive the equivalent in Common Shares valued
on the valuation date, generally at the lower of market price or net asset
value, except as specified below. The valuation date will be the dividend or
distribution payment date or, if that date is not a trading day on the national
securities exchange or market system on which the Common Shares are listed for
trading, the next preceding trading day. If the market price per Common Share on
the valuation date equals or exceeds net asset value per Common Share on that
date, the Trust will issue new Common Shares to participants valued at the
higher of net asset value or 95% of the market price on the valuation date. In
the foregoing situation, the Trust will not issue Common Shares under the Plan
below net asset value. If net asset value per Common Share on the valuation date
exceeds the market price per Common Share on that date, or if the Board of
Trustees should declare a dividend or capital gains distribution payable to the
Common Shareholders only in cash, participants in the Plan will be deemed to
have elected to receive Common Shares from the Trust valued at the market price
on that date. Accordingly, in this circumstance, the Plan Agent will, as agent
for the participants, buy the Trust's Common Shares in the open market for the
participants' accounts on or shortly after the payment date. If, before the Plan
Agent has completed its purchases, the market price exceeds the net asset value
per share of the Common Shares, the average per share purchase price paid by the
Plan Agent may exceed the net asset value of the Trust's Common Shares,
resulting in
27
the acquisition of fewer Common Shares than if the dividend or distribution had
been paid in Common Shares issued by the Trust. All reinvestments are in full
and fractional Common shares and are carried to three decimal places.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Trust reserves the right to amend or terminate the Plan as
applied to any dividend or distribution paid subsequent to written notice of the
change sent to all Common Shareholders of the Trust at least 90 days before the
record date for the dividend or distribution. The Plan also may be amended or
terminated by the Plan Agent by at least 90 days written notice to all Common
Shareholders of the Trust.
COSTS OF THE PLAN
The Plan Agent's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Trust. However, each participant will pay a
pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of dividends
and distributions. No other charges will be made to participants for reinvesting
dividends or capital gains distributions, except for certain brokerage
commissions, as described above.
TAX IMPLICATIONS
You will receive tax information annually for your personal records and to
help you prepare your federal income tax return. The automatic reinvestment of
dividends and capital gains distributions does not relieve you of any income tax
which may be payable on dividends or distributions.
RIGHT TO WITHDRAW
Plan participants may withdraw at any time by calling 1-800-341-2929 or by
writing State Street Bank and Trust Company, P.O. Box 8200, Boston, MA
02266-8200. If you withdraw, you will receive, without charge, a share
certificate issued in your name for all full Common Shares credited to your
account under the Plan and a cash payment will be made for any fractional Common
Share credited to your account under the Plan. You may again elect to
participate in the Plan at any time by calling 1-800-341-2929 or writing to the
Trust at:
Van Kampen Funds Inc.
Attn: Closed-End Funds
2800 Post Oak Blvd.
Houston, TX 77056
28
TRUST OFFICERS AND IMPORTANT ADDRESSES
VAN KAMPEN TRUST FOR INVESTMENT GRADE
NEW JERSEY MUNICIPALS
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
THEODORE A. MYERS
RICHARD F. POWERS, III* - Chairman
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
OFFICERS
RICHARD F. POWERS, III*
President
STEPHEN L. BOYD*
Executive Vice President and
Chief Investment Officer
A. THOMAS SMITH III*
Vice President and Secretary
JOHN L. SULLIVAN*
Vice President, Treasurer and
Chief Financial Officer
RICHARD A. CICCARONE*
JOHN R. REYNOLDSON*
MICHAEL H. SANTO*
JOHN H. ZIMMERMANN, III*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
CUSTODIAN AND TRANSFER AGENT
STATE STREET BANK
AND TRUST COMPANY
c/o EquiServe
P.O. Box 43011
Providence, Rhode Island 02940-3011
LEGAL COUNSEL
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS) 333 West Wacker Drive Chicago,
Illinois 60606
INDEPENDENT AUDITORS(1)
DELOITTE & TOUCHE LLP
180 North Stetson Avenue
Chicago, Illinois 60601
For Federal Income tax purposes, the following information is furnished with
respect to the distributions paid by the Trust during its taxable year ended
October 31, 2000. The Trust designated 100% of the income distributions as a
tax-exempt income distribution. In January, 2001, the Trust will provide tax
information to shareholders for the 2000 calendar year.
(1) Independent auditors for the Trust perform an annual audit of the Trust's
financial statements. The Board of Trustees has engaged Deloitte & Touche LLP to
be the Trust's independent auditors.
KPMG LLP, located at 303 West Wacker Drive, Chicago, IL 60601 ("KPMG"), ceased
being the Trust's independent accountants effective April 14, 2000. The
cessation of the client- auditor relationship between the Trust and KPMG was
based solely on a possible future business relationship by KPMG with an
affiliate of the Trust's investment adviser.
* "Interested persons" of the Trust, as defined in the Investment Company Act
of 1940, as amended.
(C) Van Kampen Funds Inc., 2000. All rights reserved.
(SM) denotes a service mark of Van Kampen Funds Inc.
29
RESULTS OF
SHAREHOLDER VOTES
An Annual Meeting of the Shareholders of the Trust was held on June 31, 2000,
where shareholders voted on the election of trustees and the ratification of
Deloitte & Touche LLP as the independent auditors.
1) With regard to the election of the following trustees by the preferred
shareholders of the Trust:
# OF SHARES
-----------------------------
IN FAVOR WITHHELD
Rod Dammeyer........................................... 1,596 -0-
2) With regard to the election of the following trustees by the common
shareholders of the Trust:
# OF SHARES
-----------------------------
IN FAVOR WITHHELD
Wayne W. Whalen........................................ 3,492,107 37,686
The other trustees whose terms did not expire in 2000 were David C. Arch, Howard
J Kerr, Theodore A. Myers, Richard F. Powers, III, and
Hugo F. Sonnenschein.
2) With regard to the ratification of Deloitte & Touche LLP as independent
auditors for the Trust, 3,462,865 common shares and 1,596 preferred shares voted
in favor of the proposal, 39,587 shares voted against and 27,341 shares
abstained.
30
APPENDIX D
Target Fund Annual Report
dated October 31, 2000
D-1
Table of Contents
OVERVIEW
LETTER TO SHAREHOLDERS 1
ECONOMIC SNAPSHOT 2
PERFORMANCE SUMMARY
RETURN HIGHLIGHTS 4
PORTFOLIO AT A GLANCE
CREDIT QUALITY 5
TWELVE-MONTH DIVIDEND HISTORY 5
TOP FIVE SECTORS 6
NET ASSET VALUE AND MARKET PRICE 6
Q&A WITH YOUR PORTFOLIO MANAGERS 7
GLOSSARY OF TERMS 11
BY THE NUMBERS
YOUR TRUST'S INVESTMENTS 12
FINANCIAL STATEMENTS 15
NOTES TO FINANCIAL STATEMENTS 20
REPORT OF INDEPENDENT AUDITORS 23
DIVIDEND REINVESTMENT PLAN 24
TRUST OFFICERS AND IMPORTANT ADDRESSES 26
RESULTS OF SHAREHOLDER VOTES 27
Our generations of money- management experience may help you pursue life's true
wealth.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
OVERVIEW
LETTER TO SHAREHOLDERS
November 20, 2000
Dear Shareholder,
The first three quarters of 2000 proved to be especially volatile, with all of
the major markets declining in the spring and spending the following months
trying to recover. To manage one's portfolio during such unpredictable times
requires investment-management experience, and the following pages should give
you some insight into how we have performed in this difficult environment.
In this report, the portfolio managers will explain how your investment
performed during the reporting period and describe the strategies they used to
manage your trust during that span. The report will also show you how your
investment has performed over time. Helpful charts summarize the trust's largest
investments, and you can examine the complete portfolio to see all of your
trust's holdings as of the end of your trust's reporting period.
At Van Kampen, we place a high priority on providing you and
your financial advisor with the information you need to help
you monitor your investments during all types of markets. With
nearly four generations of investment-management experience,
we've been around long enough to understand that by investing
with Van Kampen you're entrusting us with much more than your
money. Your investments may help make it possible to afford your next house,
keep up with rising college costs, or enjoy a comfortable retirement.
No matter what your reasons for investing, we're thankful that you've chosen to
place your investments with Van Kampen. We will continue to apply our
generations of money-management experience to helping you pursue life's true
wealth.
Sincerely,
[SIG]
Richard F. Powers, III
President and CEO
Van Kampen Investments
1
ECONOMIC SNAPSHOT
ECONOMIC GROWTH
ECONOMIC GROWTH REMAINED RELATIVELY STRONG DURING THE REPORTING PERIOD,
UNDERPINNED BY LOW UNEMPLOYMENT AND RISING PRODUCTIVITY, YET THERE WERE SIGNS
THAT A HEALTHY SLOWDOWN WAS UNDERWAY. GROSS DOMESTIC PRODUCT, THE PRIMARY
MEASURE OF ECONOMIC GROWTH, INCREASED AT A 2.4 PERCENT ANNUALIZED RATE FOR THE
THIRD QUARTER OF 2000. FOLLOWING RELATIVELY MILD FIRST- AND SECOND-QUARTER DATA,
THIS THIRD-QUARTER FIGURE OFFERS FURTHER EVIDENCE THAT GROWTH MIGHT BE SETTLING
BACK TO A MORE MODERATE AND SUSTAINABLE PACE THAN ITS RAPID RATE IN LATE 1999.
CONSUMER SPENDING AND EMPLOYMENT
CONCERNS ABOUT INFLATION REMAINED AT BAY DUE IN PART TO A GRADUAL SLOWDOWN IN
CONSUMER SPENDING. RISING INTEREST RATES, HIGHER ENERGY COSTS, AND A
DISAPPOINTING STOCK MARKET BEGAN TO TEMPER RETAIL SALES, WHICH LEVELED OFF FROM
THE BLISTERING PACE OF LATE 1999 AND EARLY 2000. AND WHILE CONSUMER SPENDING WAS
BRISK, THE OVERALL TREND HAS BEEN DOWNWARD THIS YEAR.
THE JOBLESS RATE CONTINUED TO BE EXTREMELY LOW BY HISTORICAL STANDARDS, BUT A
RECENT DECLINE IN NEW JOB CREATION SUPPORTS THE POPULAR BELIEF THAT THE ECONOMY
IS MODERATING. ALTHOUGH EMPLOYER COSTS SUCH AS WAGES AND BENEFITS WERE RISING AT
THE END OF 1999 AND THE BEGINNING OF 2000, OVER THE PAST SIX MONTHS THE
EMPLOYMENT COST INDEX HAS SHOWN MARKED DECELERATION, WHICH SHOULD HELP EASE
INFLATION CONCERNS.
INTEREST RATES AND INFLATION
THE FEDERAL RESERVE BOARD (THE FED) RAISED INTEREST RATES FOUR TIMES DURING THE
LAST 12 MONTHS IN AN EFFORT TO WARD OFF INFLATION BY CURBING ECONOMIC GROWTH.
OVER THE SAME PERIOD, THE CONSUMER PRICE INDEX ROSE 3.5 PERCENT, WHICH INDICATED
THAT INFLATION GENERALLY REMAINS UNDER CONTROL.
THE FED HAS ACKNOWLEDGED THE RISK OF RISING INFLATION AND WILL STAY ON GUARD, AS
RISING ENERGY COSTS AND LOW UNEMPLOYMENT THREATEN TO PROPEL THIS FIGURE UPWARD
IN THE COMING MONTHS. AS LONG AS INFLATION IS CONTAINED AND THE PACE OF ECONOMIC
GROWTH REMAINS FAVORABLE, THE FED IS LIKELY TO HOLD INTEREST RATES STEADY IN THE
SHORT TERM, WHICH COULD HELP STABILIZE THE STOCK AND BOND MARKETS.
2
U.S. GROSS DOMESTIC PRODUCT
SEASONALLY ADJUSTED ANNUALIZED RATES
(September 30, 1998--September 30, 2000)
[BAR GRAPH]
U.S. GROSS DOMESTIC PRODUCT
---------------------------
Sep 98 3.80
Dec 98 5.90
Mar 99 3.50
Jun 99 2.50
Sep 99 5.70
Dec 99 8.30
Mar 00 4.80
Jun 00 5.60
Sep 00 2.40
Source: Bureau of Economic Analysis
INTEREST RATES AND INFLATION
(October 31, 1998--October 31, 2000)
[LINE GRAPH]
INTEREST RATES INFLATION
-------------- ---------
Oct 98 5.00 1.50
4.75 1.50
4.75 1.60
Jan 99 4.75 1.70
4.75 1.60
4.75 1.70
Apr 99 4.75 2.30
4.75 2.10
5.00 2.00
Jul 99 5.00 2.10
5.25 2.30
5.25 2.60
Oct 99 5.25 2.60
5.50 2.60
5.50 2.70
Jan 00 5.50 2.70
5.75 3.20
6.00 3.70
Apr 00 6.00 3.00
6.50 3.10
6.50 3.70
Jul 00 6.50 3.70
6.50 3.30
6.50 3.50
Oct 00 6.50 3.50
Interest rates are represented by the closing midline federal funds target rate
on the last day of each month. Inflation is indicated by the annual percent
change of the Consumer Price Index for all urban consumers at the end of each
month.
3
PERFORMANCE SUMMARY
RETURN HIGHLIGHTS
(as of October 31, 2000)
- -----------------------------------------------------------------------
AMEX Ticker Symbol VJV
- -----------------------------------------------------------------------
One-year total return based on market price(1) 16.31%
- -----------------------------------------------------------------------
One-year total return based on NAV(2) 9.47%
- -----------------------------------------------------------------------
Distribution rate as a % of closing common stock
price(3) 6.28%
- -----------------------------------------------------------------------
Taxable-equivalent distribution rate as a % of closing
common stock price(4) 10.48%
- -----------------------------------------------------------------------
Net asset value $ 14.47
- -----------------------------------------------------------------------
Closing common stock price $13.3750
- -----------------------------------------------------------------------
One-year high common stock price (07/10/00) $14.2500
- -----------------------------------------------------------------------
One-year low common stock price (12/22/99) $11.8125
- -----------------------------------------------------------------------
Preferred share rate(5) 4.100%
- -----------------------------------------------------------------------
(1) Total return based on market price assumes an investment at the 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 stock price at the end of the period
indicated.
(2) Total return based on net asset value (NAV) assumes an investment at the
beginning of the period indicated, reinvestment of all distributions for the
period, and sale of all shares at the end of the period, all at NAV.
(3) Distribution rate represents the monthly annualized distributions of the
Trust at the end of the period and not the earnings of the Trust.
(4) The taxable-equivalent distribution rate is calculated assuming a 40.1%
combined federal and state income tax rate, which takes into consideration the
deductibility of individual state taxes paid.
(5) See "Notes to Financial Statements" footnote #4, for more information
concerning Preferred Share reset periods.
A portion of the interest income may be taxable for those investors subject to
the federal alternative minimum tax (AMT).
Past performance is no guarantee of future results. Investment return, stock
price and net asset value will fluctuate with market conditions. Trust shares,
when sold, may be worth more or less than their original cost.
4
PORTFOLIO AT A GLANCE
CREDIT QUALITY
(as a percentage of long-term investments)
As of October 31, 2000
- - AAA/Aaa............ 61.8% [PIE CHART]
- - AA/Aa.............. 10.1%
- - A/A................ 11.9%
- - BBB/Baa............ 16.2%
As of October 31, 1999
- - AAA/Aaa............ 60.3% [PIE CHART]
- - AA/Aa.............. 10.2%
- - A/A................ 11.1%
- - BBB/Baa............ 15.3%
- - Non-Rated.......... 3.1%
Based upon the highest credit quality ratings as issued by Standard & Poor's or
Moody's, respectively.
TWELVE-MONTH DIVIDEND HISTORY
(for the period ended October 31, 2000, for common shares)
[BAR GRAPH]
DIVIDENDS
---------
11/99 0.0675
12/99 0.0675
1/00 0.0675
2/00 0.0675
3/00 0.0700
4/00 0.0700
5/00 0.0700
6/00 0.0700
7/00 0.0700
8/00 0.0700
9/00 0.0700
10/00 0.0700
The dividend history represents past performance of the trust and is no
guarantee of the trust's future dividends.
5
TOP FIVE SECTORS
(as a percentage of long-term investments)
[INVESTMENT PERFORMANCE GRAPH]
OCTOBER 31, 2000 OCTOBER 31, 1999
---------------- ----------------
Health Care 25.60 27.00
Transportation 15.30 16.70
General Purpose 13.50 11.80
Waste Disposal 10.80 8.00
Other Care 9.20 9.20
NET ASSET VALUE AND MARKET PRICE
(based upon quarter-end values--April 1993 through October 2000)
[INVESTMENT PERFORMANCE GRAPH]
NET ASSET VALUE MARKET PRICE
--------------- ------------
4/93 14.8600 15.0000
15.1600 14.6250
15.6100 14.5000
12/93 15.5200 14.0000
13.1700 12.5000
13.1100 12.8750
12.8000 10.8750
12/94 12.0100 10.2500
13.4100 11.7500
13.5700 11.7500
13.8900 11.6250
12/95 14.7400 11.8750
14.0100 11.8750
13.8600 11.3750
14.1600 11.7500
12/96 14.4800 12.1250
14.1600 12.7500
14.5800 13.7500
15.0800 13.7500
12/97 15.4300 14.1250
15.4300 14.2500
15.5100 14.3750
15.9900 14.3750
12/98 15.7800 15.1250
15.6300 14.5625
14.9500 13.8750
14.4200 13.0000
12/99 13.8600 12.3750
14.1100 12.5000
14.1000 13.4375
14.3600 13.6250
10/00 14.4700 13.3750
The solid line above represents the trust's net asset value (NAV), which
indicates overall changes in value among the trust's underlying securities. The
trust's market price is represented by the dashed line, which indicates the
price the market is willing to pay for shares of the trust at a given time.
Market price is influenced by a range of factors, including supply and demand
and market conditions.
6
[HANEY PHOTO]
Q&A WITH YOUR PORTFOLIO MANAGERS
WE RECENTLY SPOKE WITH THE PORTFOLIO MANAGER OF THE VAN KAMPEN NEW JERSEY VALUE
MUNICIPAL INCOME TRUST ABOUT THE KEY EVENTS AND ECONOMIC FORCES THAT SHAPED THE
MARKETS AND INFLUENCED THE TRUST'S RETURN DURING THE 12 MONTHS ENDED OCTOBER 31,
2000. TIMOTHY D. HANEY, PORTFOLIO MANAGER, HAS MANAGED THE TRUST SINCE 1995 AND
HAS WORKED IN THE INVESTMENT INDUSTRY SINCE 1988. THE FOLLOWING DISCUSSION
REFLECTS HIS VIEWS ON THE TRUST'S PERFORMANCE.
Q WHAT WERE THE MOST IMPORTANT
DEVELOPMENTS IN THE FIXED-INCOME MARKETS AND HOW DID THE TRUST PERFORM
DURING THE REPORTING PERIOD?
A The key factor in the market's
behavior during the past fiscal year has been generally rising interest rates,
especially at the short end of the maturity spectrum. This rate environment
stemmed from the Federal Reserve Board's commitment to keeping inflation in
check by ratcheting up short-term interest rates whenever the economy threatened
to overheat and push the prices of goods and services higher. In fact, the Fed
increased short-term rates four times during the reporting period, with the last
hike occurring in May 2000.
The strength of the economy, and the accompanying Federal Reserve activity,
caused interest rates to rise across the board for the first half of the
reporting period. In the spring of 2000, the bond market rallied as investors
began to anticipate an end to the Fed's rate-tightening cycle. By the end of
October, short-term rates remained high, but rates in the intermediate to long
maturity segments of the market had actually declined from the levels we had
seen at the start of the reporting period.
Because the trust is leveraged, higher short-term rates placed pressure on
the trust's dividend, as the increased cost of borrowing cut into the fund's
earnings. However, the relatively high long-term rates that prevailed for part
of the reporting period allowed the trust to add new holdings at attractive
yields, partially offsetting the decline in income that occurred as short-term
rates climbed.
After the steady increase in short-term interest rates over the past year,
we have seen a more stable environment in recent months, as the Fed has reacted
to slower economic growth, more efficient workforce output, and moderate price
gains by keeping target lending rates unchanged. The inflation rate, as measured
by the consumer price index, peaked in March 2000 at 3.8 percent and has since
dropped back below the 3 percent level.
7
At the state level, New Jersey's economic base continues to expand, posting
moderate growth along with high wealth and income levels. Job gains have been
seen across nearly all sectors of the economy, except for a moderate decline in
manufacturing. Increasing financial reserves have resulted in a solid financial
position.
Supply in the New Jersey municipal market was down for the fiscal year, as
higher interest rates have made it unattractive for municipalities to retire
existing debt. At the same time, strong economic activity has allowed many
municipalities to generate a budget surplus, enabling them to cover spending
that would normally require municipal bond financing. In the state budget, for
example, the opening cash balance as of July 1, 2000, was $2.1 billion, well
above the $1.3 billion envisioned a year ago, which will aid cash flow this
year.
Because demand has remained strong, the lack of new issuance in the primary
market helped support bond prices, although the somewhat limited selection of
available securities required us to be very selective in choosing new bonds for
the trust's portfolio. In many cases, we found attractive values in the
secondary market, buying and selling bonds that have been in the market for a
while.
The trust continued to provide shareholders with an attractive level of
income. Its monthly dividend of $0.07 per share, which was increased from
$0.0675 per share in March 2000, translates to a distribution rate of 6.28
percent based on the trust's closing market price on October 31, 2000. Because
income from the trust is exempt from federal and state income taxes, this
distribution rate is equivalent to a yield of 10.48 percent for an investor in
the 40.1 percent combined federal and state income tax bracket.
For the 12 months through October 31, 2000, the trust produced a total
return of 16.31 percent based on market price. This reflects an increase in
market price from $12.250 per share on October 31, 1999, to $13.375 per share on
October 31, 2000. Of course, past performance is no guarantee of future results.
As a result of recent market activity, current performance may vary from the
figures shown. By comparison, the Lehman Brothers New Jersey Municipal Bond
Index posted a total return of 7.90 percent for the same period. This
broad-based, unmanaged index, which reflects the general performance of New
Jersey municipal securities with maturities greater than five years, does not
reflect any commissions or fees that would be paid by an investor purchasing the
securities it represents. Such costs would lower the performance of the index.
It is not possible to invest directly in an index. For additional performance
results, please refer to the chart and footnotes on page 4.
Q HOW DID YOU REACT TO THE
MARKET CONDITIONS YOU ENCOUNTERED IN MANAGING THE TRUST?
A Much of the activity in the trust's
portfolio during the reporting period was guided by a strategic direction we
adopted in February of 2000 and had largely implemented by the end of March. It
was our goal to lengthen the duration of the portfolio (a measure of
8
its sensitivity to changes in interest rates) so that it more closely mirrored
the benchmark indicators we use to gauge the trust's performance. At the time,
we felt the market had solid upside potential, and a longer duration would allow
the trust to more fully participate in the gains of the market if it rallied
over time.
As we began implementing this strategy, we caught the market at a good time.
Early in the year, the market presented us with attractive yields on
long-duration securities, particularly those priced at deep discounts. We
purchased some of these bonds and sold prerefunded securities and bonds with
short calls--many of which were scheduled to be called or refunded within the
next year or two. In effect, this strategy helped capture additional par value
and the potential for capital appreciation, all while achieving the desired
effect of extending the portfolio's duration. This strategy was a positive in
terms of the trust's performance, especially during the market rally that
occurred in the second and third quarters of 2000.
Q HOW DID THIS STRATEGY AFFECT THE
COMPOSITION OF THE PORTFOLIO?
A When we could, we took advantage
of situations that allowed us to add higher-yielding bonds to the portfolio.
Often, this meant selling bonds that fell within the intermediate portion of the
yield curve.
In terms of credit quality and diversification by industry sector, the
portfolio's composition was little changed during the reporting period. Most
notably, the trust's allocations to waste disposal and water and sewer bonds
rose by roughly 3 percent each, while its holdings in multi-family housing bonds
fell by around 3 percent.
The trust's allocation to securities rated A or better stood at 83.8 percent
of long-term investments at the close of the period, with its allocation to BBB
rated securities at 16.2 percent. Typically, the market rally was strongest at
the high end of the quality spectrum, so these securities saw solid price gains
while the valuations of nonrated and lower-rated securities, such as those rated
BBB or lower, remained fairly flat or declined. This market tendency contributed
to the trust's slight underperformance relative to its peer group.
Q WHAT DO YOU SEE AHEAD FOR
THE ECONOMY AND THE MUNICIPAL MARKET?
A The outlook for the municipal
bond market will be closely tied to the prospects of the U.S. economy and the
Fed's reaction to key economic indicators. While interest rates have been fairly
steady of late, the Fed's next move will be based on whether inflation shows
signs of heating up. We believe inflation appears to be under control at this
time, but the Fed will be watching economic growth statistics, the labor market,
and the prices of key commodities, such as crude oil, for signs of inflationary
pressures.
Clearly, the direction of interest rates will be determined by the Fed's
reaction to inflationary signals, so we feel it would be imprudent to make a bet
on the direction of interest rates in
9
terms of how we position the trust. Consequently, we will seek to maintain a
neutral stance with respect to the portfolio's duration in the near term.
We believe the demand for municipal securities should remain healthy. This
will hopefully bode well for the trust, although it will be competing with a
range of investment options, such as individual bonds, mutual funds, and managed
accounts, for investor assets. Also, the stock market may continue to attract
assets away from bonds, depending on its return prospects and price volatility.
Bond supply should remain tight, helping to support prices, as
municipalities continue to operate with budget surpluses that can be used for
construction projects, education funding, road improvements, and other
expenditures typically financed by new bond issuance.
The outlook for the state economy is stable, due primarily to strong job
growth and a solid fiscal standing. Debt levels are expected to rise as the
state addresses funding needs in education, transportation, and open-space
procurement, but an increasing reliance on "pay-as-you-go" funding will help
slow the rate of increase. The enacted fiscal 2001 budget assumes continued
strong financial performance, with state revenues projected to grow 6.7 percent.
We will continue to search for securities that have the potential to enhance
the trust's long-term performance. If our analysis indicates that it would be
advantageous to sell certain bonds--or as bonds are prerefunded, mature
according to schedule, or are called from the portfolio--we will strive to
replace them with bonds that offer the best relative value available at the
time.
10
GLOSSARY OF TERMS
A HELPFUL GUIDE TO SOME OF THE COMMON TERMS YOU'RE LIKELY TO SEE IN THIS REPORT
AND OTHER FINANCIAL PUBLICATIONS.
CALL FEATURE: Allows a bond issuer to buy back a bond on specific dates at set
prices before the bond's maturity date. These dates and prices are set when the
bond is issued. To compensate the bondholder for the potential loss of income
and ownership, a bond's call price is usually higher than the face value of the
bond. Bonds are usually called when interest rates drop so significantly that
the issuer can save money by issuing new bonds at lower rates.
DISCOUNT BOND: A bond whose market price is lower than its face value (or "par
value"). Because bonds usually mature at face value, a discount bond has more
potential to appreciate in price than a par bond does.
DURATION: A measure of the sensitivity of a bond's price to changes in interest
rates, expressed in years. Each year of duration represents an expected 1
percent change in the price of a bond for every 1 percent change in interest
rates. The longer a bond's duration, the greater the effect of interest-rate
movements on its price. Typically, funds with shorter durations perform better
in rising-rate environments, while funds with longer durations perform better
when rates decline.
MATURITY LENGTH: The time it takes for a bond to mature. A bond issued in 1999
and maturing in 2009 is a 10-year bond. Typically, short-term bonds mature in
five years or less, intermediate-term bonds mature in five to ten years, and
long-term bonds mature after ten years.
PREREFUNDING: The process of issuing new bonds to refinance an outstanding bond
issue prior to its maturity or call date. The proceeds from the new bonds are
generally invested in U.S. government securities. Prerefunding typically occurs
when interest rates decline and an issuer replaces its higher-yielding bonds
with current lower-yielding issues.
SECONDARY MARKET: A market where securities are traded after they are initially
offered.
YIELD SPREAD: The additional yield investors can earn by either investing in
bonds with longer maturities or by investing in bonds with lower credit ratings.
The spread is the difference in yield between bonds with short versus long
maturities or the difference in yield between high-quality bonds and
lower-quality bonds.
11
BY THE NUMBERS
YOUR TRUST'S INVESTMENTS
October 31, 2000
THE FOLLOWING PAGES DETAIL YOUR TRUST'S PORTFOLIO OF INVESTMENTS AT THE END OF
THE REPORTING PERIOD.
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
MUNICIPAL BONDS 98.2%
NEW JERSEY 92.0%
$1,000 Atlantic City, NJ Muni Util (AMBAC Insd).... 5.000% 06/01/29 $ 921,710
655 Deptford Twp, NJ Mun Util (AMBAC Insd)...... 5.500 02/01/27 654,397
1,845 East Orange, NJ Brd Ed Ctfs Partn Cap Apprec
(FSA Insd).................................. * 02/01/25 461,711
1,000 Essex Cnty, NJ Impt Auth Lease-Newark....... 6.600 04/01/14 1,079,150
500 Essex Cnty, NJ Impt Auth Pkg Fac Rev Rfdg
(AMBAC Insd)................................ 5.000 10/01/22 469,330
500 Essex Cnty, NJ Impt Auth Rev Util Sys East
Orange Franchise (MBIA Insd)................ 5.000 07/01/28 462,635
1,000 Essex Cnty, NJ Ser A1 Rfdg (AMBAC Insd)..... 5.375 09/01/10 1,038,700
1,000 Essex Cnty, NJ Util Auth Solid Waste Rev Ser
A (FSA Insd)................................ 5.500 04/01/11 1,059,550
750 Hudson Cnty, NJ Ctfs Partn Correctional Fac
Rfdg (MBIA Insd)............................ 6.500 12/01/11 779,850
1,000 Hudson Cnty, NJ Ctfs Partn Correctional Fac
Rfdg (MBIA Insd)............................ 6.600 12/01/21 1,042,630
1,250 Hudson Cnty, NJ Impt Auth Solid Waste Sys
Rev Ser A (Prerefunded @ 07/01/04).......... 6.100 07/01/20 1,338,275
1,250 Mercer Cnty, NJ Impt Auth Rev Cap Apprec.... * 04/01/11 738,625
525 Middlesex Cnty, NJ Ctfs Partn (Prerefunded @
02/15/04) (MBIA Insd)....................... 5.900 08/15/09 551,812
1,000 Middlesex Cnty, NJ Impt Auth Util Sys Rev
Perth Amboy Franchise Proj Ser A (AMBAC
Insd)....................................... 5.000 09/01/29 918,180
1,500 New Jersey Econ Dev Auth Dist Heating &
Cooling Rev Trigen Trenton Ser A............ 6.200 12/01/10 1,473,495
2,215 New Jersey Econ Dev Auth Econ Dev Rev Rfdg
Manahawkin Convalescent Ser A (FHA Gtd)..... 6.650 08/01/18 2,353,460
2,000 New Jersey Econ Dev Auth Mkt Trans Fac Rev
Sr Lien Ser A (MBIA Insd)................... 5.800 07/01/08 2,108,640
1,000 New Jersey Econ Dev Auth Mkt Trans Fac Rev
Sr Lien Ser A (MBIA Insd)................... 5.800 07/01/09 1,052,580
1,165 New Jersey Econ Dev Auth Rev First Mtg
Cadbury Corp Proj A......................... 5.500 07/01/18 1,107,449
See Notes to Financial Statements
12
YOUR TRUST'S INVESTMENTS
October 31, 2000
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
NEW JERSEY (CONTINUED)
$2,000 New Jersey Econ Dev Auth Rev Morris Hall
Saint Lawrence Proj A (LOC - NJ Natl Bnk)... 6.250% 04/01/25 $ 2,054,740
750 New Jersey Econ Dev Auth Rev Transn Proj
Sublease Ser A (FSA Insd)................... 5.000 05/01/18 720,000
1,000 New Jersey Hlthcare Fac Fin Auth Rev
Atlantic City Med Cent Ser C Rfdg........... 6.800 07/01/11 1,045,290
1,500 New Jersey Hlthcare Fac Fin Auth Rev
Berkeley Heights Convalescent (AMBAC
Insd)....................................... 5.000 07/01/26 1,377,150
300 New Jersey Hlthcare Fac Fin Auth Rev Christ
Hosp Group Issue (Connie Lee Insd).......... 7.000 07/01/04 323,856
1,745 New Jersey Hlthcare Fac Fin Auth Rev Genl
Hosp Cent at Passaic (FSA Insd)............. 6.500 07/01/11 1,936,182
690 New Jersey Hlthcare Fac Fin Auth Rev Robert
Wood Johnson Univ Hosp Ser B (MBIA Insd).... 6.625 07/01/16 712,308
950 New Jersey Hlthcare Fac Fin Auth Rev Saint
Mary Hosp................................... 5.875 07/01/12 1,003,352
1,500 New Jersey Hlthcare Fac Fin Auth Rev
Southern Ocean Cnty Hosp Ser A.............. 6.125 07/01/13 1,419,630
2,500 New Jersey Hlthcare Fac Fin Auth Rev
Southern Ocean Cnty Hosp Ser A.............. 6.250 07/01/23 2,312,125
1,425 New Jersey Hlthcare Facs Fin Auth Rev (AMBAC
Insd) (Prerefunded 07/01/04)................ 6.125 07/01/11 1,524,508
1,075 New Jersey Hlthcare Facs Fin Auth Rev (AMBAC
Insd)....................................... 6.150 07/01/11 1,137,146
2,250 New Jersey Hlthcare Facs Fin Auth Rev Gen
Hosp Ctr at Passaic (FSA Insd).............. 6.750 07/01/19 2,578,568
1,000 New Jersey St Edl Facs Auth Rev Beth Medrash
Govoha America Ser G........................ 6.375 07/01/30 988,720
500 New Jersey St Edl Facs Auth Rev Monmouth
Univ Ser D.................................. 5.125 07/01/24 445,905
2,400 New Jersey St Tpk Auth Tpk Rev Ser C Rfdg
(MBIA Insd)................................. 6.500 01/01/16 2,725,440
2,450 Newark, NJ Brd Edl (MBIA Insd).............. 5.875 12/15/09 2,594,672
2,000 Port Auth NY & NJ Cons 85th Ser (MBIA
Insd)....................................... 5.375 03/01/28 1,979,480
1,000 Port Auth NY & NJ Cons 106th Ser............ 5.625 07/01/08 1,046,310
1,000 Rutgers St Univ NJ St Univ of NJ Ser A
Rfdg........................................ 6.400 05/01/13 1,122,630
1,000 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev
Pub Svc Elec & Gas Ser D Rfdg (MBIA Insd)... 6.550 10/01/29 1,063,110
750 Secaucus, NJ Muni Util Auth Swr Rev Ser A
Rfdg........................................ 6.000 12/01/08 799,230
See Notes to Financial Statements
13
YOUR TRUST'S INVESTMENTS
October 31, 2000
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
NEW JERSEY (CONTINUED)
$2,250 Union Cnty, NJ Indl Pollutn Ctl Fin Auth
Pollutn Ctl Rev American Cyanamid Co Rfdg... 5.800% 09/01/09 $ 2,396,115
2,000 Union Cnty, NJ Utils Auth Mercer Cnty (MBIA
Insd)....................................... 5.350 06/01/23 1,927,580
1,425 Washington Twp NJ Muni Util Auth Mercer Cnty
(MBIA Insd)................................. 5.800 09/01/13 1,449,510
-----------
56,295,736
-----------
PUERTO RICO 4.5%
2,000 Puerto Rico Comwlth Hwy & Tran Auth Hwy Rev
Ser Y (FSA Insd)............................ 6.250 07/01/21 2,248,880
500 Puerto Rico Elec Pwr Auth Pwr Rev Ser T..... 6.125 07/01/09 533,100
-----------
2,781,980
-----------
U. S. VIRGIN ISLANDS 1.7%
1,000 Virgin Islands Pub Fin Auh Rev Gross Rcpts
Taxes Ser A................................. 6.375 10/01/19 1,028,040
-----------
TOTAL LONG-TERM INVESTMENTS 98.2%
(Cost $57,487,952).................................................... 60,105,756
SHORT-TERM INVESTMENTS 0.5%
(Cost $300,000)....................................................... 300,000
-----------
TOTAL INVESTMENTS 98.7%
(Cost $57,787,952).................................................... 60,405,756
OTHER ASSETS IN EXCESS OF LIABILITIES 1.3%............................. 779,425
-----------
NET ASSETS 100.0%...................................................... $61,185,181
===========
* Zero coupon bond
AMBAC--AMBAC Indemnity Corporation Connie Lee--Connie Lee Insurance Company
FHA--Federal Housing Administration FSA--Financial Security Assurance Inc.
LOC--Letter of Credit MBIA--Municipal Bond Investors Assurance Corp.
See Notes to Financial Statements
14
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
October 31, 2000
ASSETS:
Total Investments (Cost $57,787,952)........................ $60,405,756
Cash........................................................ 29,055
Interest Receivable......................................... 991,727
Other....................................................... 1,495
-----------
Total Assets............................................ 61,428,033
-----------
LIABILITIES:
Payables:
Investment Advisory Fee................................... 33,555
Reports to Shareholders................................... 14,843
Administrative Fee........................................ 10,325
Affiliates................................................ 7,351
Income Distributions -- Preferred Shares.................. 5,618
Trustees' Deferred Compensation and Retirement Plans........ 109,766
Accrued Expenses............................................ 61,394
-----------
Total Liabilities....................................... 242,852
-----------
NET ASSETS.................................................. $61,185,181
===========
NET ASSETS CONSIST OF:
Preferred Shares (Par value of $.01 per share, 100,000,000
shares authorized, 1,000 issued with liquidation
preference of $25,000 per share).......................... $25,000,000
-----------
Common Shares (Par value of $.01 per share with an unlimited
number of shares authorized, 2,499,940 shares issued and
outstanding).............................................. 24,999
Paid in Surplus............................................. 36,520,666
Net Unrealized Appreciation................................. 2,617,804
Accumulated Undistributed Net Investment Income............. 185,328
Accumulated Net Realized Loss............................... (3,163,616)
-----------
Net Assets Applicable to Common Shares.................. 36,185,181
-----------
NET ASSETS.................................................. $61,185,181
===========
NET ASSET VALUE PER COMMON SHARE ($36,185,181 divided by
2,499,940 shares outstanding)............................. $ 14.47
===========
See Notes to Financial Statements
15
Statement of Operations
For the Year Ended October 31, 2000
INVESTMENT INCOME:
Interest.................................................... $3,490,646
----------
EXPENSES:
Investment Advisory Fee..................................... 390,999
Administrative Fee.......................................... 120,307
Preferred Share Maintenance................................. 77,922
Trustees' Fees and Related Expenses......................... 17,509
Legal....................................................... 11,606
Custody..................................................... 6,885
Other....................................................... 88,250
----------
Total Expenses.......................................... 713,478
Less Credits Earned on Cash Balances.................... 172
----------
Net Expenses............................................ 713,306
----------
NET INVESTMENT INCOME....................................... $2,777,340
==========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Loss........................................... $ (39,098)
----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 1,198,321
End of the Period......................................... 2,617,804
----------
Net Unrealized Appreciation During the Period............... 1,419,483
----------
NET REALIZED AND UNREALIZED GAIN............................ $1,380,385
==========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $4,157,725
==========
See Notes to Financial Statements
16
Statement of Changes in Net Assets
For the Years Ended October 31, 2000 and 1999
YEAR ENDED YEAR ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
------------------------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............................... $ 2,777,340 $ 2,736,199
Net Realized Loss................................... (39,098) (236,409)
Net Unrealized Appreciation/Depreciation During the
Period............................................ 1,419,483 (4,411,100)
----------- -----------
Change in Net Assets from Operations................ 4,157,725 (1,911,310)
----------- -----------
Distributions from Net Investment Income:
Common Shares..................................... (2,074,655) (1,899,786)
Preferred Shares.................................. (947,098) (727,597)
----------- -----------
Total Distributions................................. (3,021,753) (2,627,383)
----------- -----------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES............................. 1,135,972 (4,538,693)
NET ASSETS:
Beginning of the Period............................. 60,049,209 64,587,902
----------- -----------
End of the Period (Including accumulated
undistributed net investment income of $185,328
and $429,741, respectively)....................... $61,185,181 $60,049,209
=========== ===========
See Notes to Financial Statements
17
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE COMMON SHARE OF THE
TRUST OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
-------------------------------------
2000 1999 1998 1997
-------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD (A)... $ 14.02 $ 15.84 $ 15.12 $ 14.32
------- ------- ------- -------
Net Investment Income........................ 1.11 1.09 1.07 1.09
Net Realized and Unrealized Gain/Loss........ .55 (1.86) .73 .78
------- ------- ------- -------
Total from Investment Operations............... 1.66 (.77) 1.80 1.87
------- ------- ------- -------
Less:
Distributions from Net Investment Income:
Paid to Common Shareholders................ .83 .76 .75 .74
Common Share Equivalent of Distributions
Paid to Preferred Shareholders........... .38 .29 .33 .33
Distributions from Net Realized Gain:
Paid to Common Shareholders................ -0- -0- -0- -0-
Common Share Equivalent of Distributions
Paid to Preferred Shareholders........... -0- -0- -0- -0-
------- ------- ------- -------
Total Distributions............................ 1.21 1.05 1.08 1.07
------- ------- ------- -------
NET ASSET VALUE, END OF THE PERIOD............. $ 14.47 $ 14.02 $ 15.84 $ 15.12
======= ======= ======= =======
Market Price Per Share at End of the Period.... $13.375 $12.250 $14.750 $13.375
Total Investment Return at Market Price (b).... 16.31% -12.40% 16.12% 21.79%
Total Return at Net Asset Value (c)............ 9.47% -6.96% 9.94% 11.09%
Net Assets at End of the Period (In
millions).................................... $ 61.2 $ 60.0 $ 64.6 $ 62.8
Ratio of Expenses to Average Net Assets
Applicable to Common Shares**................ 2.04% 1.95% 2.01% 2.09%
Ratio of Net Investment Income to Average Net
Assets Applicable to Common Shares (d)....... 5.24% 5.26% 4.78% 5.23%
Portfolio Turnover............................. 11% 14% 10% 8%
* Non-Annualized
** Ratio of Expenses to Average Net Assets
Including Preferred Shares.................. 1.19% 1.18% 1.22% 1.24%
(a) Net Asset Value at April 30, 1993, is adjusted for common and preferred
share offering costs of $.362 per common share.
(b) Total return based on market price assumes an investment at the 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 stock price at the end of the
period indicated.
(c) Total return based on net asset value (NAV) assumes an investment at the
beginning of the period indicated, reinvestment of all distributions for the
period, and sale of all shares at the end of the period, all at NAV.
(d) Net Investment Income is adjusted for the common share equivalent of
distributions paid to preferred shareholders.
18
APRIL 30, 1993
(COMMENCEMENT
YEAR ENDED OCTOBER 31 OF INVESTMENT
- --------------------------------- OPERATIONS) TO
1996 1995 1994 OCTOBER 31, 1993
- ------------------------------------------------------
$ 14.20 $ 12.14 $ 15.60 $ 14.64
------- ------- -------- -------
1.10 1.09 1.04 .38
.05 2.07 (3.46) .91
------- ------- -------- -------
1.15 3.16 (2.42) 1.29
------- ------- -------- -------
.70 .74 .78 .26
.33 .36 .25 .07
-0- -0- .01 -0-
-0- -0- -0- -0-
------- ------- -------- -------
1.03 1.10 1.04 .33
------- ------- -------- -------
$ 14.32 $ 14.20 $ 12.14 $ 15.60
======= ======= ======== =======
$11.625 $11.625 $ 10.875 $14.625
5.98% 13.78% -20.92% -.78%*
5.91% 23.66% -17.60% 5.78%*
$ 60.8 $ 60.5 $ 55.3 $ 64.0
2.15% 2.30% 2.24% 2.01%
5.40% 5.51% 5.69% 4.07%
25% 34% 53% 7%*
1.26% 1.31% 1.31% 1.47%
See Notes to Financial Statements
19
NOTES TO
FINANCIAL STATEMENTS
October 31, 2000
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen New Jersey Value Municipal Income Trust (the "Trust") is registered
as a non-diversified, closed-end management investment company under the
Investment Company Act of 1940, as amended. The Trust's investment objective is
to provide a high level of current income exempt from federal income taxes and
New Jersey gross income tax, consistent with preservation of capital. The Trust
will invest substantially all of its assets in New Jersey municipal securities
rated investment grade at the time of investment. The Trust commenced investment
operations on April 30, 1993.
The following is a summary of significant accounting policies consistently
followed by the Trust 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 are valued at fair value
using procedures established in good faith by the Board of Trustees. 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
Trust 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 Trust will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when-issued or delayed delivery
purchase commitments until payment is made. At October 31, 2000, there were no
when-issued and delayed delivery purchase commitments.
C. INVESTMENT INCOME Interest income is recorded on an accrual basis. Bond
premium is amortized and original issue discount is accreted over the expected
life of each applicable security.
20
NOTES TO
FINANCIAL STATEMENTS
October 31, 2000
D. FEDERAL INCOME TAXES It is the Trust's policy to comply with the requirements
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.
The Trust intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At October 31, 2000, the Trust had an accumulated capital loss
carryforward for tax purposes of $3,163,616 which will expire between October
31, 2002 and October 31, 2008.
At October 31, 2000, for federal income tax purposes, cost of long- and
short-term investments is $57,787,952; the aggregate gross unrealized
appreciation is $2,891,383 and the aggregate gross unrealized depreciation is
$273,579, resulting in net unrealized appreciation on long- and short-term
investments of $2,617,804.
E. DISTRIBUTION OF INCOME AND GAINS The Trust declares and pays dividends
monthly 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.
F. EXPENSE REDUCTIONS During the year ended October 31, 2000, the Trust's
custody fee was reduced by $172 as a result of credits earned on overnight cash
balances.
2. INVESTMENT ADVISORY AGREEMENT AND
OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Trust's Investment Advisory Agreement, Van Kampen
Investment Advisory Corp. (the "Adviser") will provide investment advice and
facilities to the Trust for an annual fee payable monthly of .65% of the average
net assets of the Trust. In addition, the Trust will pay a monthly
administrative fee to Van Kampen Funds Inc. or its affiliates (collectively "Van
Kampen"), the Trust's Administrator, at an annual rate of .20% of the average
net assets of the Trust. The administrative services provided by the
Administrator include record keeping and reporting responsibilities with respect
to the Trust's portfolio and preferred shares and providing certain services to
shareholders.
For the year ended October 31, 2000, the Trust recognized expenses of
approximately $1,000 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Trust, of which a trustee of
the Trust is an affiliated person.
Under separate Accounting Services and Legal Services agreements, the
Adviser provides accounting and legal services to the Trust. The Adviser
allocates
21
NOTES TO
FINANCIAL STATEMENTS
October 31, 2000
the cost of such services to each Trust. For the year ended October 31, 2000,
the Trust recognized expenses of approximately $20,800 representing Van Kampen's
cost of providing accounting and legal services to the Trust, which are reported
as part of other and legal expenses, respectively, in the statement of
operations.
Certain officers and trustees of the Trust are also officers and directors
of Van Kampen. The Trust does not compensate its officers or trustees who are
officers of Van Kampen.
The Trust provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable for a ten-year period
and are based upon each trustee's years of service to the Trust. The maximum
annual benefit per trustee under the plan is $2,500.
3. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $6,210,139 and $6,662,471, respectively.
4. PREFERRED SHARES
The Trust has outstanding 1,000 Auction Preferred Shares ("APS"). Dividends are
cumulative and the dividend rate is currently reset every seven days through an
auction process. The rate in effect on October 31, 2000 was 4.100%. During the
year ended October 31, 2000, the rates ranged from 2.250% to 4.900%.
The Trust pays annual fees equivalent to .25% of the preferred share
liquidation value for the remarketing efforts associated with the preferred
auctions. These fees are included as a component of Preferred Share Maintenance
expense.
The APS are redeemable at the option of the Trust in whole or in part at the
liquidation value of $25,000 per share plus accumulated and unpaid dividends.
The Trust is subject to certain asset coverage tests and the APS are subject to
mandatory redemption if the tests are not met.
5. SUBSEQUENT EVENT
On November 20, 2000, the Trustees of Van Kampen New Jersey Value Municipal
Trust ("Target Fund") announced its intention to merge the Target Fund into the
Van Kampen Trust for Investment Grade New Jersey Municipals ("Acquiring Fund").
The Trustees of each of the funds have approved in principle an agreement and
plan of reorganization between the funds providing for a transfer of assets and
liabilities of the Target Fund to the Acquiring Fund in exchange for shares of
beneficial interest of the Acquiring Fund (the "Reorganization"). The
Reorganization is subject to the approval by the shareholders of the Target
Fund.
22
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders of Van Kampen New Jersey Value Municipal
Income Trust
We have audited the accompanying statement of assets and liabilities of Van
Kampen New Jersey Value Municipal Income Trust (the "Trust"), including the
portfolio of investments, as of October 31, 2000, and the related statements of
operations, changes in net assets and the financial highlights for the year then
ended. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The Trust's financial statements and financial highlights for the periods
ended prior to October 31, 2000 were audited by other auditors whose report,
dated December 9, 1999, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2000, by correspondence with the Trust's
custodian. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen New Jersey Value Municipal Income Trust as of October 31, 2000, the
results of its operations, the changes in its net assets and the financial
highlights for the year ended, in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Chicago, Illinois
December 6, 2000
23
DIVIDEND REINVESTMENT PLAN
The Trust offers a dividend reinvestment plan (the "Plan") pursuant to which
Common Shareholders may elect to have dividends and capital gains distributions
reinvested in Common Shares of the Trust. The Trust declares dividends out of
net investment income, and will distribute annually net realized capital gains,
if any. Common Shareholders may join or withdraw from the Plan at any time.
If you decide to participate in the Plan, State Street Bank and Trust
Company, as your Plan Agent, will automatically invest your dividends and
capital gains distributions in Common Shares of the Trust for your account.
HOW TO PARTICIPATE
If you wish to participate and your shares are held in your own name, call
1-800-341-2929 for more information and a Plan brochure. If your shares are held
in the name of a brokerage firm, bank, or other nominee, you should contact your
nominee to see if it would participate in the Plan on your behalf. If you wish
to participate in the Plan, but your brokerage firm, bank or nominee is unable
to participate on your behalf, you should request that your shares be
re-registered in your own name which will enable your participation in the Plan.
HOW THE PLAN WORKS
Participants in the Plan will receive the equivalent in Common Shares valued
on the valuation date, generally at the lower of market price or net asset
value, except as specified below. The valuation date will be the dividend or
distribution payment date or, if that date is not a trading day on the national
securities exchange or market system on which the Common Shares are listed for
trading, the next preceding trading day. If the market price per Common Share on
the valuation date equals or exceeds net asset value per Common Share on that
date, the Trust will issue new Common Shares to participants valued at the
higher of net asset value or 95% of the market price on the valuation date. In
the foregoing situation, the Trust will not issue Common Shares under the Plan
below net asset value. If net asset value per Common Share on the valuation date
exceeds the market price per Common Share on that date, or if the Board of
Trustees should declare a dividend or capital gains distribution payable to the
Common Shareholders only in cash, participants in the Plan will be deemed to
have elected to receive Common Shares from the Trust valued at the market price
on that date. Accordingly, in this circumstance, the Plan Agent will, as agent
for the participants, buy the Trust's Common Shares in the open market for the
participants' accounts on or shortly after the payment date. If, before the Plan
Agent has completed its purchases, the market price exceeds the net asset value
per share of the Common Shares, the average per share purchase price paid by the
Plan Agent may exceed the net asset value of the Trust's Common Shares,
resulting in
24
the acquisition of fewer Common Shares than if the dividend or distribution had
been paid in Common Shares issued by the Trust. All reinvestments are in full
and fractional Common Shares and are carried to three decimal places.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Trust reserves the right to amend or terminate the Plan as
applied to any dividend or distribution paid subsequent to written notice of the
changes sent to all Common Shareholders of the Trust at least 90 days before the
record date for the dividend or distribution. The Plan also may be amended or
terminated by the Plan Agent by at least 90 days written notice to all Common
Shareholders of the Trust.
COSTS OF THE PLAN
The Plan Agent's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Trust. However, each participant will pay a
pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of dividends
and distributions. No other charges will be made to participants for reinvesting
dividends or capital gains distributions, except for certain brokerage
commissions, as described above.
TAX IMPLICATIONS
You will receive tax information annually for your personal records and to
help you prepare your federal income tax return. The automatic reinvestment of
dividends and capital gains distributions does not relieve you of any income tax
which may be payable on dividends or distributions.
RIGHT TO WITHDRAW
Plan participants may withdraw at any time by calling 1-800-341-2929 or by
writing State Street Bank and Trust Company, P.O. Box 8200, Boston, MA
02266-8200. If you withdraw, you will receive, without charge, a share
certificate issued in your name for all full Common Shares credited to your
account under the Plan and a cash payment will be made for any fractional Common
Share credited to your account under the Plan. You may again elect to
participate in the Plan at any time by calling 1-800-341-2929 or writing to the
Trust at:
Van Kampen Funds Inc.
Attn: Closed-End Funds
2800 Post Oak Blvd.
Houston, TX 77056
25
TRUST OFFICERS AND IMPORTANT ADDRESSES
VAN KAMPEN NEW JERSEY VALUE
MUNICIPAL INCOME TRUST
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
THEODORE A. MYERS
RICHARD F. POWERS, III* - Chairman
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
OFFICERS
RICHARD F. POWERS, III*
President
STEPHEN L. BOYD*
Executive Vice President and
Chief Investment Officer
A. THOMAS SMITH III*
Vice President and Secretary
JOHN L. SULLIVAN*
Vice President, Treasurer and
Chief Financial Officer
RICHARD A. CICCARONE*
JOHN R. REYNOLDSON*
MICHAEL H. SANTO*
JOHN H. ZIMMERMANN, III*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
CUSTODIAN AND TRANSFER AGENT
STATE STREET BANK
AND TRUST COMPANY
c/o EquiServe
P.O. Box 43011
Providence, Rhode Island 02940-3011
LEGAL COUNSEL
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS) 333 West Wacker Drive Chicago,
Illinois 60606
INDEPENDENT AUDITORS(1)
DELOITTE & TOUCHE LLP
180 North Stetson Avenue
Chicago, Illinois 60601
For Federal Income tax purposes, the following information is furnished with
respect to the distributions paid by the Trust during its taxable year ended
October 31, 2000. The Trust designated 100% of the income distributions as a
tax-exempt income distribution. In January, 2001, the Trust will provide tax
information to shareholders for the 2000 calendar year.
(1) Independent auditors for the Trust perform an annual audit of the Trust's
financial statements. The Board of Trustees has engaged Deloitte & Touche LLP to
be the Trust's independent auditors.
KPMG LLP, located at 303 West Wacker Drive, Chicago, IL 60601 ("KPMG"), ceased
being the Trust's independent accountants effective April 14, 2000. The
cessation of the client- auditor relationship between the Trust and KPMG was
based solely on a possible future business relationship by KPMG with an
affiliate of the Trust's investment adviser.
* "Interested persons" of the Trust, as defined in the Investment Company Act
of 1940, as amended.
(C) Van Kampen Funds Inc., 2000. All rights reserved.
(SM) denotes a service mark of Van Kampen Funds Inc.
26
RESULTS OF
SHAREHOLDER VOTES
An Annual Meeting of the Shareholders of the Trust was held on June 21, 2000,
where shareholders voted on the election of trustees and the ratification of
Deloitte & Touche LLP as the independent auditors.
1) With regard to the election of the following trustees by the common
shareholders of the Trust:
# OF SHARES
-----------------------------
IN FAVOR WITHHELD
David C. Arch.......................................... 2,320,210 11,396
Howard J Kerr.......................................... 2,320,210 11,396
The other trustees whose terms did not expire in 2000 were Rod Dammeyer,
Theodore A. Myers, Richard F. Powers III, Hugo F. Sonnenschein and Wayne W.
Whalen.
2) With regard to the ratification of Deloitte & Touche LLP as independent
auditors for the Trust, 2,310,904 shares voted in favor of the proposal, 6,734
shares voted against and 13,968 shares abstained.
27
YOUR NOTES
28
APPENDIX E
Pro Forma
Financial Statements
E-1
Van Kampen Trust For Investment Grade
New Jersey-Van Kampen New Jersey Value Municipal Trust
Proforma Portfolio Of Investments
October 31, 2000
(Unaudited)
VK Trust VK NJ
for Inv Value VK Trust
Grade Municipal for VK NJ Value
New Jersey Trust Proforma Inv Grade Municipal
Par Amt Par Amt Par Amt New Jersey Trust Proforma
(000) (000) (000) Description Coupon Maturity Market Value Market Value Market Value
====================================================================================================================================
Municipal Bonds 98.5%
New Jersey 86.9%
$1,695 $1,000 $2,695 Atlantic City, NJ Muni Util (AMBAC Insd).. 5.000% 6/1/29 $1,562,298 $921,710 $2,484,008
1,965 0 1,965 Bayonne, NJ Muni Util Auth Wtr Sys
Rev (MBIA Insd)........................... 5.000 1/1/28 1,820,081 0 1,820,081
2,000 0 2,000 Bergen Cnty, NJ Util Auth Wtr Pollutn Ctl Rev
Ser A (Prerefunded @ 06/15/02) (FGIC Insd) 6.500 12/15/12 2,103,020 0 2,103,020
1,500 0 1,500 Brick Twp, NJ Muni Util Auth Rev
(Prerefunded @ 12/01/02) (AMBAC Insd).... 6.500 12/1/12 1,590,150 0 1,590,150
2,000 0 2,000 Camden Cnty, NJ Muni Util Auth Swr Rev Cap
Apprec Ser B (FGIC Insd).................. * 9/1/14 960,240 0 960,240
2,500 0 2,500 Camden Cnty, NJ Muni Util Auth Swr Rev
Cap Apprec Ser B (FGIC Insd).............. * 9/1/15 1,126,825 0 1,126,825
4,095 0 4,095 Camden, NJ (FSA Insd)..................... * 2/15/11 2,415,927 0 2,415,927
0 655 655 Deptford Twp, NJ Mun Util (AMBAC Insd).... 5.500 2/1/27 0 654,397 654,397
2,850 0 2,850 East Orange, NJ Brd Ed/Ctfs Partn Cap Apprec
(FSA Insd)................................ * 2/1/28 597,531 0 597,531
1,845 0 1,845 East Orange, NJ Brd Ed/Ctfs Partn Cap Apprec
(FSA Insd)................................ * 8/1/19 641,894 0 641,894
0 1,845 1,845 East Orange, NJ Brd Ed/Ctfs Partn Cap Apprec
(FSA Insd)................................ * 2/1/25 0 461,711 461,711
2,330 0 2,330 Edgewater, NJ Muni Util Auth Rev Swr Rfdg
(MBIA Insd)............................... * 11/1/12 1,259,132 0 1,259,132
840 0 840 Essex Cnty, NJ Impt Auth Lease Jail & Youth
House Proj (Prerefunded @ 12/01/04)
(AMBAC Insd).............................. 6.600 12/1/07 919,262 0 919,262
0 1,000 1,000 Essex Cnty, NJ Impt Auth Lease-Newark..... 6.600 4/1/14 0 1,079,150 1,079,150
1,000 0 1,000 Essex Cnty NJ Impt Auth Lease Rev Gtd City
Of Newark (AMBAC Insd).................... 5.125 4/1/29 941,980 0 941,980
0 500 500 Essex Cnty, NJ Impt Auth Pkg Fac Rev Rfdg
(AMBAC Insd).............................. 5.000 10/1/22 0 469,330 469,330
3,000 0 3,000 Essex Cnty, NJ Impt Auth Rev Irvington Twp
Sch Dist (Prerefunded @10/01/02) (FSA Insd) 6.625 10/1/17 3,177,900 0 3,177,900
0 500 500 Essex Cnty, NJ Impt Auth Rev Util Sys East
Orange Franchise (MBIA Insd).............. 5.000 7/1/28 0 462,635 462,635
0 1,000 1,000 Essex Cnty, NJ Ser A1 Rfdg (AMBAC Insd)... 5.375 9/1/10 0 1,038,700 1,038,700
0 1,000 1,000 Essex Cnty, NJ Util Auth Solid Waste Rev Ser A
(FSA Insd)................................ 5.500 4/1/11 0 1,059,550 1,059,550
0 750 750 Hudson Cnty, NJ Ctfs Partn Correctional Fac
Rfdg (MBIA Insd).......................... 6.500 12/1/11 0 779,850 779,850
4,875 1,000 5,875 Hudson Cnty, NJ Ctfs Partn Correctional Fac
Rfdg (MBIA Insd).......................... 6.600 12/1/21 5,082,821 1,042,630 6,125,451
0 1,250 1,250 Hudson Cnty, NJ Impt Auth Solid Waste Sys Rev
Ser A (Prerefunded @ 07/01/04)............ 6.100 7/1/20 0 1,338,275 1,338,275
0 1,250 1,250 Mercer Cnty, NJ Impt Auth Rev Cap Apprec.. * 4/1/11 0 738,625 738,625
2,000 0 2,000 Mercer Cnty, NJ Impt Auth Rev Ewing Brd Edl
Lease Proj (Prerefunded @ 05/15/02)
(MBIA Insd)............................... 6.400 5/15/11 2,097,020 0 2,097,020
2,300 0 2,300 Mercer Cnty, NJ Impt Auth Rev Gtd Site &
Disp Fac Proj Solid Waste Rfdg............ * 4/1/08 1,605,630 0 1,605,630
6,500 0 6,500 Mercer Cnty, NJ Impt Auth Rev Gtd Site &
Disp Fac Proj Solid Waste Rfdg............ * 4/1/10 4,077,060 0 4,077,060
E-2
Van Kampen Trust For Investment Grade
New Jersey-Van Kampen New Jersey Value Municipal Trust
Proforma Portfolio Of Investments
October 31, 2000
(Unaudited)
VK Trust VK NJ
for Inv Value VK Trust
Grade Municipal for VK NJ Value
New Jersey Trust Proforma Inv Grade Municipal
Par Amt Par Amt Par Amt New Jersey Trust Proforma
(000) (000) (000) Description Coupon Maturity Market Value Market Value Market Value
====================================================================================================================================
$7,055 $0 $7,055 Mercer Cnty, NJ Impt Auth Rev Gtd Site &
Disp Fac Proj Solid Waste Rfdg............ * 4/1/12 $3,919,617 $0 $3,919,617
0 525 525 Middlesex Cnty, NJ Ctfs Partn
(Prerefunded @ 02/15/04) (MBIA Insd)...... 5.900% 8/15/09 0 551,812 551,812
1,560 1,000 2,560 Middlesex Cnty, NJ Impt Auth Util Sys Rev
Perth Amboy Franchise Proj Ser A
(AMBAC Insd).............................. 5.000 9/1/29 1,432,361 918,180 2,350,541
0 1,500 1,500 New Jersey Econ Dev Auth Dist Heating &
Cooling Rev Trigen Trenton Ser A.......... 6.200 12/1/10 0 1,473,495 1,473,495
0 2,215 2,215 New Jersey Econ Dev Auth Econ Dev Rev
Rfdg Manahawkin Convalescent Ser A
(FHA Insd)................................ 6.650 8/1/18 0 2,353,460 2,353,460
450 0 450 New Jersey Econ Dev Auth Econ Dev Rev Ser F
(LOC: Banque Nationale Paris)............. 6.600 6/1/12 469,166 0 469,166
375 0 375 New Jersey Econ Dev Auth Econ Dev Rev Ser Y
(LOC: Banque Nationale Paris)............. 6.600 6/1/12 390,848 0 390,848
1,000 2,000 3,000 New Jersey Econ Dev Auth Mkt Transition Fac
Rev Sr Lien Ser A (MBIA Insd)............. 5.800 7/1/08 1,054,320 2,108,640 3,162,960
1,500 1,000 2,500 New Jersey Econ Dev Auth Mkt Transition Fac
Rev Sr Lien Ser A (MBIA Insd)............. 5.800 7/1/09 1,578,870 1,052,580 2,631,450
0 1,165 1,165 New Jersey Econ Dev Auth Rev First Mtg
Cadbury Corp Proj A....................... 5.500 7/1/18 0 1,107,449 1,107,449
0 2,000 2,000 New Jersey Econ Dev Auth Rev Morris Hall
Saint Lawrence Proj A (LOC: NJ Natl Bnk).. 6.250 4/1/25 0 2,054,740 2,054,740
2,000 750 2,750 New Jersey Econ Dev Auth Rev Transition Proj
Sublease Ser A (FSA Insd)................. 5.000 5/1/18 1,920,000 720,000 2,640,000
10,000 0 10,000 New Jersey Econ Dev Auth St Contract Econ
Rec (MBIA Insd)........................... 5.900 3/15/21 10,659,900 0 10,659,900
4,575 1,000 5,575 New Jersey Hlthcare Fac Fin Auth Rev Atlantic
City Med Cent Ser C Rfdg.................. 6.800 7/1/11 4,782,202 1,045,290 5,827,492
0 1,500 1,500 New Jersey Hlthcare Fac Fin Auth Rev Berkeley
Heights Convalescent (AMBAC Insd)......... 5.000 7/1/26 0 1,377,150 1,377,150
0 300 300 New Jersey Hlthcare Fac Fin Auth Rev Christ
Hosp Group Issue (Connie Lee Insd)........ 7.000 7/1/04 0 323,856 323,856
2,200 1,745 3,945 New Jersey Hlthcare Fac Fin Auth Rev Genl
Hosp Cent at Passaic (FSA Insd)........... 6.500 7/1/11 2,441,032 1,936,182 4,377,214
2,000 2,250 4,250 New Jersey Hlthcare Fac Fin Auth Rev Genl Hosp
Cent at Passaic (FSA Insd)................ 6.750 7/1/19 2,292,060 2,578,568 4,870,628
1,000 0 1,000 New Jersey Hlthcare Fac Fin Auth Rev Palisades
Med Cent Oblig Group (ACA Insd)........... 5.250 7/1/28 878,560 0 878,560
0 690 690 New Jersey Hlthcare Fac Fin Auth Rev Robert
Wood Johnson Univ Hosp Ser B (MBIA Insd).. 6.625 7/1/16 0 712,308 712,308
0 950 950 New Jersey Hlthcare Fac Fin Auth Rev Saint
Mary Hosp................................. 5.875 7/1/12 0 1,003,352 1,003,352
0 1,500 1,500 New Jersey Hlthcare Fac Fin Auth Rev Southern
Ocean Cnty Hosp Ser A..................... 6.125 7/1/13 0 1,419,630 1,419,630
0 2,500 2,500 New Jersey Hlthcare Fac Fin Auth Rev Southern
Ocean Cnty Hosp Ser A..................... 6.250 7/1/23 0 2,312,125 2,312,125
0 1,075 1,075 New Jersey Hlthcare Facs Fin Auth Rev
(AMBAC Insd).............................. 6.150 7/1/11 0 1,137,146 1,137,146
0 1,425 1,425 New Jersey Hlthcare Facs Fin Auth Rev
(AMBAC Insd).............................. 6.125 7/1/11 0 1,524,508 1,524,508
E-3
Van Kampen Trust For Investment Grade
New Jersey-Van Kampen New Jersey Value Municipal Trust
Proforma Portfolio Of Investments
October 31, 2000
(Unaudited)
VK Trust VK NJ
for Inv Value VK Trust
Grade Municipal for VK NJ Value
New Jersey Trust Proforma Inv Grade Municipal
Par Amt Par Amt Par Amt New Jersey Trust Proforma
(000) (000) (000) Description Coupon Maturity Market Value Market Value Market Value
====================================================================================================================================
$2,200 $0 $2,200 New Jersey Hlthcare Fac Hlth Sys Catholic
Health East Ser E......................... 4.750% 11/15/29 $1,882,034 $0 $1,882,034
1,150 0 1,150 New Jersey St............................. 6.800 7/15/06 1,250,567 0 1,250,567
1,175 0 1,175 New Jersey St Edl Facs Auth Rev Beth Medrash
Govoha America Ser G...................... 5.875 10/1/12 1,176,739 0 1,176,739
0 1,000 1,000 New Jersey St Edl Facs Auth Rev Beth Medrash
Govoha America Ser G...................... 6.375 7/1/30 0 988,720 988,720
0 500 500 New Jersey St Edl Facs Auth Rev Monmouth
Univ Ser D................................ 5.125 7/1/24 0 445,905 445,905
915 0 915 New Jersey St Edl Facs Auth Seton Hall Univ
Proj Rfdg (AMBAC Insd).................... 5.000 7/1/18 877,210 0 877,210
4,200 0 4,200 New Jersey St Hwy Auth Garden St Pkwy Genl
Rev Sr Pkwy............................... 6.250 1/1/14 4,352,544 0 4,352,544
0 2,400 2,400 New Jersey St Tpk Auth Tpk Rev Ser C Rfdg
(MBIA Insd)............................... 6.500 1/1/16 0 2,725,440 2,725,440
0 2,450 2,450 Newark, NJ Brd Edl (MBIA Insd)............ 5.875 12/15/09 0 2,594,672 2,594,672
2,000 0 2,000 North Bergen Twp, NJ (FSA Insd)........... * 8/15/09 1,306,380 0 1,306,380
2,675 0 2,675 Passaic Vly, NJ Wtr Comm Wtr Supply Rev Cap
Apprec Ser A (FGIC Insd).................. * 12/15/09 1,714,702 0 1,714,702
2,000 0 2,000 Passaic Vly, NJ Wtr Comm Wtr Supply Rev Cap
Apprec Ser A (FGIC Insd).................. * 12/15/10 1,213,800 0 1,213,800
2,850 0 2,850 Port Auth NY & NJ Cons 78th Ser........... 6.500 4/15/11 2,948,724 0 2,948,724
0 2,000 2,000 Port Auth NY & NJ Cons 85th Ser (MBIA Insd) 5.375 3/1/28 0 1,979,480 1,979,480
0 1,000 1,000 Port Auth NY & NJ Cons 106th Ser.......... 5.625 7/1/08 0 1,046,310 1,046,310
2,000 0 2,000 Rockaway Vly, NJ Regl Swr Auth Swr Rev Rfdg
(MBIA Insd)............................... * 12/15/09 1,282,020 0 1,282,020
0 1,000 1,000 Rutgers St Univ of NJ Ser A Rfdg.......... 6.400 5/1/13 0 1,122,630 1,122,630
1,225 0 1,225 Rutgers St Univ of NJ Ser A Rfdg.......... 6.500 5/1/18 1,275,605 0 1,275,605
2,000 1,000 3,000 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev
Pub Svc Elec & Gas Ser D Rfdg (MBIA Insd). 6.550 10/1/29 2,126,220 1,063,110 3,189,330
0 750 750 Secaucus, NJ Muni Util Auth Swr Rev Ser A
Rfdg...................................... 6.000 12/1/08 0 799,230 799,230
165 0 165 Union City, NJ (FSA Insd)................. 6.375 11/1/10 186,780 0 186,780
1,500 0 1,500 Union City, NJ (Prerefunded @ 09/01/02)
(MBIA Insd)............................... 6.700 9/1/12 1,588,395 0 1,588,395
0 2,250 2,250 Union Cnty, NJ Indl Pollutn Ctl Fin Auth
Pollutn Ctl Rev American Cyanamid Co Rfdg. 5.800 9/1/09 0 2,396,115 2,396,115
500 0 500 Union Cnty, NJ Util Auth Cnty Deficiency
Ser C2.................................... 5.000 6/15/28 461,405 0 461,405
0 2,000 2,000 Union Cnty, NJ Utils Auth Mercer Cnty
(MBIA Insd)............................... 5.350 6/1/23 0 1,927,580 1,927,580
1,000 0 1,000 Univ Medicine & Dentistry Ser A (MBIA Insd) 5.000 9/1/17 961,510 0 961,510
0 1,425 1,425 Washington Twp NJ Muni Util Auth Mercer
Cnty (MBIA Insd).......................... 5.800 9/1/13 0 1,449,510 1,449,510
- -----------------------------------------------------------------------------------------------------------------------------------
88,402,342 56,295,736 144,698,078
===================================================================================================================================
E-4
Van Kampen Trust For Investment Grade
New Jersey-Van Kampen New Jersey Value Municipal Trust
Proforma Portfolio Of Investments
October 31, 2000
(Unaudited)
VK Trust VK NJ
for Inv Value VK Trust
Grade Municipal for VK NJ Value
New Jersey Trust Proforma Inv Grade Municipal
Par Amt Par Amt Par Amt New Jersey Trust Proforma
(000) (000) (000) Description Coupon Maturity Market Value Market Value Market Value
====================================================================================================================================
Guam 4.0%
$2,000 $0 $2,000 Guam Arpt Auth Rev Ser B.................. 6.700% 10/1/23 $2,073,940 $0 $2,073,940
1,800 0 1,800 Guam Govt Ltd Oblig Hwy Ser A Rfdg
(FSA Insd)................................ 6.300 5/1/12 1,875,870 0 1,875,870
1,500 0 1,500 Guam Govt Ser A........................... 5.625 9/1/02 1,503,345 0 1,503,345
1,250 0 1,250 Guam Pwr Auth Rev Ser A (AMBAC Insd)...... 5.125 10/1/29 1,179,188 0 1,179,188
- -----------------------------------------------------------------------------------------------------------------------------------
6,632,343 0 6,632,343
===================================================================================================================================
Puerto Rico 5.8%
1,750 0 1,750 Puerto Rico Comwlth Hwy & Tran Auth Hwy
Rev Ser T (Prerefunded @ 07/01/02)........ 6.500 7/1/22 1,843,012 0 1,843,012
0 2,000 2,000 Puerto Rico Comwlth Hwy & Tran Auth Hwy
Rev Ser Y (FSA Insd)...................... 6.250 7/1/21 0 2,248,880 2,248,880
1,700 0 1,700 Puerto Rico Comwlth Pub Impt
(Prerefunded @ 07/01/02).................. 6.800 7/1/21 1,798,141 0 1,798,141
2,500 0 2,500 Puerto Rico Elec Pwr Auth Pwr Rev
Ser EE Rfdg............................... 4.750 7/1/24 2,208,400 0 2,208,400
0 500 500 Puerto Rico Elec Pwr Auth Pwr Rev Ser T... 6.125 7/1/09 0 533,100 533,100
1,000 0 1,000 Puerto Rico Pub Bldgs Auth Rev Gtd
Ser K (Prerefunded @ 07/01/02)............ 6.875 7/1/21 1,058,880 0 1,058,880
- -----------------------------------------------------------------------------------------------------------------------------------
6,908,433 2,781,980 9,690,413
===================================================================================================================================
U.S. Virgin Islands 1.8%
1,000 1,000 2,000 Virgin Islands Pub Fin Auth Rev Gross Rcpts
Taxes Ln Nt Ser A......................... 6.375 10/1/19 1,028,040 1,028,040 2,056,080
1,000 0 1,000 Virgin Islands Pub Fin Auth Rev Sr Lien Fd
Ln Ser A Rfdg (ACA Insd).................. 5.625 10/1/25 949,910 0 949,910
- -----------------------------------------------------------------------------------------------------------------------------------
1,977,950 1,028,040 3,005,990
===================================================================================================================================
Total Long-Term Investments 98.5%
(Cost $154,185,445) ............................................... 103,921,068 60,105,756 164,026,824
Short-Term Investments 0.4%
(Cost $700,000).................................................. 400,000 300,000 700,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments 98.9%
(Cost $154,885,445).............................................. 104,321,068 60,405,756 164,726,824
- ------------------------------------------------------------------------------------------------------------------------------------
Other Assets in Excess of Liabilities 1.1%............................. 979,682 779,425 1,759,107
====================================================================================================================================
Net Assets 100.0%................................................... $105,300,750 $61,185,181 $166,485,931
====================================================================================================================================
ACA * Zero coupon bond
ACA -American Capital Access
AMBAC-AMBAC Indemnity Corp.
Connie Lee-Connie Lee Insurance Company
FGIC-Financial Guaranty Insurance Company
FHA-Federal Housing Administration
FSA-Financial Security Assurance Inc.
LOC-Letter of Credit
MBIA-Municipal Bond Investors Assurance Corp.
E-5
VAN KAMPEN TRUST FOR INVESTMENT GRADE NEW JERSEY - VAN KAMPEN NEW JERSEY
VALUE MUNICIPAL TRUST
PROFORMA CONDENSED STATEMENT OF ASSETS AND LIABILITIES
October 31, 2000
(Unaudited)
Amounts in thousands
Van Kampen
Trust for Van Kampen
Investment New Jersey
New Jersey Value Municipal Adjustments Proforma
------------ --------------- ------------ ------------
Total Investments (Cost of $96,967
$57,488 and $154,185 respectively)..................... $104,321 $60,406 $164,727
Other Assets Less Liabilities............................... 980 779 (181) 1,578
------------ ------------ ------------ ------------
Net Assets.................................................. $105,301 $61,185 ($181) $166,305
============ ============ ============ ============
Net Assets Consist of:
Preferred Shares............................................ 40,000 25,000 65,000
Common Shares............................................... 39 25 64
Paid in Surplus............................................. 57,680 36,521 94,201
Net Unrealized Appreciation................................. 7,224 2,618 9,842
Accumulated Undistributed Net
Investment Income...................................... 194 185 (181) 198
Accumulated Net Realized Gain (Loss)........................ 163 (3,164) 0 (3,001)
------------ ------------ ------------ ------------
Net Assets.................................................. $105,300 $61,185 ($181) $166,304
============ ============ ============ ============
Net Assets Applicable to Common Shares...................... $65,300 $36,185 (181) $101,304
Common Shares Outstanding................................... 3,935 2,500 0 6,107
------------ ------------ ------------ ------------
Net Asset Value Per Common Share............................ $16.59 $14.47 ($181) $16.59
============ ============ ============ ============
(1) The pro forma statements are presented as if the Reorganization was
effective October 31, 2000. The pro forma statements give effect to the
proposed exchange of stock for assets and liabilities with the Van Kampen
Trust for Investment Grade New Jersey being the surviving entity. The
proposed transaction will be accounted for in accordance with accounting
principles generally accepted in the United States of America as a
tax-free reorganization. The historical cost basis of the investments is
carried over to the surviving entity.
(2) The pro forma statements presume the issuance by the Van Kampen Trust for
Investment Grade New Jersey of approximately 2,172,000 common shares in
exchange for the assets and liabilities of the Van Kampen New Jersey Value
Municipal Trust.
(3) A non-recurring cost associated with this transaction of approximately
$181,000 will be incurred. Approximately $156,000 or $0.0624 will be borne
by the common shareholders of the Van Kampen New Jersey Value Municipal
Trust while approximately $25,000 or $0.01 will be borne by the common
shareholders of the Van Kampen Trust for Investment Grade New Jersey.
E-6
VAN KAMPEN TRUST FOR INVESTMENT GRADE NEW JERSEY - VAN KAMPEN NEW JERSEY
VALUE MUNICIPAL TRUST
PROFORMA CONDENSED STATEMENT OF OPERATIONS
For the Year Ended October 31, 2000
(Unaudited)
Amounts in thousands
Van Kampen
Trust for Van Kampen
Investment New Jersey
New Jersey Value Municipal Adjustments Proforma
------------ --------------- ------------ ------------
Investment Income:
Interest................................................. $6,102 $3,491 $9,593
Dividends................................................ 0 0 0
------------ ------------ ------------ ------------
Total Income................................................ 6,102 3,491 0 9,593
------------ ------------ ------------ ------------
Expenses:
Investment Advisory Fee.................................. 673 391 1,064
Administrative Fee....................................... 207 120 327
All Other Expenses (1)................................... 294 203 (70) 427
------------ ------------ ------------ ------------
Total Expenses.............................................. 1,174 714 (70) 1,818
Less Credits Earned on Cash Balances..................... 1 0 1
------------ ------------ ------------ ------------
Net Expenses................................................ 1,173 714 (70) 1,817
------------ ------------ ------------ ------------
Net Investment Income....................................... $4,929 $2,777 $70 $7,776
============ ============ ============ ============
Realized and Unrealized Gain/Loss:
Realized Gain/Loss on Investments........................ $319 ($39) $280
Realized Gain/Loss on Futures............................ 0 0 0
Net Change in Unrealized Appreciation/
Depreciation During the Period...................... 1,867 1,420 3,287
------------ ------------ ------------ ------------
Net Realized and Unrealized Gain............................ $2,186 $1,381 $0 $3,567
============ ============ ============ ============
Net Increase in Net Assets From Operations.................. $7,115 $4,158 $70 $11,343
============ ============ ============ ============
(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.
E-7
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 will ful 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
1
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 disposi tion 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:
(A) by vote of a majority of the Disinterested Trustees
acting on the matter (pro vided 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
2
(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 Commis
sion), 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) Declaration of Trust of the Registrant +
(b) Articles of Amendment relating to name change+
(c) Form of Certificate of Vote Establishing Preferred Shares+
(d) Amendment to Certificate of Vote in connection with share split+
2. Bylaws of the Registrant+
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) Form of specimen share certificate for Common Shares of the
Registrant+
(b) Form of specimen share certificate for APS of the Registrant+
6. (a) Form Investment Advisory Agreement between the Registrant and Van
Kampen Investment Advisory Corp.+
(b) Form of Administration Agreement
7. Not Applicable
8. Not Applicable
9. Custodian Contract between the Registrant and State Street
Bank and Trust Company+
3
10. Not Applicable
11. Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
(Illinois), counsel for the Registrant++
12. Tax opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois)++
13. (a) Form of Transfer Agency Agreement between the Registrant and
State Street Bank and Trust Company+
(b) Form of Auction Agency Agreement between the Registrant and
Bankers Trust Company+
(c) Form of Broker-Dealer Agreement+
(d) Form of Letter of Representations++
14. (a) Consent of Deloitte & Touche LLP, independent auditors for the
Registrant++
(b) Consent of Deloitte & Touche LLP, independent auditors for the
Target Fund++
15. Not Applicable
16. Power of Attorney+
17. Code of Ethics+
+ Filed herewith.
++ To be filed by further 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 state ment 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 Registrant undertakes to file, by post-effective amendment, either
a copy of the Internal Revenue Service private letter ruling applied for or an
opinion of counsel as to certain tax matters, within a reasonable time after
receipt of such ruling or opinion.
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, thereunto duly authorized, in the City of Oakbrook
Terrace and State of Illinois, on February 9, 2000.
VAN KAMPEN TRUST FOR INVESTMENT GRADE
NEW JERSEY MUNICIPALS
By: /s/ A. THOMAS SMITH III
------------------------------------
A. Thomas Smith III
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
SIGNATURES TITLE
---------- -----
Principal Executive Officer:
/s/ Richard F. Powers, III* Trustee and President
- ------------------------------------------
Richard F. Powers, III*
Principal Financial Officer:
/s/ John L. Sullivan*
- ------------------------------------------- Vice President, Chief Financial
John L. Sullivan Officer and Treasurer
5
Trustees:
/s/ David C. Arch* Trustee
- -----------------------------------------------------
David C. Arch
/s/ Rod Dammeyer* Trustee
- -----------------------------------------------------
Rod Dammeyer
/s/ Howard J Kerr* Trustee
- -----------------------------------------------------
Howard J Kerr
/s/ Theodore A. Myers* Trustee
- -----------------------------------------------------
Theodore A. Myers
/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
* Signed by A. Thomas Smith III pursuant to a power of attorney filed herewith.
/s/ A. Thomas Smith III February 9, 2001
- -----------------------------------------------------
A. Thomas Smith III
Attorney-in-Fact
6
EXHIBIT INDEX
1(a) Declaration of Trust of the Registrant
1(b) Articles of Amendment relating to name change
1(c) Form of Certificate of Vote Establishing Preferred Shares
1(d) Amendment to Certificate of Vote in connection with share split
2 Bylaws of the Registrant
5(a) Form of specimen share certificate for Common Shares of the Registrant
5(b) Form of specimen share certificate for APS of the Registrant
6(a) Form Investment Advisory Agreement between the Registrant and Van Kampen
Investment Advisory Corp.
6(b) Form of Administration Agreement
9 Custodian Contract between the Registrant and State Street Bank and Trust
Company
13(a) Form of Transfer Agency Agreement between the Registrant and State Street
Bank and Trust Company
13(b) Form of Auction Agency Agreement between the Registrant and Bankers Trust
Company
13(c) Form of Broker-Dealer Agreement
14(a) Consent of Deloitte & Touche LLP, independent auditors for the Registrant
14(b) Consent of Deloitte & Touche LLP, independent auditors for the Target Fund
16 Power of Attorney
17 Code of Ethics
7