As filed with the Securities and Exchange Commission on March 18, 2005
Securities Act File No. [ ]
Investment Company Act File No. 811-06362
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO. _
[ ] POST-EFFECTIVE AMENDMENT NO. _
(CHECK APPROPRIATE BOX OR BOXES)
VAN KAMPEN MUNICIPAL TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
(800) 847-2424
(AREA CODE AND TELEPHONE NUMBER)
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
AMY R. DOBERMAN, ESQ.
MANAGING DIRECTOR
VAN KAMPEN INVESTMENTS INC.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
WAYNE W. WHALEN, ESQ.
CHARLES B. TAYLOR, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
333 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60606
(312) 407-0700
================================================================================
Approximate Date of Proposed:
As soon as practicable after this Registration Statement is declared effective.
============================================================================================================================
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- ----------------------------------------------------------------------------------------------------------------------------
TITLE OF SECURITIES AMOUNT BEING PROPOSED MAXIMUM PROPOSED AMOUNT OF
BEING REGISTERED REGISTERED (1) OFFERING PRICE MAXIMUM AGGREGATE REGISTRATION FEE
PER UNIT OFFERING PRICE
- ---------------------------------------- ----------------- --------------------- ----------------------- -------------------
Common Shares ($0.01 par value) 1,000 $ 14.645(1) $ 14,655 $ 117.70
- ---------------------------------------- ----------------- --------------------- ----------------------- -------------------
Auction Preferred Shares ($0.01 par
value) 40 $ 25,000 $ 1,000,000 $ 117.70
- ---------------------------------------- ----------------- --------------------- ----------------------- -------------------
(1) Average of high and low reported price for common shares on March 16, 2005.
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
EXPLANATORY NOTE
This Registration Statement is organized as follows:
o Questions and Answers to Investment Grade Municipal Trust Shareholders
o Notice of Special Meeting of Shareholders of Investment Grade
Municipal Trust
o Proxy Statement/Prospectus regarding the Proposed Reorganization
of Van Kampen Investment Grade Municipal Trust into Van Kampen
Municipal Trust
o Statement of Additional Information regarding the Reorganization of
Investment Grade Municipal Trust into Van Kampen Municipal Trust
o Part C Information
o Exhibits
-- MAY 2005 --
- --------------------------------------------------------------------------------
IMPORTANT NOTICE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TO SHAREHOLDERS OF VAN KAMPEN INVESTMENT
GRADE MUNICIPAL TRUST
- --------------------------------------------------------------------------------
Questions & Answers
- ---------------------------------------
Although we recommend that you read the complete Proxy Statement/Prospectus, We
have provided for your convenience 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 reorganization (the "Reorganization") of Van Kampen Investment Grade
Municipal Trust (the "Target Fund") into Van Kampen Municipal Trust (the
"Acquiring Fund"), a closed-end investment company that has the same investment
objective and substantially similar investment policies as the Target Fund.
Q WHY IS THE REORGANIZATION
BEING RECOMMENDED?
A The Board of Trustees of the
Target Fund has determined that the Reorganization will benefit common
shareholders of the Target Fund. The Target Fund and the Acquiring Fund are
substantially similar. Each Fund invests primarily in investment grade municipal
securities and has the same investment objective to seek to provide a high level
of current income exempt from federal income tax consistent with preservation of
capital. Each Fund is managed by similar investment advisory personnel. After
the Reorganization, it is anticipated that common shareholders of each Fund will
experience a reduced overall operating expense ratio, as certain fixed
administrative costs will be spread across the combined fund's larger asset
base. It is not anticipated that the Reorganization will directly benefit
holders of preferred shares of the Target Fund; however, it is anticipated that
the holders of preferred shares of each Fund will not be adversely affected by
the Reorganization, and none of the expenses of the Reorganization will be borne
by preferred shareholders.
Q HOW WILL THE
REORGANIZATION AFFECT ME?
A Assuming shareholders of
the Target Fund approve the Reorganization, the assets and liabilities of the
Target Fund will be combined with those of the Acquiring Fund, you will become a
shareholder of the Acquiring Fund and the Target Fund will dissolve. If you are
a holder of common shares of the Target Fund, you will receive newly-issued
common shares of the Acquiring Fund, and if you are a holder of preferred shares
of the Target Fund, you will receive newly-issued preferred shares of the
Acquiring Fund. The aggregate net asset value of the common shares you receive
in the Reorganization will equal the net asset value of the common shares you
own immediately prior to the Reorganization less the costs of the Reorganization
(though you may receive cash for fractional shares). The aggregate liquidation
preference of the preferred shares you receive in the Reorganization will equal
the aggregate liquidation preference of the preferred shares you own immediately
prior to the Reorganization. No certificates for shares of the Acquiring Fund
will be issued in connection with the Reorganization, although such certificates
will be available upon request.
Q WILL I HAVE TO PAY ANY
SALES LOAD, COMMISSION OR OTHER SIMILAR FEE IN CONNECTION WITH THE
REORGANIZATION?
A You will pay no sales loads
or commissions in connection with the Reorganization. However, if the
Reorganization is completed, the costs associated with the Reorganization,
including the costs associated with the shareholder meeting, will be borne by
the Target Fund and the Acquiring Fund in proportion to their projected declines
in total operating expenses as a consequence of the Reorganization.
Q WILL I HAVE TO PAY ANY
FEDERAL TAXES AS A RESULT OF THE REORGANIZATION?
A The Reorganization is
intended to qualify as a "reorganization" within the meaning of Section
368(a)(1) of the Internal Revenue Code of 1986, as amended. If the
Reorganization so qualifies, in general, a shareholder of the Target Fund will
recognize no gain or loss upon the receipt solely of shares of the Acquiring
Fund in connection with the Reorganization. Additionally, the Target Fund will
not recognize any gain or loss as a result of the transfer of all of its assets
and liabilities solely in exchange for the shares of the Acquiring Fund or as a
result of its dissolution.
Neither the Acquiring Fund nor its shareholders will recognize any gain
or loss in connection with the Reorganization.
Q HOW DO I VOTE MY PROXY?
A You may cast your vote by
mail, phone or internet. To vote by mail, please mark your vote on the enclosed
proxy card and sign, date and return the card in the postage-paid envelope
provided. If you choose to vote via phone or internet, please refer to the
instructions found on the proxy card accompanying this Proxy
Statement/Prospectus. To vote by phone or internet, you will need the "control
number" that appears on the proxy card.
Q HOW DOES THE BOARD OF
TRUSTEES OF THE TARGET FUND SUGGEST I VOTE?
A After careful consideration,
the Board of Trustees of the Target Fund recommend that you vote "FOR" the
Reorganization Agreement as described in the Proxy Statement/Prospectus.
Q WHOM DO I CONTACT FOR
FURTHER INFORMATION?
A You can contact your
financial adviser for further information. You may also call Van Kampen's Client
Relations Department at (800) 847-2424 (Telecommunication Device for the Deaf
users may call (800) 421-2833) or visit our web site at www.vankampen.com where
you can send us an e-mail message by selecting "Contact Us."
ABOUT THE PROXY CARD
- --------------------------------------------------------------------------------
Please vote on the proposed Reorganization 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.
<Table>
[X] PLEASE MARK
VOTES AS IN
THIS EXAMPLE
</Table>
VAN KAMPEN XXXXX
JOINT ANNUAL MEETING OF SHAREHOLDERS
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
<Table>
<Caption>
FOR ALL
FOR ALL WITHHOLD EXCEPT
1x. Authority to vote [ ] [ ] [ ] 2. To transact such other business as may
for the election as properly come before the Meeting.
Class X Trustees
the nominees named
below:
XXXXXXXXX, XXXXXXXXX, XXXXXXXXX
To withhold authority to vote for any one or more
individual nominee check "For All Except" and write
the nominee's name on the line below.
----------------------------------
</Table>
Please be sure to sign and date this Proxy, Date
Shareholder sign here Co-owner sign here
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
SAMPLE
VAN KAMPEN
INVESTMENT GRADE MUNICIPAL TRUST
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(800) 847-2424
NOTICE OF SPECIAL MEETING
OF SHAREHOLDERS
TO BE HELD ON JUNE 22, 2005
Notice is hereby given that a special meeting of shareholders (the "Special
Meeting") of Van Kampen Investment Grade Municipal Trust (the "Target Fund")
will be held at the offices of Van Kampen Investments Inc., 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555 on June 22, 2005 at 2:30 p.m. for the
following purposes:
1. To approve an Agreement and Plan of Reorganization (the "Reorganization
Agreement") between the Target Fund and Van Kampen Municipal Trust (the
"Acquiring Fund"), the termination of the Target Fund's registration
under the Investment Company Act of 1940, as amended, and the dissolution
of the Target Fund under applicable state law; and
2. To transact such other business as may properly be presented at the
Special Meeting or any adjournment thereof.
Shareholders of record as of the close of business on April 25, 2005 are
entitled to vote at the Special Meeting or any adjournment thereof.
THE BOARD OF TRUSTEES OF THE TARGET FUND REQUESTS THAT YOU VOTE YOUR SHARES BY
INDICATING YOUR VOTING INSTRUCTIONS ON THE ENCLOSED PROXY CARD, DATING AND
SIGNING SUCH PROXY CARD AND RETURNING IT IN THE ENVELOPE PROVIDED, WHICH IS
ADDRESSED FOR YOUR CONVENIENCE AND NEEDS NO POSTAGE IF MAILED IN THE UNITED
STATES.
THE BOARD OF TRUSTEES OF THE TARGET FUND RECOMMENDS THAT YOU CAST YOUR VOTE:
FOR THE REORGANIZATION AGREEMENT AS DESCRIBED IN THE PROXY
STATEMENT/PROSPECTUS.
IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK THAT
YOU MAIL YOUR PROXY CARD PROMPTLY.
For the Board of Trustees,
LOU ANNE MCINNIS
Assistant Secretary
Van Kampen Investment Grade Municipal
Trust
[ ], 2005
---------------------
YOUR VOTE IS IMPORTANT.
PLEASE VOTE PROMPTLY BY SIGNING AND RETURNING THE
ENCLOSED PROXY CARD NO MATTER HOW MANY SHARES YOU OWN.
The information in this Proxy Statement/Prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This Proxy
Statement/Prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
SUBJECT TO COMPLETION, DATED MARCH 18, 2005
PROXY STATEMENT/PROSPECTUS
VAN KAMPEN
INVESTMENT GRADE MUNICIPAL TRUST
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(800) 847-2424
SPECIAL MEETING OF SHAREHOLDERS
MAY , 2005
This Proxy Statement/Prospectus is furnished to you as a shareholder of Van
Kampen Investment Grade Municipal Trust (the "Target Fund"). A special meeting
of shareholders of the Target Fund (the "Special Meeting") will be held at the
offices of Van Kampen Investments Inc., 1 Parkview Plaza, Oakbrook Terrace,
Illinois 60181-5555 on June 22, 2005 at 2:30 p.m. to consider the items listed
below and discussed in greater detail elsewhere in this Proxy
Statement/Prospectus. If you are unable to attend the Special Meeting or any
adjournment thereof, the Board of Trustees of the Target Fund requests that you
vote your shares by completing and returning the enclosed proxy card. The
approximate mailing date of this Proxy Statement/Prospectus is May , 2005.
The purposes of the Special Meeting are:
1. To approve an Agreement and Plan of Reorganization (the "Reorganization
Agreement") between the Target Fund and Van Kampen Municipal Trust (the
"Acquiring Fund"), the termination of the Target Fund's registration
under the Investment Company Act of 1940, as amended (the "1940 Act"),
and the dissolution of the Target Fund under applicable state law; and
2. To transact such other business as may properly be presented at the
Special Meeting or any adjournment thereof.
The Reorganization Agreement that you are being asked to consider involves a
transaction that will be referred to in this Proxy Statement/Prospectus as the
"Reorganization." The Reorganization seeks to combine two substantially similar
funds to achieve certain economies of scale and other operational efficiencies.
Each Fund invests primarily in investment grade municipal securities and has the
same investment objective to seek to provide a high level of current income
exempt from federal income tax consistent with preservation of capital. The
Target Fund and the Acquiring Fund are sometimes referred to herein each as a
"Fund" and collectively as the "Funds".
In the Reorganization, the Acquiring Fund will acquire substantially all of
the assets and assume substantially all of the liabilities of the Target Fund in
exchange solely for an equal aggregate value of newly-issued common shares of
beneficial interest, par value $0.01 per share ("Acquiring Fund Common Shares"),
and newly-issued series [ ] auction preferred shares of the Acquiring Fund with
a par value of $0.01 per share and a liquidation preference of $25,000 per share
("Acquiring Fund APS"). The Target Fund will distribute Acquiring Fund Common
Shares to holders of common shares of the Target Fund ("Target Fund Common
Shares") and Acquiring Fund APS to holders of Remarketed Preferred Shares of the
Target Fund ("Target Fund RP"), and will then terminate its registration under
the Investment Company Act of 1940, as amended (the "1940 Act"), and dissolve
under applicable state law. The aggregate net asset value of Acquiring Fund
Common Shares received in the Reorganization will equal the aggregate net asset
value of the Target Fund Common Shares less the costs of the Reorganization
(though you may receive cash for fractional shares) held immediately prior to
the Reorganization and the aggregate liquidation preference of the Acquiring
Fund APS received in the Reorganization will equal the aggregate liquidation
preference of the Target Fund RP held immediately prior to the Reorganization.
The Acquiring Fund will continue to operate as a registered closed-end
investment company with the investment objective and policies described in this
Proxy Statement/Prospectus. Acquiring Fund APS and Target Fund RP are sometimes
referred to herein collectively as "Preferred Shares".
This Proxy Statement/Prospectus sets forth concisely the information
shareholders of the Target Fund should know before voting on the Reorganization
Agreement 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 May , 2005, relating
to this Proxy Statement/ Prospectus (the "Reorganization Statement of Additional
Information") has been filed with the Securities and Exchange Commission (the
"SEC") and is incorporated herein by reference. If you wish to request the
Reorganization Statement of Additional Information, please ask for the
"Reorganization Statement of Additional Information." Copies of each Fund's most
recent annual report and semi-annual report can be obtained on a web site
maintained by Van Kampen Investments Inc. at www.vankampen.com. In addition,
each Fund will furnish, without charge, a copy of the Reorganization Statement
of Additional Information, its most recent annual report and most recent
semi-annual report to any shareholder upon request. Any such request should be
directed to the Van Kampen Client Relations Department by calling (800) 847-2424
(TDD users may call (800) 421-2833) or by writing to the respective Fund at 1
Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, Illinois 60181-5555. The
address of the principal executive offices of the Funds is 1221 Avenue of the
Americas, New York, New York 10020, and the telephone number is (800) 847-2424.
The Funds are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith file reports,
proxy statements, proxy material and other information with the SEC. Materials
filed with the SEC can be reviewed and copied at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549 or downloaded from the SEC's
web site at www.sec.gov. Information on the operation of the SEC's Public
Reference Room may be obtained by calling the SEC at (202) 942-8090. You can
also request copies of these materials, upon payment at the prescribed rates of
a duplicating fee, by electronic request to the SEC's e-mail address
(publicinfo@sec.gov) or by writing the Public Reference Branch, Office of
Consumer Affairs and Information Services, SEC, Washington, DC, 20549-0102.
The Acquiring Fund Common Shares are listed on the New York Stock Exchange
(the "NYSE") and the Chicago Stock Exchange (the "CHX") under the ticker symbol
"VKQ" will continue to be so listed subsequent to the Reorganization. The common
shares of the Target Fund are listed on the NYSE and the CHX under the ticker
symbol "VIG". Reports, proxy statements and other information concerning the
Funds may be inspected at the offices of the NYSE, 20 Broad, New York, New York
10005.
This Proxy Statement/Prospectus serves as a prospectus of the Acquiring Fund
in connection with the issuance of the Acquiring Fund Common Shares and the
Acquiring Fund APS in the Reorganization. No person has been authorized to give
any information or make any representation not contained in this Proxy
Statement/ Prospectus and, if so given or made, such information or
representation must not be relied upon as having been authorized. This Proxy
Statement/Prospectus does not constitute an offer to sell or a solicitation of
an offer to buy any securities in any jurisdiction in which, or to any person to
whom, it is unlawful to make such offer or solicitation.
The Board of Trustees of the Target Fund knows of no business other than that
discussed above that will be presented for consideration at the Special Meeting.
If any other matter is properly presented, it is the intention of the persons
named in the enclosed proxy to vote in accordance with their best judgment.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is May , 2005.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
SUMMARY..................................................... 1
The Proposed Reorganization............................... 1
Background and Reasons for the Proposed Reorganization.... 1
Expenses.................................................. 2
Further Information Regarding the Reorganization.......... 3
RISK FACTORS AND SPECIAL CONSIDERATIONS..................... 4
Market Risk............................................... 4
Interest Rate Risk........................................ 5
Credit Risk............................................... 5
Income Risk............................................... 5
Nonpayment Risk........................................... 6
Call Risk................................................. 6
Municipal Securities Risk................................. 6
Risks of Using Strategic Transactions..................... 6
Manager Risk.............................................. 7
Market Discount Risk...................................... 7
Leverage Risk............................................. 7
Anti-Takeover Provisions.................................. 8
Special Risks Related to Preferred Shares................. 9
COMPARISON OF THE FUNDS..................................... 10
Investment Objectives and Policies........................ 10
Other Investment Practices and Policies................... 13
Investment Restrictions................................... 15
Management of the Funds................................... 18
Additional Information about Common Shares of the Funds... 22
Common Share Price Data................................... 23
Preferred Shares.......................................... 26
Governing Law............................................. 30
Certain Provisions of the Declaration of Trust............ 31
Conversion to Open-End Fund............................... 32
Voting Rights............................................. 33
Financial Highlights...................................... 34
INFORMATION ABOUT THE REORGANIZATION........................ 34
General................................................... 34
Terms of the Reorganization Agreement..................... 36
Material U.S. Federal Income Tax Consequences of the
Reorganization.......................................... 38
Legal Matters............................................. 40
OTHER INFORMATION........................................... 40
Voting Information and Requirements....................... 40
Shareholder Information................................... 41
Section 16(a) Beneficial Ownership Reporting Compliance... 41
Shareholder Proposals..................................... 42
Solicitation of Proxies................................... 42
Other Matters to Come Before the Meeting.................. 42
</Table>
------------------------------------------------------------------------------
SUMMARY
------------------------------------------------------------------------------
The following is a summary of certain information contained elsewhere in this
Proxy Statement/Prospectus and is qualified in its entirety by reference to the
more complete information contained in this Proxy Statement/Prospectus and in
the Reorganization Statement of Additional Information. Shareholders should read
the entire Proxy Statement/Prospectus carefully.
THE PROPOSED REORGANIZATION
The Board of Trustees of the Target Fund, including the trustees who are not
"interested persons" of the Target Fund (as defined in the 1940 Act), has
unanimously approved the Reorganization Agreement. If the shareholders of the
Target Fund approve the Reorganization Agreement, Acquiring Fund Common Shares
and series [ ] Acquiring Fund APS will be issued to holders of Target Fund
Common Shares and Target Fund RP, respectively, in exchange for substantially
all of the assets of the Target Fund and the assumption of substantially all of
the liabilities of the Target Fund. The Target Fund will then terminate its
registration under the 1940 Act and dissolve under applicable state law. The
aggregate net asset value of Acquiring Fund Common Shares received in the
Reorganization will equal the aggregate net asset value of Target Fund Common
Shares held immediately prior to the Reorganization less the costs of the
Reorganization (though you may receive cash for fractional shares) and the
aggregate liquidation preference of Acquiring Fund APS received in the
Reorganization will equal the aggregate liquidation preference of Target Fund RP
held immediately prior to the Reorganization.
BACKGROUND AND REASONS FOR THE PROPOSED REORGANIZATION
The Reorganization seeks to combine two substantially similar funds to achieve
certain economies of scale and other operational efficiencies. Each Fund is
registered as a diversified closed-end management investment company under the
1940 Act. Each Fund invests primarily in investment grade municipal securities.
The investment objective of each Fund is to seek to provide a high level of
current income exempt from federal income tax, consistent with preservation of
capital. The Acquiring Fund invests at least 80% of its total assets in
municipal securities rated or deemed investment grade at the time of investment.
The Target Fund invests at least 80% of its total assets in tax-exempt municipal
securities rated or deemed investment grade at the time of investment. The Funds
are managed by similar investment advisory personnel.
The proposed Reorganization will combine the assets of these similar funds by
reorganizing the Target Fund into the Acquiring Fund. The Board of Trustees of
the Target Fund (the "Target Fund Board"), based upon its evaluation of all
1
relevant information, anticipates that the Reorganization will benefit holders
of Target Fund Common Shares. In particular, the Target Fund Board believes,
based on data presented by Van Kampen Asset Management, investment adviser to
each of the Funds (the "Adviser"), that holders of Target Fund Common Shares
will experience a reduced overall operating expense ratio as a result of the
Reorganization. The combined fund resulting from the Reorganization will have a
larger asset base than either of the Funds has currently; certain fixed
administrative costs, such as costs of printing shareholder reports and proxy
statements, legal expenses, audit fees, mailing costs and other expenses, will
be spread across this larger asset base, thereby lowering the expense ratio for
common shareholders of the combined fund.
EXPENSES
The table below illustrates the anticipated reduction in operating expenses
expected as a result of the Reorganization. The table sets forth (i) the fees
and expenses paid by the Target Fund for the 12-month period ended October 31,
2004, (ii) the fees and expenses paid by the Acquiring Fund for the 12-month
period ended October 31, 2004 and (iii) the pro forma fees and expenses for the
Acquiring Fund for the 12-month period ended October 31, 2004, assuming the
Reorganization had been completed at the beginning of such period.
FEE AND EXPENSE TABLE FOR COMMON SHAREHOLDERS OF THE TARGET FUND
AND THE ACQUIRING FUND AS OF OCTOBER 31, 2004
<Table>
<Caption>
ACTUAL
------------------ PRO FORMA
TARGET ACQUIRING ACQUIRING
FUND FUND FUND
------ --------- ---------
Common Shareholder Transaction Expenses(a):
Maximum Sales Load (as a percentage of offering
price)(b)....................................... None None None
Dividend Reinvestment Plan Fees................... None None None
Annual Expenses (as a percentage of net assets
attributable to Common Shares):
Investment Advisory Fees(c)....................... 0.82% 0.82% 0.82%
Interest Payments on Borrowed Funds............... 0% 0% 0%
Other Expenses.................................... 0.61% 0.24% 0.24%
Total Annual Expenses(c)........................ 1.43% 1.06% 1.06%
</Table>
- ---------------
(a) No information is presented with respect to Preferred Shares because holders
of Preferred Shares do not bear any operating expenses of either Fund and
will not bear any operating expenses of the combined fund.
(b) Common shares purchased in the secondary market may be subject to brokerage
commissions or other charges. No sales load will be charged on the
2
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.
(c) Expense information has been restated to reflect management fees in effect
as of November 1, 2004. If assets attributable to Preferred Shares were
included, the investment advisory fees for each Fund and for the Acquiring
Fund on a pro forma basis would be 0.55%, 0.55% and 0.55% and the Total
Annual Expenses would be 0.96%, 0.71% and 0.71%.
The following example is intended to help you compare the costs of investing
in the Acquiring Fund, both before and pro forma after the Reorganization, with
the costs of investing in the Target Fund. 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:
<Table>
<Caption>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Target Fund........................... $ 15 $45 $78 $171
Acquiring Fund........................ $ 11 $34 $58 $129
Pro Forma -- Acquiring Fund........... $ 11 $34 $58 $129
</Table>
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 SEC regulations. The example
should not be considered a representation of past or future expenses or annual
rates of return. Actual expenses or annual rates of return may be more or less
than those assumed for purposes of the example.
FURTHER INFORMATION REGARDING THE REORGANIZATION
The Target Fund Board has determined that the Reorganization is in the best
interests of holders of Target Fund Common Shares and that the interests of such
shareholders will not be diluted as a result of the Reorganization. Similarly,
the Board of Trustees of the Acquiring Fund has determined that the
Reorganization is in the best interests of holders of Acquiring Fund Common
Shares and that the interests of such shareholders will not be diluted as a
result of the Reorganization. It is not anticipated that the Reorganization will
directly benefit the holders of Preferred Shares of either Fund; however, it is
anticipated that the holders of Preferred Shares of each Fund will not be
adversely affected by the Reorganization and the expenses of the Reorganization
will not be borne by the holders of Preferred Shares of either Fund. As a result
of the Reorganization, however, a shareholder of either Fund will hold a reduced
percentage of ownership in the larger combined fund than he or she did in either
of the separate Funds.
3
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code" or "Code"). If the Reorganization so qualifies, in
general, a shareholder of the Target Fund will recognize no gain or loss upon
the receipt solely of shares of the Acquiring Fund in connection with the
Reorganization. Additionally, the Target Fund will not recognize any gain or
loss as a result of the transfer of all of its assets and liabilities solely in
exchange for the shares of the Acquiring Fund or as a result of its dissolution.
Neither the Acquiring Fund nor its shareholders will recognize any gain or loss
in connection with the Reorganization.
The Target Fund Board requests that shareholders of the Target Fund approve
the proposed Reorganization at the Special Meeting to be held on June 22, 2005.
If shareholders of the Target Fund approve the Reorganization, it is expected
that the closing date of the transaction (the "Closing Date") will be after the
close of business on or about June 30, 2005, but it may be at a different time
as described herein.
The Target Fund Board recommends that you vote "FOR" the proposed
Reorganization.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Because each Fund, under normal market conditions, invests at least 80% of its
assets in investment grade municipal securities, any risks inherent in such
investments are equally applicable to both Funds and will apply to the combined
fund after the Reorganization. The Reorganization itself is not expected to
adversely affect the rights of holders of common shares or Preferred Shares of
either Fund or to create additional risks.
MARKET RISK
Market risk is the possibility that the market values of securities owned by
each Fund will decline. The prices of debt securities tend to fall as interest
rates rise, and such declines tend to be greater among debt securities with
longer maturities. Market risk is often greater among certain types of debt
securities, such as zero coupon bonds which do not make regular interest
payments but are instead bought at a discount to their face values and paid in
full upon maturity. As interest rates change, these securities often fluctuate
more in price than securities that make regular interest payments and therefore
subject the Funds to greater market risk than a fund that does not own these
types of securities. When-issued and delayed delivery transactions are subject
to changes in market conditions from the time of the commitment until
settlement. This may adversely affect the prices or yields of the securities
being purchased. The greater the Funds' outstanding commitments for these
securities, the greater the Funds' exposure to market price fluctuations.
4
INTEREST RATE RISK
Interest rate risk is the risk that prices of municipal securities generally
increase when interest rates decline and decrease when interest rates increase.
Prices of longer-term securities generally change more in response to interest
rate changes than prices of shorter-term securities.
CREDIT RISK
Credit risk refers to an issuer's ability to make timely payments of interest
and principal. The degree of credit risk depends on both the financial condition
of the issuer and the terms of the obligation. The Acquiring Fund invests at
least 80% of total assets in municipal bonds that are rated investment grade by
("S&P") or Moody's Investors Service Inc. ("Moody's") or comparably rated by
another nationally recognized statistical rating organization or unrated
securities considered by the Fund's investment adviser to be of comparable
quality. The Target Fund invests at least 80% of total assets in tax-exempt
municipal bonds that are rated investment grade by S&P or Moody's or comparably
rated by another nationally recognized statistical rating organization or are
unrated securities considered by the Fund's investment adviser to be of
comparable quality. Each Fund may invest up to 20% of its assets in securities
rated below investment grade (but not rated lower than B- by S&P or B3 by
Moody's) or unrated securities considered by the Fund's investment adviser to be
of comparable quality. Therefore, the Funds are subject to a higher level of
credit risk than a fund that invests solely in investment grade securities.
Securities rated BBB by S&P or Baa by Moody's are in the lowest of the four
investment grades and are considered by the rating agencies to be medium-grade
obligations which possess speculative characteristics so that changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity of the issuer to make principal and interest payments than in the case
of higher-rated securities. The credit quality of non-investment grade
securities is considered speculative by recognized rating agencies with respect
to the issuer's continuing ability to pay interest and principal. Lower-grade
securities may have less liquidity and a higher incidence of default than
higher-grade securities. The Funds may incur higher expenditures to protect the
Funds' interests in such securities. The credit risks and market prices of
lower-grade securities generally are more sensitive to negative issuer
developments, such as reduced revenues or increased expenditures, or adverse
economic conditions, such as a recession, than are higher-grade securities.
INCOME RISK
The income shareholders receive from a Fund is based primarily on interest
rates of securities in a Fund's portfolio, which can vary widely over the short-
and long-term. If interest rates drop, your income from such Fund may drop as
well.
5
NONPAYMENT RISK
Although the Funds invest at least 80% of their respective total assets in
municipal securities that are rated investment grade at the time of investment,
municipal securities, like other debt obligations, are subject to the risk of
nonpayment. The ability of issuers of 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 nonpayment
would result in a reduction of income to a Fund and could result in a reduction
in the value of the municipal security experiencing nonpayment and a potential
decrease in the net asset value of the Fund.
CALL RISK
If interest rates fall, it is possible that issuers of securities with high
interest rates will prepay or "call" their securities before their maturity
dates. In this event, the proceeds from the called securities would likely be
reinvested by the Funds in securities bearing the new, lower interest rates,
resulting in a possible decline in the Fund's income and distributions to
shareholders.
MUNICIPAL SECURITIES RISK
Under normal market conditions, the Funds invest primarily in municipal
securities. The yields of municipal securities may move differently and
adversely compared to the yields of overall debt securities markets. Although
the interest received on municipal securities generally is exempt from federal
income tax, each Fund may invest all or a substantial portion of its total
assets in municipal securities that pay interest subject to the federal
alternative minimum tax. In addition, there could be changes in applicable tax
laws or tax treatments that reduce or eliminate the current federal income tax
exemption generally applicable to interest received on municipal securities or
otherwise adversely affect the current federal or state tax status of municipal
securities.
RISKS OF USING STRATEGIC TRANSACTIONS
Each Fund may engage in certain transactions ("Strategic Transactions")
designed to, among other things, reduce its exposure to interest rate movements.
For example, each Fund may purchase and sell exchange-listed and over-the-
counter put and call options on securities, financial futures and other
financial instruments, purchase and sell financial futures contracts and enter
into various interest rate transactions such as swaps, caps, floors or collars.
If a Fund incorrectly forecasts market values, interest rates or other factors,
that Fund's performance could suffer as a result of its Strategic Transactions.
Each Fund also may suffer a loss if the other party to the Strategic Transaction
fails to meet its obligations. The Funds are not required to use Strategic
Transactions and may choose not to do so.
6
MANAGER RISK
As with any managed fund, the investment adviser to each Fund may not be
successful in selecting the best-performing securities or investment techniques,
and a Funds' performance may lag behind that of similar funds.
MARKET DISCOUNT RISK
Whether investors will realize gains or losses upon the sale of shares of a
Fund will depend upon the market price of the shares at the time of sale and the
price at which the shares were purchased, which may be less or more than such
Fund's net asset value per share. Since the market price of the shares will be
affected by such factors as the relative demand for and supply of the shares in
the market, general market and economic conditions and other factors beyond the
control of the Funds, the Funds cannot predict whether shares of the Funds will
trade at, below or above net asset value. Shares of closed-end funds often trade
at a discount to their net asset values, and the Funds' shares may trade at such
a discount.
LEVERAGE RISK
Use of leverage, through the issuance of Preferred Shares, involves certain
risks to holders of common shares of the Funds. For example, each Fund's
issuance of Preferred Shares may result in higher volatility of the net asset
value of its common shares and potentially more volatility in the market value
of its common shares. In addition, changes in the short-term and medium-term
dividend rates on, and the amount of taxable income allocable to, the Preferred
Shares of a Fund will affect the yield to holders of common shares of such Fund.
In certain circumstances, when a Fund is required to allocate taxable income to
holders of its Preferred Shares, such 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 such Fund were not leveraged as long as each Fund, while
accounting for its costs and operating expenses, is able to realize a higher net
return on its investment portfolio than the then-current dividend rate (and any
Additional Dividend) paid on its Preferred Shares. Similarly, since a pro rata
portion of each Fund's net realized capital gains is generally payable to
holders of the each common shares, the use of leverage will increase the amount
of such gains distributed to holders of each 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
7
medium-term rates may substantially increase relative to the long-term
obligations in which each Fund may be invested. To the extent that the current
dividend rate (and any Additional Dividend) on a Fund's Preferred Shares
approaches the net return on such Fund's investment portfolio, the benefit of
leverage to holders of common shares of the Fund will be decreased. If the
current dividend rate (and any Additional Dividend) on the Preferred Shares were
to exceed the net return on a Fund's portfolio, holders of common shares of such
Fund would receive a lower rate of return than if the Fund were not leveraged.
Similarly, since both the costs of issuing Preferred Shares and any decline in
the value of a Fund's investments (including investments purchased with the
proceeds from any Preferred Shares offering) will be borne entirely by holders
of such Fund's common shares, the effect of leverage in a declining market would
result in a greater decrease in net asset value to holders of common shares than
if such Fund were not leveraged. If a Fund is liquidated, holders of such Fund's
Preferred Shares will be entitled to receive liquidating distributions before
any distribution is made to holders of common shares of that Fund.
In an extreme case, a decline in net asset value could affect a Fund's ability
to pay dividends on its common shares. Failure to make such dividend payments
could adversely affect a Fund's qualification as a regulated investment company
under the federal tax laws. However, each Fund intends to take all measures
necessary to make required Common Share dividend payments. If either Fund's
current investment income is ever insufficient to meet dividend payments on
either its common shares or its Preferred Shares, each Fund may have to
liquidate certain of its investments. In addition, each Fund has the authority
to redeem its Preferred Shares for any reason and may be required to redeem all
or part of its Preferred Shares in the following circumstances:
- if the asset coverage for the preferred shares declines below 200%, either
as a result of a decline in the value of the Fund's portfolio investments or
as a result of the repurchase of common shares in tender offers or
otherwise, or
- in order to maintain the asset coverage guidelines established by Moody's
and S&P in rating the preferred shares.
Redemption of the Preferred Shares or insufficient investment income to make
dividend payments, may reduce the net asset value of each Fund's common shares
and require each Fund to liquidate a portion of its investments at a time when
it may be disadvantageous to do so.
ANTI-TAKEOVER PROVISIONS
The Declaration of Trust of each Fund (in each case, the "Declaration of
Trust") includes provisions that could limit the ability of other entities or
persons to acquire control of that Fund or to change the composition of its
Board of Trustees. Such
8
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 either Fund.
SPECIAL RISKS RELATED TO PREFERRED SHARES
AUCTION/REMARKETING RISK. The dividend rate for the APS normally is set
through an auction process. In the auction, preferred shareholders may indicate
the dividend rate at which they would be willing to hold or sell their shares or
purchase additional shares. An auction fails if there are more APS offered for
sale than there are buyers, in which case preferred shareholders may not be able
to sell their APS. Also, if preferred shareholders place bids to retain shares
at an auction only at a specified dividend rate and that rate exceeds the rate
set at the auction, they will not retain their shares. Additionally, if
preferred shareholders buy shares or elect to retain shares without specifying a
dividend rate below which they would not wish to buy or continue to hold those
APS, they could receive a lower rate of return on their shares than the market
rate. Finally, the dividend period for the APS may be changed by the Acquiring
Fund, subject to certain conditions, including notice to preferred shareholders,
which could also affect the liquidity of an investment in APS.
The dividend rate on the RP of the Target Fund is set using a remarketing
process, which has separate risks. There can be no assurance that the
remarketing agent will be able to remarket all shares of RP tendered in a
remarketing. If any shares of RP tendered in a remarketing therefor are not
remarketed, a holder thereof may be required to hold some or all of its shares
at least until the end of the next dividend period therefor or to sell its
shares outside a remarketing. In such case, the remarketing procedures may
require an allocation of shares of RP on a pro rata basis to the extent
practicable, or by lot, as determined by the remarketing agent in its sole
discretion, which may result in a holder's selling a number of shares of RP that
is less than the number of shares of RP specified in such holder's tender order.
Additionally, while a holder or prospective purchaser of RP may informally
indicate to the remarketing agent its dividend rate preferences, any such notice
given to the remarketing agent to tender or hold shares for a particular
dividend period is irrevocable and may not be conditioned upon the level at
which applicable dividend rates are set. Therefore, the actual applicable
dividend rate for such dividend period may be greater than or less than the rate
indicated and will not be determined until after a holder is required to elect
to hold or tender its shares.
SECONDARY MARKET RISK. Broker-dealers may maintain a secondary trading market
in the Preferred Shares outside of auctions or remarketings, as applicable;
however, they are not obligated to do so and there can be no assurance that such
a secondary market will develop or, if it does develop, that it will provide
preferred shareholders with a liquid trading market. It may not be possible to
sell preferred
9
shares between auctions or remarketings, as applicable, or it may only be
possible to sell them for a price less than their liquidation preference plus
any accumulated dividends. An increase in the level of interest rates likely
will have an adverse effect on the secondary market price of the Preferred
Shares. Preferred Shares may only be transferred outside of auctions or
remarketings to or through broker-dealers or other persons as the Fund permits.
RATINGS AND ASSET COVERAGE RISKS. Although the Preferred Shares of each Fund
have been rated "Aaa" by Moody's and "AAA" by S&P, such ratings do not eliminate
or necessarily mitigate the risks of investing in Preferred Shares. Moody's or
S&P could downgrade its rating of the Preferred Shares or withdraw its rating at
any time, which may make the Preferred Shares less liquid at an auction or in
the secondary market. If a Fund fails to satisfy its asset coverage ratios, it
will be required to redeem a sufficient number of Preferred Shares in order to
return to compliance with the asset coverage ratios. A Fund may voluntarily
redeem Preferred Shares under certain circumstances in order to meet asset
coverage tests.
COMPARISON OF THE FUNDS
INVESTMENT OBJECTIVES AND POLICIES
The Funds have the same investment objective and substantially similar
investment policies. 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 intends to achieve its objective primarily by investing in a
diversified portfolio of municipal securities which the investment adviser
believes does not involve undue risk to income or principal. Under normal market
conditions, the Acquiring Fund will invest at least 80% of its total assets in
municipal securities rated at least investment grade at the time of investment
or unrated securities considered by the Fund's investment adviser to be of
comparable quality and the Target Fund will invest at least 80% of its total
assets in tax-exempt municipal securities rated investment grade at the time of
investment or unrated securities considered by the Fund's investment adviser to
be of comparable quality. Investment grade securities are rated BBB or higher by
S&P or Baa or higher by Moody's in the case of long-term obligations, and have
equivalent ratings in the case of short-term obligations. Securities rated BBB
by S&P are regarded by S&P as having an adequate capacity to pay interest and
repay principal; whereas such securities normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely, in the opinion of S&P, to lead to a weakened capacity to pay interest
and repay principal for debt in this category than in higher rated categories.
Securities rated Baa by Moody's are considered by Moody's as medium grade
obligations; they are neither highly protected nor poorly secured; interest
payments
10
and principal security appear to Moody's to be adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time; in the opinion of Moody's, they lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Up to 20% of each Fund's total assets may be invested
in tax-exempt municipal securities rated between BB+ and B- (inclusive) by S&P
or between Ba1 and B3 (inclusive) by Moody's (or equivalently rated short-term
obligations) and unrated tax-exempt securities that the Adviser believes are of
comparable quality. Each Fund may be more dependent upon the Adviser's
investment analysis of unrated municipal securities than is the case with
respect to rated 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.
MUNICIPAL SECURITIES. Municipal securities are obligations issued by or on
behalf of states, certain territories and possessions of the United States and
the District of Columbia and their political subdivisions, agencies and
instrumentalities, the interest on which is, in the opinion of bond counsel or
other counsel to the issuer of such securities, at the time of issuance, not
includable in gross income for regular federal income tax purposes. It is a
fundamental policy for the Target Fund that at least 80% of the Target Fund's
net assets be invested in tax-exempted municipal securities and for the
Acquiring Fund that at least 80% of the Acquiring Target Fund's net assets be
invested in municipal securities. Subject to the limitations set forth in this
Proxy Statement/Prospectus, the Funds may engage in certain hedging transactions
and may purchase and sell put and call options on indices of municipal
securities. Such transactions will not be treated as investments in tax-exempt
securities for the purpose of the 80% test. The Funds have not established any
limit on the percentage of their respective portfolios that may be invested in
municipal securities that pay interest 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.
Municipal securities include long-term obligations, often called municipal
bonds, as well as short-term municipal notes, participation certificates,
municipal leases and tax-exempt commercial paper. During ordinary market
conditions, longer-term municipal securities generally provide a higher yield
than short-term municipal securities of similar credit quality and therefore the
Funds generally expect to invest
11
primarily in longer-term municipal securities. The Funds may, however, invest in
short-term municipal securities when yields are greater than yields available on
long-term municipal securities, to stabilize net asset value, or for temporary
defensive purposes.
The two principal classifications of municipal bonds are "general obligation"
bonds and "revenue" or "special obligation" bonds, which include "industrial
revenue bonds." General obligation bonds are secured by the issuer's pledge of
its faith, credit and taxing power for the payment of principal and interest,
and accordingly the capacity of the issuer of a general obligation bond as to
the timely payment of interest and the repayment of principal when due is
affected by the issuer's maintenance of its tax base. Revenue or special
obligation bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special tax or other specific revenue source such as from the user of the
facility being financed; accordingly the timely payment of interest and, the
repayment of principal in accordance with the terms of the revenue or special
obligation bond is a function of the economic viability of such facility or such
revenue source. Although the ratings of S&P or Moody's of the municipal
securities in the Funds' portfolio are relative and subjective, and are not
absolute standards of quality, such ratings reflect the assessment of S&P or
Moody's, as the case may be, of the issuer's ability, or the economic viability
of the special revenue source, with respect to the timely payment of interest
and the repayment of principal in accordance with the terms of the obligation.
Municipal securities may have fixed or variable interest rates. The Funds may
purchase floating and variable rate demand notes, which are municipal securities
normally having a stated maturity in excess of one year, but which permit the
holder to tender the notes for purchase at the principal amount thereof. The
interest rate on a floating rate demand note is based on a known lending rate,
such as a bank's prime rate, and is adjusted each time such rate is adjusted.
The interest rate demand note is adjusted at specified intervals. There
generally is no secondary market for these notes, although they may be tendered
for redemption at face value. Each such note purchased by the Funds will meet
the criteria established for the purchase of municipal securities.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(collectively called "lease obligations") of municipal authorities or entities.
Although lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged, a lease
obligation ordinarily is backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is
12
appropriated for such purpose on a yearly basis. Although "non-appropriation"
lease obligations are secured by the leased property, disposition of the
property in the event of foreclosure might prove difficult.
A Fund generally will not invest more than 25% of its total assets in any
industry, nor will either Fund generally invest more than 5% of its assets in
the securities of any single issuer. Governmental issuers of municipal
securities are not considered part of any "industry." However, municipal
securities backed only by the assets and revenues of nongovernmental users may
for this purpose be deemed to be issued by such nongovernmental users, and the
25% limitation would apply to such obligations. It is nonetheless possible that
the Funds may invest more than 25% of assets in a broader segment of the
municipal securities market, such as revenue obligations of hospitals and other
health care facilities, housing agency revenue obligations or airport revenue
obligations if the Adviser determines that the yields available from obligations
in a particular segment of the market justify the additional risks associated
with a larger investment in such segment. Although such obligations could be
supported by the credit of governmental users or by the credit of
nongovernmental users engaged in a number of industries, economic, business,
political and other developments generally affecting the revenues of such users
(for example, proposed legislation or pending court decisions affecting the
financing of such projects and market factors affecting the demand for their
services or products) may have a general adverse effect on all municipal
securities in such a market segment. Additionally, the Target Fund reserves the
right to invest more than 25% of its assets in industrial development bonds or
in issuers located in the same state, although it has no present intention to
invest more than 25% of its assets in issuers located in the same state.
OTHER INVESTMENT PRACTICES AND POLICIES
In connection with the investment objective and policies described above, each
Fund may, but is not required to, utilize various other investment strategies as
described below to earn income, to facilitate portfolio management and to
mitigate risk. Such strategies are generally accepted by modern portfolio
managers and are regularly utilized by many investment companies and other
institutional investors. These investment practices entail risks. Although the
Adviser believes that these investment practices may further the Funds'
respective investment objectives, no assurance can be given that these
investment practices will achieve this result.
SECURITIES OPTIONS TRANSACTIONS, INTEREST RATE AND OTHER HEDGING TRANSACTIONS.
The Fund may also purchase and sell options on municipal securities and may
engage in interest rate and other hedging transactions, such as purchasing and
selling financial futures contracts and related options thereon. These
investment practices entail risks.
13
RATING AGENCY LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. For as long as
Preferred Shares are rated by Moody's, a Fund will engage in transactions in
options on securities, futures contracts based on the Municipal Index or
Treasury Bonds and options on such futures contracts (collectively "Moody's
Hedging Transactions") only when consistent with the provisions set forth in the
"Certificate of Vote," unless it receives written confirmation from Moody's that
engaging in such transactions would not impair the ratings then assigned to the
Preferred Shares by Moody's. For as long as Preferred Shares are rated by S&P, a
Fund will not buy or sell futures contracts or options thereon or write put
options or call options on portfolio securities unless it receives written
confirmation from S&P that engaging in such transactions will not impair the
ratings then assigned to the Preferred Shares by S&P, except that a Fund may buy
and sell futures contracts based on the Municipal Index or Treasury Bonds, may
purchase put and call options on such contracts and may write covered call
options and secured put options on portfolio securities (collectively "S&P
Hedging Transactions").
"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 a 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 or lower than yields on the municipal securities obtained
pursuant to such transactions. Because a Fund 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 a Fund missing the opportunity of
obtaining a price or yield considered to be advantageous. When a Fund is the
buyer in such a transaction, however, it will maintain, in a segregated account
with its custodian, cash or liquid portfolio securities having an aggregate
value equal to the amount of such purchase commitments until payment is made. A
Fund will make commitments to purchase municipal securities on such basis only
with the intention of actually acquiring these securities, but a Fund may sell
such securities prior to the settlement date if such sale is considered to be
advisable. To the extent a Fund engages in "when issued" and "delayed delivery"
transactions, it will do so for the purpose of acquiring securities for a Fund's
portfolio consistent with a Fund's investment objective and policies and not for
the purpose of investment leverage. No specific limitation exists as to the
percentage of a Fund's assets which may be used to acquire securities on a "when
issued" or "delayed delivery" basis.
OTHER PRACTICES. Each Fund has no restrictions on the maturity of municipal
securities in which it may invest. Each Fund will seek to invest in municipal
securities of such maturities that, in the judgment of a Fund and the Adviser,
will provide a high level of current income consistent with market conditions.
14
INVESTMENT RESTRICTIONS
The Funds' investment objectives, the Target Fund's policy of investing at
least 80% of its net assets in tax-exempted municipal securities, the Acquiring
Fund's policy of investing at least 80% of its net assets in municipal
securities and the following investment restrictions are fundamental and cannot
be changed without the approval of the holders of a majority of applicable
Fund's outstanding common shares and Preferred Shares (defined in the 1940 Act
as the lesser of (i) more than 50% of the Fund's outstanding common shares and
of the outstanding Preferred Shares, voting by class, or (ii) 67% of such Fund's
outstanding common shares and of the outstanding Preferred Shares, voting by
class, present at a meeting at which the holders of more than 50% of such
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:
1. 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 then 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 except that the Fund may purchase
securities of other investment companies to the extent permitted by (i)
1940 Act, as amended from time to time, (ii) the rules and regulations
promulgated by the Securities and Exchange Commission under the 1940 Act,
as amended from time to time or, (iii) an exemption or other relief from
the provisions of the 1940 Act.
2. Invest more than 25% of its assets in a single industry; however, as
described above under "Investment Objectives and Policies," the Fund may
from time to time invest more than 25% of its assets in a particular
segment of the municipal bond market.
3. Issue senior securities, as defined in the 1940 Act, other than the APS in
the case of the Acquiring Fund, RP in the case of the Target Fund, or other
preferred shares of beneficial interest, except to the extent such issuance
might be involved with borrowings described under subparagraph (4) below or
with respect to hedging transactions or the writing of options within
limits described in this Proxy Statement/Prospectus.
4. Borrow money, except for temporary or emergency purposes from banks or for
repurchase of its 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
15
mortgage, pledge or hypothecate any assets except in connection with a
borrowing. The Fund will not purchase portfolio securities during any
period in which such borrowings exceed 5% of the total asset value of the
Fund. Notwithstanding this investment restriction, the Fund may enter into
"when issued" and "delayed delivery" transactions as described below under
the heading "Investment Objectives and Policies " in this Proxy
Statement/Prospectus.
5. Buy any securities "on margin." Neither the deposit of initial or variation
margin in connection with hedging 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 financial futures or options,
except as described under the heading "Investment Objectives and Policies"
and in Appendix B in the Funds' Common Share Prospectuses.
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. Invest in securities of other investment companies except as part of a
merger, reorganization or other acquisition except to the extent permitted
by (i) 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the Securities and Exchange Commission under the
1940 Act, as amended from time to time or, (iii) an exemption or other
relief from the provisions of the 1940 Act.
Additionally, the Acquiring Fund as a fundamental policy may not:
1. Make loans of money or property to any person, except to the extent the
obligations in which the Fund may invest are considered to be loans.
2. Make investments for the purpose of exercising control or participation in
management, except that the acquiring Fund may purchase securities of other
investment companies to the extent permitted by (i) 1940 Act, as amended
from time to time, (ii) the rules and regulations promulgated by the
Securities and Exchange Commission under the 1940 Act, as amended from time
to time or, (iii) an exemption or other relief from the provisions of the
1940 Act.
3. Purchase or sell real estate, commodities or commodity contracts, except to
the extent the municipal securities in which the Fund may invest are
considered to be interests in real estate, and except to the extent that
financial futures and related options in which the Fund may invest are
considered to be commodities or commodities contracts.
16
4. Invest in equity interests in oil, gas or other mineral exploration or
development programs except pursuant to the exercise by the Fund or its
rights under agreements relating to municipal securities.
Additionally, the Target Fund as a fundamental policy may not:
1. Invest in illiquid investments, including securities which are subject to
legal or contractual restrictions on resale or for which there is no
readily available market (e.g., trading in the securities is suspended or,
in the case of unlisted securities, market makers do not exist or will not
entertain bids or offers), if more than 25% of the Fund's assets (taken at
market value) would be invested in such securities. The Fund does not treat
investments in caps, swaps and floors as illiquid investments.
2. Make loans of money or properly 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.
3. 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 securities owned by the Fund would be deemed to
constitute such control or participation except that the Fund may purchase
securities of other investment companies to the extent permitted by (i)
1940 Act, as amended from time to time, (ii) the rules and regulations
promulgated by the Securities and Exchange Commission under the 1940 Act,
as amended from time to time or, (iii) an exemption or other relief from
the provisions of the 1940 Act.
4. Purchase or sell real estate, commodities or commodity contracts, except to
the extent the securities the Target Fund may invest in are considered to
be interests in real estate, commodities or commodities contracts or to the
extent the Target Fund exercises its rights under agreements relating to
such securities (in which case the Target Fund may liquidate real estate
acquired as a result of a default on a mortgage), and except to the extent
the hedging and risk management transactions the Target Fund may engage in
are considered to be commodities or commodities contracts.
5. Invest in equity interests in oil, gas or other mineral exploration or
development programs.
17
MANAGEMENT OF THE FUNDS
THE BOARDS. The Board of each Fund is responsible for the overall supervision
of the operations of its respective Fund and performs the various duties imposed
on trustees of investment companies by the 1940 Act and under applicable state
law.
THE ADVISER. The investment adviser for each Fund is Van Kampen Asset
Management. The Adviser is a wholly owned subsidiary of Van Kampen Investments
Inc. ("Van Kampen Investments"). Van Kampen Investments is a diversified asset
management company that administers more than [three million] retail investor
accounts, has extensive capabilities for managing institutional portfolios and
has more than $96 billion under management or supervision as of January 31,
2005. Van Kampen Investments has over 40 open-end funds, more than 30 closed-end
funds and more than 2,700 unit investment trusts that are distributed by
authorized dealers nationwide. Van Kampen Investments is an indirect wholly
owned subsidiary of Morgan Stanley, a preeminent global financial services firm
that maintains leading market positions in each of its three primary businesses:
securities, asset management and credit services. Morgan Stanley is a full
service securities firm engaged in securities trading and brokerage activities,
investment banking, research and analysis, financing and financial advisory
services. The principal business address of the Adviser and Van Kampen
Investments is 1221 Avenue of the Americas, New York, New York 10020.
Pursuant to separate investment advisory agreements between each Fund and the
Adviser, the Acquiring Fund pays the Adviser a monthly fee at the annual rate of
0.55% of such Fund's average daily managed assets and the Target Fund pays the
Adviser a monthly fee at the annual rate of 0.55% of such Fund's average daily
net assets. Effective November 1, 2004, the investment advisory fee paid by each
Fund was reduced from 0.60% to 0.55%. Subsequent to the Reorganization, the
Adviser will continue to receive compensation at the rate of 0.55% of the
average daily managed assets, including assets attributable to Preferred Shares,
of the combined fund.
Under a separate Accounting Services and Legal Services agreement, the Adviser
provides accounting and legal services to each Fund. The Adviser allocates the
cost of such services to each Fund.
PORTFOLIO MANAGEMENT. Each Fund's portfolio is managed by the Adviser's
Municipal Fixed Income team. The team is made up of established investment
professionals. Current members of the team include Thomas Byron, Vice President;
Robert Wimmel, Vice President; and John Reynoldson, Executive Director.
Thomas Byron has worked for the Adviser since [ ] and began managing
the Funds in [ ]. Robert Wimmel has worked for the Adviser since
[ ] and began managing the Funds in [ ]. John Reynoldson has worked
for the Adviser since [ ] and began managing the Funds in [ ].
18
Thomas Byron is the lead portfolio manager of each Fund. Robert Wimmel and
John Reynoldson are co-portfolio managers. Members of the team collaborate to
manage the assets of each Fund.
The Reorganization Statement of Additional Information provides additional
information about the portfolio managers' compensation, other accounts managed
by the portfolio managers and the portfolio managers' ownership of securities in
the Acquiring Fund.
PORTFOLIO TRANSACTIONS WITH AFFILIATES. The Adviser may place portfolio
transactions, to the extent permitted by law, with brokerage firms affiliated
with the Funds and the Adviser and with brokerage firms participating in the
distribution of the Funds' shares if it reasonably believes that the quality of
execution and the commission are comparable to that available from other
qualified firms.
LEGAL PROCEEDINGS. The Adviser, certain affiliates of the Adviser, certain
investment companies advised by the Adviser or its affiliates were named as
defendants in a number of similar class action complaints which were
consolidated. The consolidated amended complaint also names as defendants
certain individual trustees and directors of certain investment companies
advised by affiliates of the Adviser; the complaint does not, however, name the
individual trustees of any Van Kampen funds. The complaint generally alleges
that defendants violated their statutory disclosure obligations and fiduciary
duties by failing properly to disclose (i) that the Adviser and certain
affiliates of the Adviser allegedly offered economic incentives to brokers and
others to steer investors to the funds advised by the Adviser or its affiliates
rather than funds managed by other companies, and (ii) that the funds advised by
the Adviser or its affiliates allegedly paid excessive commissions to brokers in
return for their alleged efforts to steer investors to these funds. The
complaint seeks, among other things, unspecified compensatory damages,
rescissionary damages, fees and costs. The defendants have moved to dismiss this
action and otherwise intend to defend it vigorously. While the defendants
believe that they have meritorious defenses, the ultimate outcome of this matter
is not presently determinable at this early stage of litigation.
The Adviser and certain affiliates of the Adviser are also named as defendants
in a derivative suit which additionally names as defendants individual trustees
of certain Van Kampen funds; the named investment companies are listed as
nominal defendants. The complaint alleges that defendants caused the Van Kampen
funds to pay economic incentives to a proprietary sales force to promote the
sale of proprietary mutual funds. The complaint also alleges that the Van Kampen
funds paid excessive commissions to Morgan Stanley and its affiliates in
connection with the sales of the funds. The complaint seeks, among other things,
the removal of the current trustees of the funds, rescission of the management
contracts for the funds, disgorgement of profits by Morgan Stanley and its
affiliates and monetary damages. This complaint has been coordinated with the
action described in the preceding
19
paragraph. The defendants have moved to dismiss this action and otherwise intend
to defend it vigorously. This action is currently stayed until the later of (i)
a ruling on the motion to dismiss the action described in the preceding
paragraph, or (ii) a ruling on a motion to dismiss the claims described in the
next paragraph. While the defendants believe that they have meritorious
defenses, the ultimate outcome of this matter is not presently determinable at
this early stage of litigation.
The plaintiff in the action described in the preceding paragraph has
instituted a new derivative action against the same defendants alleging that the
defendants failed to detect and/or prevent market timing and late trading of the
Van Kampen funds by third parties. The defendants expect to move to dismiss this
new action and believe that they will have meritorious defenses to the claims
alleged.
The Adviser and one of the investment companies advised by the Adviser are
named as defendants in a class action complaint generally alleging that the
defendants breached their duties of care to long-term shareholders of the
investment company by valuing portfolio securities at the closing prices of the
foreign exchanges on which they trade without accounting for significant market
information that became available after the close of the foreign exchanges but
before calculation of net asset value. As a result, the complaint alleges,
short-term traders were able to exploit stale pricing information to capture
arbitrage profits that diluted the net asset value of shares held by long-term
investors. The complaint seeks unspecified compensatory damages, punitive
damages, fees and costs. Defendants have appealed an order of the federal court
remanding this case to state court. The federal appeals court has issued a stay
of discovery in the state court during pendency of the appeal. Prior to issuance
of the stay, the state court denied defendants' motion to dismiss. While the
defendants believe that they have meritorious defenses, the ultimate outcome of
this matter is not presently determinable at this early stage of litigation.
The Adviser and the individual trustees of certain Van Kampen funds are named
as defendants in a recently filed class action complaint that alleges that the
defendants breached various fiduciary and statutory duties to investors by
failing to ensure that the funds participated in securities class action
settlements involving securities in the funds' portfolios. The complaint seeks
compensatory and punitive damages. None of the funds are named as defendants,
and no claims are asserted against them. The defendants expect to move to
dismiss the complaint and believe they have meritorious defenses.
OTHER SERVICE PROVIDERS
THE ADMINISTRATOR. Van Kampen Funds Inc. (the "Administrator") serves as
administrator to the Acquiring Fund. The principal business address of the
Administrator is 1221 Avenue of the Americas, New York, New York 10020. The
administrative services provided by the Administrator include record keeping and
20
reporting responsibilities with respect to such Fund's portfolio and Preferred
Shares and providing certain services to shareholders. Prior to June 1, 2004,
the Acquiring Fund paid the Administrator a monthly administrative fee at the
annual rate of 0.05% of the average net assets of such Fund. Effective June 1,
2004, the administrative fee was reduced from 0.05% to 0.00%. Subsequent to the
Reorganization, the Administrator will continue to serve as Administrator to the
combined fund at the reduced rate.
THE COMMUNICATION SUPPORT SERVICES PROVIDER. Van Kampen Funds Inc. (the
"Support Service Provider") serves as the communications support service
provider to the Target Fund. The principal business address of the Support
Service Provider is 1221 Avenue of the Americas, New York, New York 10020. The
communications support services include telephonic and written correspondence
with shareholders and brokers. The Target Fund does not pay any fee to the
Support Service Provider but bears certain expenses incurred by the Support
Service Provider.
CUSTODIAN AND TRANSFER AGENT. State Street Bank and Trust Company is the
custodian, transfer agent, dividend paying agent and registrar for the common
shares of each of the Funds. Its principal business address is P.O. Box 43071,
Providence, Rhode Island, 02940-3071. Deutsche Bank is the auction agent for the
Acquiring Fund APS and is the paying agent with respect to the Target Fund RP.
Its principal business address is 280 Park Avenue 9th Floor, New York, New York
10017. Merrill Lynch Capital Markets is the remarketing agent for the Target
Fund RP. Its principal business address is 4 World Financial Center, 250 Vesey
Street, New York, New York 10080.
CAPITALIZATION
The Board of Trustees of each Fund may authorize separate classes of shares
together with such designation of preferences, rights, voting powers,
restrictions, limitations, qualifications or terms as may be determined from
time to time by the trustees.
21
The table below sets forth the capitalization of the Target Fund and the
Acquiring Fund as of October 31, 2005, and the pro forma capitalization of the
combined fund as if the Reorganization had occurred on that date.
CAPITALIZATION AS OF OCTOBER 31, 2004
(AMOUNT IN THOUSANDS)
<Table>
<Caption>
ACQUIRING FUND TARGET FUND PRO FORMA
(ACTUAL) (ACTUAL) ACQUIRING FUND
-------------- ----------- --------------
NET ASSETS CONSIST OF:
Common Shares ($.01 par value)*..... 364 48 394
Paid in surplus..................... 538,413 51,563 589,739
Net unrealized appreciation......... 61,956 5,436 67,392
Accumulated undistributed net
investment income................. 3,814 (166) 3,648
Accumulated net realized loss....... (914) (6,732) (7,646)
NET ASSETS APPLICABLE TO COMMON
SHARES............................ 603,633 50,149 653,527
PREFERRED SHARES ($.01 par value,
with liquidation preference of
$25,000 and $100,000 for Acquiring
Fund and Target Fund,
respectively)*.................... 300,000 25,000 325,000
NET ASSETS INCLUDING PREFERRED
SHARES............................ $903,633 $75,144 $978,527
</Table>
- ---------------
* Based on the number of outstanding shares listed in "Outstanding Securities of
the Funds" table below.
OUTSTANDING SECURITIES OF THE FUNDS AS OF OCTOBER 31, 2004
<Table>
<Caption>
AMOUNT OUTSTANDING
AMOUNT HELD EXCLUSIVE OF AMOUNT
FOR ITS OWN SHOWN IN PREVIOUS
TITLE OF CLASS AMOUNT AUTHORIZED ACCOUNT COLUMN
- -------------- ----------------- ----------- -------------------
TARGET FUND (ACTUAL)
Common Shares............... Unlimited 0 4,839,000
Preferred Shares............ 100,000,000 0 250
ACQUIRING FUND (ACTUAL)
Common Shares............... Unlimited 0 36,365,393
Preferred Shares............ 100,000,000 0 12,000
</Table>
ADDITIONAL INFORMATION ABOUT COMMON SHARES OF THE FUNDS
GENERAL. Common shareholders of a Fund are entitled to share equally in
dividends declared by the Fund's Board of Trustees payable to holders of the
common shares and in the net assets of the Fund available for distribution to
22
holders of the common shares after payment of the preferential amounts payable
to preferred shareholders. Common shareholders do not have preemptive or
conversion rights and a Fund's common shares are not redeemable. The outstanding
common shares of each Fund are fully paid and nonassessable (except as described
under "Governing Law" below). So long as any Preferred Shares of a Fund are
outstanding, holders of the Fund's common shares will not be entitled to receive
any dividends or other distributions from the Fund unless all accumulated
dividends on the Fund's outstanding Preferred Shares have been paid, and unless
asset coverage (as defined in the 1940 Act) with respect to such Preferred
Shares would be at least 200% after giving effect to such distributions.
PURCHASE AND SALE. Purchase and sale procedures for the common shares of each
of the Funds are identical. Investors typically purchase and sell common shares
of the Funds through a registered broker-dealer on the NYSE or CHX, thereby
incurring a brokerage commission set by the broker-dealer. Alternatively,
investors may purchase or sell common shares of the Funds through privately
negotiated transactions with existing shareholders.
COMMON SHARE PRICE DATA
The following table sets forth the high and low sales prices for common shares
of each Fund on the NYSE for each full quarterly period within each Fund's two
most recent fiscal years and for the first fiscal quarter in the current fiscal
year for each Fund, along with the net asset value and discount or premium to
net asset value for each quotation.
ACQUIRING FUND
<Table>
<Caption>
NET ASSET PREMIUM NET ASSET PREMIUM
QUARTERLY PERIOD ENDING HIGH PRICE VALUE (DISCOUNT) LOW PRICE VALUE (DISCOUNT)
- ----------------------- ---------- --------- ---------- --------- --------- ----------
January 31, 2005...... $14.92 $16.57 $(1.65) $14.10 $16.28 $(2.18)
October 31, 2004...... $14.90 $16.60 $(1.70) $14.30 $16.25 $(1.95)
July 31, 2004......... $14.18 $16.04 $(1.86) $13.30 $15.40 $(2.10)
April 30, 2004........ $15.74 $17.05 $(1.31) $13.79 $16.05 $(2.26)
January 31, 2004...... $15.42 $16.71 $(1.29) $14.53 $16.42 $(1.89)
October 31, 2003...... $14.80 $16.43 $(1.63) $13.93 $15.69 $(1.76)
July 31, 2003......... $15.75 $17.11 $(1.36) $14.02 $15.69 $(1.67)
April 30, 2003........ $15.05 $16.50 $(1.45) $14.20 $16.25 $(2.05)
January 31, 2003...... $14.50 $16.21 $(1.71) $13.90 $15.92 $(2.02)
</Table>
23
TARGET FUND
<Table>
<Caption>
NET ASSET PREMIUM NET ASSET PREMIUM
QUARTERLY PERIOD ENDING HIGH PRICE VALUE (DISCOUNT) LOW PRICE VALUE (DISCOUNT)
- ----------------------- ---------- --------- ---------- --------- --------- ----------
January 31, 2005...... $9.18 $10.37 $(1.19) $8.65 $10.17 $(1.52)
October 31, 2004...... $9.15 $10.29 $(1.14) $8.77 $10.16 $(1.39)
July 31, 2004......... $8.77 $10.05 $(1.28) $8.34 $9.84 $(1.50)
April 30, 2004........ $9.73 $10.65 $(0.92) $8.52 $10.01 $(1.49)
January 31, 2004...... $9.48 $10.40 $(0.92) $8.91 $10.15 $(1.24)
October 31, 2003...... $8.98 $10.11 $(1.13) $8.55 $9.82 $(1.27)
July 31, 2003......... $9.55 $10.56 $(1.01) $8.74 $9.89 $(1.15)
April 30, 2003........ $9.01 $10.25 $(1.24) $8.73 $10.01 $(1.28)
January 31, 2003...... $8.85 $10.15 $(1.30) $8.55 $9.96 $(1.41)
</Table>
As of [ ,] 2005, (i) the net asset value per share for Target Fund
Common Shares was $[ ] and the market price per share was $[ ], representing
a [premium/discount] to net asset value of [ ]%, and (ii) the net asset value
per share for Acquiring Fund Common Shares was $[ ] and the market price per
share was $[ ], representing a [premium/discount] to net asset value of
[ ]%.
The Funds' common shares have historically traded at a discount. In order to
reduce or eliminate a market value discount from net asset value, the Board of
Trustees of each Fund may, subject to the terms and conditions of its Preferred
Shares, authorize that Fund from time to time to repurchase the common shares in
the open market or to tender for the common shares at net asset value. The Board
of Trustees of each Fund, in consultation with the Adviser, will review on a
quarterly basis the possibility of open market repurchases and/or tender offers
for the common shares. Subject to its borrowing restrictions, each Fund may
incur debt to finance such repurchases, which entails risks. The ability of a
Fund to enter into tender offers and the common share repurchases may be limited
by the 1940 Act asset coverage requirements and any additional asset coverage
requirements which may be imposed by a rating agency in connection with any
rating of the Preferred Shares. No assurance can be given that the Board of
Trustees of either Fund will, in fact, authorize that Fund to undertake such
repurchases and/or tender offers or that, if undertaken, such actions would
result in the common shares trading at a price which is equal or close to net
asset value.
DIVIDENDS AND DISTRIBUTIONS. The Funds' current policies with respect to
dividends and distributions relating to their respective common shares are
substantially similar. It is each Fund's present policy, which may be changed by
its Board of Trustees, to make monthly distributions to holders of its common
shares of substantially all of the Fund's net investment income remaining after
the payment of dividends on any outstanding Preferred Shares. Under current
federal tax law,
24
the Acquiring 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. The Target Fund
generally allocates net tax-exempted income first to its RP to the extent
available and allocates any net capital gains and other taxable income to the
common shares. Net income of each Fund consists of all interest income accrued
on portfolio assets less all expenses of such Fund.
Expenses of each Fund are accrued each day. Net realized capital gains, if
any, are expected to be distributed to shareholders at least once a year. While
there are any of a Fund's Preferred Shares outstanding, such Fund may not
declare any cash dividend or other distribution on its common shares, unless at
the time of such declaration, (1) all accrued Preferred Shares dividends have
been paid and (2) the value of such 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 Preferred Shares (expected
to equal the aggregate original purchase price of the outstanding Preferred
Shares plus any accrued and unpaid dividends thereon, whether or not earned or
declared on a cumulative basis). In addition to the requirements of the 1940
Act, the Fund may be required to comply with other asset coverage requirements
as a condition of the Fund obtaining a rating of its Preferred Shares from a
nationally recognized rating service. These requirements may include an asset
coverage test more stringent than under the 1940 Act. This limitation on a
Fund's ability to make distributions on its common shares could in certain
circumstances impair the ability of such Fund to maintain its qualification for
taxation as a regulated investment company. Each Fund intends, however, to the
extent possible, to purchase or redeem Preferred Shares from time to time to
maintain compliance with such asset coverage requirements and may pay special
dividends to the holders of the Preferred Shares in certain circumstances in
connection with any such impairment of the Fund's status as a regulated
investment company.
For information concerning the manner in which dividends and distributions to
holders of each Fund's common shares may be reinvested automatically in the
Fund's common shares, see "Dividend Reinvestment Plan" below.
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 holders of common shares
of each Fund in administering the Plans.
25
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.
PREFERRED SHARES
GENERAL. The Preferred Shares of each Fund have similar structures. Both
Target Fund RP and Acquiring Fund APS are preferred shares of beneficial
interest which entitle their holders to receive dividends when, as and if
declared by the Board of Trustees of such Fund out of funds legally available
therefor, at a rate per annum that may vary for successive dividend periods. The
Acquiring Fund APS have a liquidation preference of $25,000 per share. The
Target Fund RP have a liquidation preference of $100,000 per share. Neither
Target Fund RP nor Acquiring Fund APS are traded on a stock exchange or
over-the-counter. While the Target Fund RP and Acquiring Fund APS are
substantially similar in many respects, there are several differences that
shareholders should consider. Holders of each Fund's Preferred Shares do not
have preemptive rights to purchase any shares of RP or APS, respectively, or any
other preferred shares that might be issued. The net asset value per share of a
Fund's Preferred Shares equals its liquidation preference plus accumulated but
unpaid dividends per share.
SERIES. Under the 1940 Act, each Fund is permitted to have outstanding more
than one series of preferred shares so long as no single series has priority
over another series as to the distribution of assets of the Fund or the payment
of dividends. The Target Fund currently has one series of RP outstanding. The
Acquiring Fund currently has four series of APS outstanding, Series A APS,
Series B APS, Series C APS and Series D APS. Except with regard to the length of
the regular dividend period applicable to each series and as otherwise described
in the Prospectus offering the Acquiring Fund APS, the terms of each series of
the Acquiring Fund APS are the same.
PURCHASE AND SALE. APS of the Acquiring Fund and RP of the Target Fund are
purchased or sold using different procedures.
The APS of the Acquiring Fund generally are purchased and sold through
auctions generally conducted every 7 days in the case of series A APS and C APS
and every 28 days in the case of series B APS and D APS by Deutsche Bank, as the
auction agent for the Fund's APS (the "Auction Agent") unless the Acquiring Fund
elects to declare a special dividend period. Unless otherwise permitted by the
Fund, existing and potential holders of Acquiring Fund APS only may participate
in auctions through their broker-dealers. Broker-dealers submit the orders of
their
26
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 the Acquiring
Fund.
The RP of the Target Fund generally are purchased and sold through
remarketings conducted every 28 days by Merrill Lynch Capital Markets, unless
the Target Fund elects to declare a special dividend period. Target Fund RP is
purchased and sold through remarketing procedures. On each tender date (the
business day preceding the related dividend reset date) for shares of RP, the
remarketing agent will, after canvassing the market and considering prevailing
market conditions, provide to holders of shares of RP non-binding indications of
the applicable dividend rate for the next succeeding 28-day dividend period. The
actual applicable dividend rate for such dividend period may be greater than or
less than the rate indicated in such non-binding indications and will not be
determined until after a holder is required to elect to hold or tender its
shares of RP or a new purchaser is required to agree to purchase shares of RP.
Each holder of shares of RP then must notify the remarketing agent of its desire
(on a share-by-share basis) either to tender such share at a price of $100,000
per share or to continue to hold such share for a 28-day dividend period. Any
holder or prospective purchaser may informally indicate to the remarketing agent
its applicable dividend rate preferences. However, any such notice given to the
remarketing agent to tender or hold shares for a particular dividend period is
irrevocable and may not be conditioned upon the level at which applicable
dividend rates are set. On the dividend reset date, the remarketing agent will
then determine the applicable dividend rate for the next dividend period, which
will be the lowest rate available which enables the remarketing agent to
remarket on behalf of the holders thereof all shares of RP tendered to it on
such tender date at a price of $100,000 per share. Such determination will be
made in the sole discretion of the remarketing agent and will be conclusive and
binding on the Target Fund and on the holders of shares of RP. The remarketing
agent intends to make a secondary market in the shares of RP outside of
remarketings. The remarketing agent, however, has no obligation to make a
secondary market in the shares of RP outside of remarketings, and there can be
no assurance that a secondary market for shares of RP will develop or, if it
does develop, that it will provide holders with liquidity of investment.
In connection with the Reorganization, a holder of Target Fund RP would
receive series [ ] Acquiring Fund APS. Accordingly, Acquiring Fund APS received
in connection with the Reorganization would have a regular dividend period of 28
days like the 28 day dividend period of the Target Fund RP.
27
DIVIDENDS AND DISTRIBUTIONS. The holders of the Preferred Shares are entitled
to receive, when, as and if declared by the Board of Trustees of the Fund, out
of funds legally available therefore, cumulative cash dividends on their shares.
Dividends on a Fund's Preferred Shares so declared and payable shall be paid in
preference to and in priority over any dividends so declared and payable on the
Fund's common shares.
Holders of Target Fund RP generally receive dividends out of the Fund's
available net tax-exempt income, which qualify in their entirety as
distributions of tax-exempt interest income for federal income tax purposes. The
Acquiring Fund, however, is required to allocate net capital gains and other
taxable income, if any, proportionately between its common shares and APS. The
amount of taxable income allocated to the APS depends upon the amount of such
income realized by the Fund, but is generally not expected to be significant.
In normal circumstances, whenever the Acquiring Fund intends to include any
net capital gains or other taxable income in any dividend on APS, the Fund will
notify the Auction Agent of the amount to be so included prior to the Auction
establishing the applicable rate for such dividend. The Auction Agent will in
turn notify each broker-dealer who will notify existing and potential holders of
Acquiring Fund APS. As a result, auction participants may, in response to such
information, place bids which take account of the inclusion of net capital gains
or other taxable income in the dividend. If the Acquiring Fund retroactively
allocates any net capital gains or other taxable income to the APS without
having given notice to the Auction Agent, the Fund will pay an additional
dividend to offset substantially the tax effect thereof. As a result of the
notice and additional dividend provisions, the after-tax return to a holders of
Target Fund RP and Acquiring Fund APS is not expected to differ substantially.
While the Funds normally utilize the auction or remarketing procedures
described above, each Fund may utilize special dividend periods in certain
circumstances to set the dividend rate.
DIVIDEND RATES. The following table provides information about the dividend
rates for each Fund's APS or RP as of a recent auction or remarketing date.
<Table>
<Caption>
AUCTION OR REMARKETING DIVIDEND DATE PREFERRED SHARES RATE
- ------------------------------------ ---------------- ----
[ ], 2005.......................... Target Fund RP [ ]%
[ ], 2005.......................... Acquiring Fund Series A APS [ ]%
[ ], 2005.......................... Acquiring Fund Series B APS [ ]%
[ ], 2005.......................... Acquiring Fund Series C APS [ ]%
[ ], 2005.......................... Acquiring Fund Series D APS [ ]%
</Table>
REDEMPTIONS. The redemption provisions pertaining to the Preferred Shares of
each Fund are similar. It is anticipated that Preferred Shares of each Fund will
generally be redeemable at the option of the Fund at a price equal to their
28
liquidation preference plus accumulated but unpaid dividends (whether or not
earned or declared) to the date of redemption plus, in certain circumstances, a
redemption premium. Preferred Shares 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 Preferred Shares specified by
Moody's and S&P in connection with their issuance of ratings on the Preferred
Shares. Additionally, with respect to the RP, the Target Fund is required to
redeem RP if the Target Fund fails to generate sufficient available net
tax-exempt income to pay accrued and unpaid dividends on the RP out of solely
tax-exempt income. The liquidation preference of the Target Fund RP is $100,000
and the liquidation preference of the Acquiring Fund APS is $25,000.
RATINGS. The Target Fund RP and the Acquiring Fund APS have each been assigned
a rating of "AAA" from S&P and "Aaa" from Moody's. Each Fund intends that, so
long as its Preferred Shares are outstanding, the composition of its portfolio
will reflect guidelines established by S&P and Moody's in connection with each
Fund's receipt of a rating for such shares of at least "AAA" from S&P and "Aaa"
from Moody's. S&P and Moody's, which are nationally recognized statistical
rating organizations, issue ratings for various securities reflecting the
perceived creditworthiness of such securities. The guidelines for rating such
preferred shares have been developed by S&P and Moody's in connection with
issuances of asset-backed and similar securities, including debt obligations and
variable rate preferred stock, generally on a case-by-case basis through
discussions with the issuers of these securities. The guidelines are designed to
ensure that assets underlying outstanding debt or preferred stock will be varied
sufficiently and will be of sufficient quality and amount to justify investment
grade ratings. The guidelines do not have the force of law but have been adopted
by each Fund in order to satisfy current requirements necessary for S&P and
Moody's to issue the above-described ratings for Preferred Shares, which ratings
generally are relied upon by institutional investors in purchasing such
securities. The guidelines provide a set of tests for portfolio composition and
asset coverage that supplement (and in some cases are more restrictive than) the
applicable requirements under the 1940 Act.
Each Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by S&P or Moody's. Failure to adopt
any such modifications, however, may result in a change in the ratings described
above or a withdrawal of the ratings altogether. In addition, any rating agency
providing a rating for a Fund's Preferred Shares, 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
29
agency guidelines, provided the Board of Trustees has obtained written
confirmation from S&P and Moody's that any such change would not impair the
ratings then assigned by S&P and Moody's to the Preferred Shares. For so long as
any shares of a Fund's Preferred Shares are rated by S&P or Moody's, as the case
may be, a Fund's use of options and financial futures contracts and options
thereon will be subject to certain limitations mandated by the rating agencies.
LIQUIDATION RIGHTS. Upon any liquidation, dissolution or winding up of a Fund,
whether voluntary or involuntary, the holders of the Fund's Preferred Shares
will be entitled to receive, out of the assets of the Fund in question available
for distribution to shareholders, before any distribution or payment is made
upon any of the Fund's common shares or any other capital shares of the Fund
ranking junior in right of payment upon liquidation to Preferred Shares, $25,000
per share if the Fund is the Acquiring Fund and $100,000 per share if the Fund
is the Target Fund 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 Preferred Shares will be entitled to no
other payments except for any additional dividends (as more fully described
below). If such assets of the Fund are insufficient to make the full liquidation
payment on the Preferred Shares and liquidation payments on any other
outstanding class or series of preferred shares of the Fund ranking on a parity
with the Preferred Shares as to payment upon liquidation, then such assets will
be distributed among the holders of Preferred Shares 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 Preferred Shares will not be entitled to any further participation in any
distribution of assets by the Fund except for any additional dividends (which
are more fully described below). A consolidation, merger or share exchange of a
Fund with or into any other entity or entities or a sale, whether for cash,
shares of stock, securities or properties, of all or substantially all or any
part of the assets of a Fund shall not be deemed or construed to be a
liquidation, dissolution or winding up of such Fund for this purpose.
ADDITIONAL INFORMATION. For additional information regarding APS, Target Fund
shareholders should consult the Reorganization Statement of Additional
Information, which contains a more complete summary of the terms of the
Acquiring Fund APS, and the Certificate of Vote of Trustees Establishing
Preferred Shares governing the Acquiring Fund APS, included as Appendix B to the
Reorganization Statement of Additional Information.
GOVERNING LAW
Each Fund is organized as a business trust under the laws of The Commonwealth
of Massachusetts. The Target Fund was organized on April 14, 1989 and
30
commenced operations on November 30, 1989; the Acquiring Fund was organized on
July, 19 1991 and commenced operations on November 30, 1991.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust of each Fund contains an express disclaimer of
shareholder liability for acts or obligations of such Fund and provides for
indemnification and reimbursement of expense out of such Fund's property for any
shareholder held personally liable for the obligations of such Fund. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which a Fund itself would be unable to
meet its obligations. Given the nature of each Fund's assets and operations, the
possibility of a Fund being unable to meet its obligations is remote and, in the
opinion of counsel to the Funds, the risk to the Funds' respective shareholders
is remote.
Each Fund is also subject to federal securities laws, including the 1940 Act
and the rules and regulations promulgated by SEC thereunder, and applicable
state securities laws. Each Fund is registered as a diversified, closed-end
management investment company under the 1940 Act.
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 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
31
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.
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.
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 the common
and preferred shares, each voting as a class, present at a meeting at which
holders of more than 50% of the outstanding shares of each such class are
present in person or by proxy. If approved in the foregoing manner, conversion
of the Fund could not occur until 90 days after the shareholders' meeting at
which such conversion was
32
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 NYSE, the AMEX,
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 by or under the 1940 Act) at their net asset value,
less such redemption charge, if any, as might be in effect at the time of a
redemption. If a Fund were converted to an open-end fund, it is likely that new
common shares would be sold at net asset value plus a sales load. Following any
such conversion, it is also possible that certain of the Fund's investment
policies and strategies would have to be modified to assure sufficient portfolio
liquidity. In particular the Fund would be required to maintain its portfolio
such that not more than 15% of its assets would be invested in illiquid
securities. Such requirement could cause the Fund to dispose of portfolio
securities or other assets at a time when it is not advantageous to do so, and
could adversely affect the ability of the Fund to meet its investment objective.
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 above 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 Preferred Shares, holders of Preferred
Shares have no voting rights. When holders of a Fund's Preferred Shares are
entitled to vote, they are also entitled to cast one vote per share held.
Holders of Preferred Shares, 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
Preferred Shares are unpaid in an amount equal to two full years dividends
thereon, the holders of all outstanding Preferred Shares, voting as a class, are
entitled to elect a majority of the Fund's Trustees until all dividends have
been paid or declared and set apart for payment.
Unless a higher percentage is provided for under "Certain Provisions of the
Declarations of Trust" above, the affirmative vote of the holders of a majority
of a Fund's outstanding APS or RP, voting as a class, is required to approve 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.
33
The affirmative vote of a majority of the holders of Preferred Shares of a
Fund, voting as a class, is required to amend, alter or repeal any of the
preferences, rights or powers of holders of Preferred Shares 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.
FINANCIAL HIGHLIGHTS
TARGET FUND. The following schedule presents financial highlights for one
Target Fund Common Share outstanding throughout the periods indicated.
[To come by amendment]
ACQUIRING FUND. The following schedule presents financial highlights for one
Acquiring Fund Common Share outstanding throughout the periods indicated.
[To come by amendment]
INFORMATION ABOUT THE REORGANIZATION
GENERAL
Under the Reorganization Agreement (attached as Appendix A to the
Reorganization 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 for Acquiring Fund Common
Shares and Acquiring Fund series [ ] APS to be issued by the Acquiring Fund.
The Acquiring Fund will issue and cause to be listed on the NYSE and CHX
newly-issued Acquiring Fund Common Shares. The Acquiring Fund Common Shares
issued to the Target Fund will have an aggregate net asset value equal to the
aggregate net asset value of the Target Fund Common Shares less the costs of the
Reorganization (except that cash will be paid in lieu of any fractional shares).
The shares of series [ ] Acquiring Fund APS issued will have an aggregate
liquidation preference equal to the aggregate liquidation preference of the
Target Fund RP. 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 series [ ] Acquiring Fund APS to the
holders of Target Fund RP. As soon as practicable after the Closing Date for the
Reorganization, the Target Fund will deregister as an investment company under
the 1940 Act and dissolve under applicable state law.
The Target Fund will distribute the Acquiring Fund Common Shares and the
series [ ] Acquiring Fund APS received by it pro rata to its holders of record
of Target Fund Common Shares and Target Fund RP, 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
34
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 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 RP would
represent the respective pro rata number of Acquiring Fund APS due such holder.
See "Terms of the Reorganization Agreement -- Surrender and Exchange of Share
Certificates" below for a description of the procedures to be followed by Target
Fund shareholders to obtain their Acquiring Fund Common Shares or Acquiring Fund
APS (and cash in lieu of fractional shares, if any).
As a result of the Reorganization, every holder of Target Fund Common Shares
would own Acquiring Fund Common Shares that (except for cash payments received
in lieu of fractional shares) would have an aggregate net asset value
immediately after the Closing Date equal to the aggregate net asset value of
that shareholder's Target Fund Common Shares immediately prior to the Closing
Date less the costs of the Reorganization. Since the Acquiring Fund Common
Shares 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 except for
its share of the Reorganizational costs. Similarly, the aggregate liquidation
preference of the Acquiring Fund APS to be issued to the Target Fund will equal
the aggregate liquidation preference of the Target Fund RP. Every holder of
Target Fund RP would receive Acquiring Fund APS that would have an aggregate
liquidation preference immediately after the Closing Date equal to the aggregate
liquidation preference of that shareholder's Target Fund RP immediately prior to
the Closing Date. The liquidation preference per share of the Acquiring Fund APS
will remain unchanged by the Reorganization. Thus, the Reorganization will
result in no dilution of net asset value of the Target Fund Common Shares or
Acquiring Fund Common Shares, other than to reflect the costs of the
Reorganization, and will result in no dilution of the value per share of
Acquiring Fund APS or Target Fund RP. However, as a result of the
Reorganization, a shareholder of either Fund will hold a reduced percentage of
ownership in the larger combined entity than he or she did in either Fund prior
to the Reorganization.
35
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 RP will find
that the auction dates and dividend payment dates for the Acquiring Fund APS
received in the Reorganization are ordinarily (i.e., except in the case of a
special dividend period) on a 28 day auction similar to the 28 day remarketing
schedule in the case of RP. Any change in the standard dividend period should
not materially affect the value of the Preferred Shares held by holders of
Target Fund RP. The auction or remarketing procedures for the RP and APS of the
Funds are substantially similar. As a result of the Reorganization, the last
dividend period for the Target Fund RP prior to the Closing Date may be shorter
than the dividend period for such RP determined as set forth in its applicable
Certificate of Vote.
TERMS OF THE REORGANIZATION AGREEMENT
The following is a summary of the significant terms of the Reorganization
Agreement. This summary is qualified in its entirety by reference to the
Reorganization Agreement, attached as Appendix A to the Reorganization Statement
of Additional Information.
VALUATION OF ASSETS AND LIABILITIES. The respective assets of each of the
Funds will be valued on the business day prior to the Closing 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.
AMENDMENTS AND CONDITIONS. The Reorganization Agreement may be amended at any
time prior to the Closing Date with respect to any of the terms therein. The
obligations of each Fund pursuant to the Reorganization Agreement are subject to
various conditions, including a registration statement on Form N-14 being
declared effective by the SEC, approval by the shareholders of the Target Fund,
receipt of an opinion of counsel as to tax matters, receipt of an opinion of
counsel as to corporate and securities matters and the continuing accuracy of
various representations and warranties of the Funds being confirmed by the
respective parties.
POSTPONEMENT; TERMINATION. Under the Reorganization Agreement, the Board of
Trustees of either Fund may cause the Reorganization to be postponed or
36
abandoned in certain circumstances should such Board determine that it is in the
best interests of the shareholders of its respective Fund to do so.
The Reorganization Agreement may be terminated, and the Reorganization
abandoned at any time (whether before or after adoption thereof by the
shareholders of either of the Funds) prior to the Closing Date, or the Closing
Date may be postponed: (i) by mutual consent of the Boards of Trustees of the
Funds and (ii) by the Board of Trustees of either Fund if any condition to that
Fund's obligations set forth in the Reorganization Agreement has not been
fulfilled or waived by such Board.
SURRENDER AND EXCHANGE OF SHARE CERTIFICATES. After the Closing Date, each
holder of an outstanding certificate or certificates formerly representing
Target Fund Common Shares will be entitled to receive, upon surrender of his or
her certificate or certificates, a certificate or certificates representing the
number of Acquiring Fund Common Shares distributable with respect to such
holder's Target Fund Common Shares, together with cash in lieu of any fractional
Acquiring Fund Common Shares. Promptly after the Closing Date, the transfer
agent for the Acquiring Fund Common Shares will mail to each holder of
certificates formerly representing Target Fund Common Shares a letter of
transmittal for use in surrendering his or her certificates for certificates
representing Acquiring Fund Common Shares and cash in lieu of any fractional
shares.
Please do not send in any share certificates at this time. Upon consummation
of the Reorganization, holders of Target Fund Common Shares will be furnished
with instructions for exchanging their share certificates for Acquiring Fund
share certificates and, if applicable, cash in lieu of fractional shares.
From and after the Closing Date, certificates formerly representing Target
Fund Common Shares will be deemed for all purposes to evidence ownership of the
number of full Acquiring Fund Common Shares distributable with respect to the
Target Fund Common Shares held before the Reorganization provided that, until
such share certificates have been so surrendered, no dividends payable to the
holders of record of Target Fund Common Shares as of any date subsequent to the
Closing Date will be reinvested pursuant to the Acquiring Fund's Dividend
Reinvestment Plan, but will instead be paid in cash. Once such Target Fund share
certificates have been surrendered, participants in the Target Fund's Dividend
Reinvestment Plan will automatically be enrolled in the Dividend Reinvestment
Plan of the Acquiring Fund.
From and after the Closing Date, there will be no transfers on the share
transfer books of the Target Fund. If, after the Closing Date, certificates
representing Target Fund Common Shares are presented to the Acquiring Fund, they
will be cancelled and exchanged for certificates representing Acquiring Fund
Common Shares, as applicable, and cash in lieu of fractional shares, if any,
distributable with respect to such Target Fund Common Shares in the
Reorganization.
37
Preferred Shares are held in "street name" by the Depository Trust Company and
all transfers will be accomplished by book entry.
EXPENSES OF THE REORGANIZATION. In the event the Reorganization is completed,
the expenses of the Reorganization will be shared by the Target Fund and the
Acquiring Fund in proportion to their projected declines in total operating
expenses as a result of the Reorganization. The expenses of the Reorganization
will not be borne by the holders of Preferred Shares of either Fund. Management
of the Funds estimates total costs of the Reorganization to be approximately
$[ ]. Of these expenses, approximately will be borne by the Target Fund
and approximately will be borne by the Acquiring Fund. In the event the
Reorganization is not completed, the Adviser will bear the costs associated with
the Reorganization. The Target Fund Board has reviewed and approved the
foregoing arrangements with respect to expenses and other charges relating to
the Reorganization.
Expenses incurred in connection with the Reorganization include, but are not
limited to: all costs related to the preparation and distribution of materials
distributed to each Fund's Board; all expenses incurred in connection with the
preparation of the Reorganization Agreement and a registration statement on Form
N-14; SEC and state securities commission filing fees and legal and audit fees
in connection with the Reorganization; the costs of printing and distributing
this Proxy Statement/Prospectus; legal fees incurred preparing materials for the
Board of each Fund, attending each Fund's Board meetings and preparing the
minutes; auditing fees associated with each Fund's financial statements;
portfolio transfer taxes (if any); and any similar expenses incurred in
connection with the Reorganization. Neither the Funds nor the Adviser will pay
any expenses of shareholders arising out of or in connection with the
Reorganization.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
The following is a general summary of the material anticipated U.S. federal
income tax consequences of the Reorganization. The discussion is based upon the
Internal Revenue Code, Treasury regulations, court decisions, published
positions of the Internal Revenue Service ("IRS") and other applicable
authorities, all as in effect on the date hereof and all of which are subject to
change or differing interpretations (possibly with retroactive effect). The
discussion is limited to U.S. persons who hold shares of the Target Fund as
capital assets for federal income tax purposes (generally, assets held for
investment). This summary does not address all of the federal U.S. income tax
consequences that may be relevant to a particular shareholder or to shareholders
who may be subject to special treatment under U.S. federal income tax laws. No
ruling has been or will be obtained from the IRS regarding any matter relating
to the Reorganization. No assurance can be given that the IRS would not assert,
or that a court would not sustain, a position contrary to any of the tax aspects
described below. Prospective investors must consult their own
38
tax advisers as to the U.S. federal income tax consequences of the
Reorganization, as well as the effects of state, local and non-U.S. tax laws.
It is a condition to closing the Reorganization that each of the Target Fund
and the Acquiring Fund receives an opinion from Skadden, Arps, Slate, Meagher &
Flom LLP ("Skadden Arps"), dated as of the Closing Date, regarding the
characterization of the Reorganization as a "reorganization" within the meaning
of Section 368(a) of the Internal Revenue Code. As such a reorganization, the
U.S. federal income tax consequences of the Reorganization can be summarized as
follows:
- No gain or loss will be recognized by the Target Fund or the Acquiring Fund
upon the transfer to the Acquiring Fund of substantially all of the assets
of the Target Fund in exchange 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 and the subsequent liquidation of
the Target Fund.
- No gain or loss will be recognized by a shareholder of the Target Fund who
exchanges, as the case may be, all of his, her or its Target Fund Common
Shares solely for Acquiring Fund Common Shares pursuant to the
Reorganization or all of his, her or its Target Fund RP solely for Acquiring
Fund APS pursuant to the Reorganization (except with respect to cash
received in lieu of a fractional share of the Acquiring Fund, as discussed
below).
- The aggregate tax basis of the Acquiring Fund Common Shares or Acquiring
Fund APS, as the case may be, received by a shareholder of the Target Fund
pursuant to the Reorganization will be the same as the aggregate tax basis
of the shares of the Target Fund surrendered in exchange therefor (reduced
by any amount of tax basis allocable to a fractional share for which cash is
received).
- 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.
- A shareholder of the Target Fund that receives cash in lieu of a fractional
share of the Acquiring Fund pursuant to the Reorganization will recognize
capital gain or loss with respect to the fractional share in an amount equal
to the difference between the amount of cash received for the fractional
share and the portion of such shareholder's tax basis in its Target Fund
shares that is allocable to the fractional share. The capital gain or loss
will be long-term if the holding period for such Target Fund Common Shares
or Target Fund RP, as the case may be, is more than one year as of the date
of the exchange.
39
- The Acquiring Fund's tax basis in the Target Fund's assets received by the
Acquiring Fund pursuant to the Reorganization will equal the tax basis of
such assets in the hands of the Target Fund immediately prior to the
Reorganization, and the Acquiring Fund's holding period of such assets will
include the period during which the assets were held by the Target Fund.
The Acquiring Fund intends to continue to be taxed under the rules applicable
to regulated investment companies as defined in Section 851 of the Internal
Revenue Code, which are the same rules currently applicable to the Target Fund
and its shareholders.
Pursuant to the grandfather relief granted in Revenue Ruling 89-81, 1989-1
C.B. 226, Target Fund is permitted to designate that dividends paid on the
Target Fund RP consist of more than the Target Fund RP's pro rata share of
tax-exempt income earned by the Target Fund. The Acquiring Fund, however, is not
eligible to make such disproportionate designations. Accordingly, designations
made by the Acquiring Fund with respect to dividends paid on the Acquiring Fund
APS will be treated as consisting of a pro rata portion of each type of income
so designated.
The Acquiring Fund will succeed to the capital loss carryforwards of the
Target Fund, which will be subject to the limitations described below. The
Target Fund has capital loss carryforwards that, in the absence of the
Reorganization, would generally be available to offset its capital gains. As a
result of the Reorganization, however, the Target Fund will undergo an
"ownership change" for tax purposes (because the Target Fund is significantly
smaller than the Acquiring Fund), and accordingly, the use of capital loss
carryforwards of the Target Fund (and certain built-in losses) will be limited
by the operation of the tax loss limitations rules of the Code. The Code
generally limits the amount of pre-ownership change losses that may be used to
offset post-ownership change gains to an "annual loss limitation amount"
(generally the product of the net asset value of the Target Fund immediately
prior to the ownership change and a rate established by the IRS for the month in
which the Reorganization occurs (for example, such rate is 4.27% for March
2005). Subject to certain limitations, any unused portion of the "annual loss
limitation amount" may be available in subsequent years, subject to the overall
eight-year capital loss carryforward limit, as measured from the date of
recognition. In addition, for five years after the Closing Date, the combined
fund will not be allowed to offset certain pre-Reorganization built-in gains
attributable to one Fund with capital loss carryforwards (and certain built-in
losses) attributable to the other Fund.
The opinion of Skadden Arps will be based on federal income tax law in effect
on the Closing Date. In rendering its opinion, Skadden Arps will also rely upon
certain representations of the management of the Acquiring Fund and the Target
Fund and assume, among other things, that the Reorganization will be consummated
in
40
accordance with the Reorganization Agreement and as described herein. An opinion
of counsel is not binding on the IRS or any court.
The Acquiring Fund intends to continue to be taxed under the rules applicable
to regulated investment companies as defined in Section 851 of the Internal
Revenue Code, which are the same rules currently applicable to the Target Fund
and its shareholders.
LEGAL MATTERS
Certain legal matters concerning the federal income tax consequences of the
Reorganization and the issuance of Acquiring Fund Common Shares and Acquiring
Fund APS will be passed upon by Skadden Arps, which serves as counsel to the
Target Fund and the Acquiring Fund. Wayne W. Whalen, a partner of Skadden Arps,
is a trustee of both the Target Fund and the Acquiring Fund.
------------------------------------------------------------------------------
OTHER INFORMATION
------------------------------------------------------------------------------
VOTING INFORMATION AND REQUIREMENTS
RECORD DATE. 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
NYSE, shareholder approval of the Reorganization Agreement requires the
affirmative vote of shareholders of the Target Fund representing more than 50%
of the outstanding Target Fund Common Shares and Target Fund RP, each voting
separately as a class.
PROXIES. The Target Fund Board has fixed the close of business on [ ],
2005 as the record date (the "Record Date") for the determination of
shareholders entitled to notice of, and to vote at, the Special Meeting or any
adjournment thereof. Shareholders on the Record Date will be entitled to one
vote for each share held, with no shares having cumulative voting rights. At the
Record Date, the Target Fund had outstanding [ ] Target Fund Common Shares and
[ ] Target Fund RP.
Target Fund shareholders may vote by appearing in person at the Special
Meeting, by returning the enclosed proxy card or by casting their vote via
telephone or the internet using the instructions provided on the enclosed proxy
card. Any person giving a proxy may revoke it at any time prior to its exercise
by giving written notice of the revocation to the Secretary of the Target Fund
at the address indicated above, by delivering a duly executed proxy bearing a
later date, or by attending the Special Meeting and voting in person. The giving
of a proxy will not affect your right to vote in person if you attend the
Special Meeting and wish to do so.
41
All properly executed proxies received prior to the Special Meeting will be
voted in accordance with the instructions marked thereon or otherwise as
provided therein. Unless instructions to the contrary are marked, proxies will
be voted "FOR" the approval of the proposed Reorganization. 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) have the same effect as votes "AGAINST" the
proposed Reorganization since approval of the proposed Reorganization is based
on the affirmative vote of a majority of the total shares outstanding. A
majority of the outstanding shares entitled to vote on a proposal must be
present in person or by proxy to have a quorum to conduct business at the
Special Meeting. Abstentions and broker non-votes will be deemed present for
quorum purposes.
CERTAIN VOTING INFORMATION REGARDING TARGET FUND RP. RP 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 RP outstanding have voted on
the Reorganization and (ii) less than 10% of the Target Fund RP outstanding have
voted against the Reorganization. In such instance, the broker-dealer firm will
vote such uninstructed Target Fund RP on the Reorganization in the same
proportion as the votes cast by all holders of the Target Fund's RP 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 the 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 INFORMATION
Except as set forth below, as of [ ], to the knowledge of the Funds,
no shareholder owned beneficially more than 5% of a class of a Fund's
outstanding shares:
[insert]
As of [ ], no trustees or executive officers owned, directly or
beneficially, common shares or Preferred Shares of either Fund. As of [ ], the
trustees and executive officers of the Funds individually and as a group owned
less than 1% of the outstanding shares of each Fund.
42
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 30(f) of the 1940 Act and Section 16(a) of the Securities Exchange Act
of 1934, as amended, require the Funds' trustees, officers, investment adviser,
affiliated persons of the investment adviser and persons who own more than 10%
of a registered class of the Fund's equity securities to file forms with the SEC
and the NYSE, 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. 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 1221
Avenue of the Americas, New York, New York 10020.
SOLICITATION OF PROXIES
Solicitation of proxies is being made primarily by the mailing of this Notice
and Proxy Statement/Prospectus with its enclosures on or about [ ],
2005. Target Fund shareholders whose shares are held by nominees such as brokers
can vote their proxies by contacting their respective nominee. In addition to
the solicitation of proxies by mail, employees of the Adviser and its affiliates
as well as dealers or their representatives may, without additional
compensation, solicit proxies in person or by mail, telephone, telegraph,
facsimile or oral communication. The Target Fund has retained ALAMO Direct Mail
Services, Inc. ("ALAMO") to make telephone calls to Target Fund Shareholders to
remind them to vote. In addition, ALAMO may also be retained to assist with any
necessary solicitation of proxies. In the event of a solicitation, ALAMO would
be paid a project management fee as well as fees charged on a per call basis and
certain other expenses. Management estimates that any such solicitation would
cost approximately $[ ]. Proxy solicitation expenses are an expense of the
Reorganization which will be borne by the Target Fund and the Acquiring Fund in
proportion to their projected declines in total operating expenses as a result
of the Reorganization.
43
OTHER MATTERS TO COME BEFORE THE MEETING
The Target Fund Board knows of no business other than that described in this
Proxy Statement/Prospectus which will be presented for consideration at the
Special Meeting. If any other matters are properly presented, it is the
intention of the persons named on the enclosed proxy card to vote proxies in
accordance with their best judgment.
In the event that a quorum is present at the Special Meeting but sufficient
votes to approve the proposed Reorganization are not received, proxies
(including abstentions and broker non-votes) will be voted in favor of one or
more adjournments of the Special Meeting to permit further solicitation of
proxies on the proposed Reorganization, provided that the Target Fund Board
determines that such an adjournment and additional solicitation is reasonable
and in the interest of shareholders based on a consideration of all relevant
factors, including the percentage of votes then cast, the percentage of negative
votes cast, the nature of the proposed solicitation activities and the nature of
the reasons for such further solicitation. Any such adjournment will require the
affirmative vote of the holders of a majority of the outstanding shares voted at
the session of the Special Meeting to be adjourned.
If you cannot be present in person at the Special Meeting, please fill in,
sign and return the enclosed proxy card promptly. No postage is necessary if
mailed in the United States.
LOU ANNE MCINNIS
Assistant Secretary
Van Kampen Investment Grade Municipal
Trust
May , 2005
44
[VAN KAMPEN INVESTMENTS LOGO]
EXHIBIT I
DESCRIPTION OF SECURITIES RATINGS
STANDARD & POOR'S -- A brief description of the applicable Standard &
Poor's (S&P) rating symbols and their meanings (as published by S&P) follows:
A S&P issue credit rating is a current opinion of the creditworthiness of
an obligor with respect to a specific financial obligation, a specific class of
financial obligations, or a specific financial program (including ratings on
medium-term note programs and commercial paper programs). It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation and takes into account the currency in
which the obligation is denominated. The issue credit rating is not a
recommendation to purchase, sell, or hold a financial obligation, inasmuch as it
does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the obligors
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any credit rating and may, on occasion, rely
on unaudited financial information. Credit ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances. Issue credit ratings can be either long-term or
short-term. Short-term ratings are generally assigned to those obligations
considered short term in the relevant market. In the U.S., for example, that
means obligations with an original maturity of no more than 365 days including
commercial paper. Short-term ratings are also used to indicate the
creditworthiness of an obligor with respect to put features on long-term
obligations. The result is a dual rating, in which the short-term ratings
address the put feature, in addition to the usual long-term rating. Medium-term
notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment -- capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the terms
of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above. (Such differentiation applies when an entity has
both senior and subordinated obligations, secured and unsecured obligations, or
operating company and holding company obligations.) Accordingly, in the case of
junior debt, the rating may not conform exactly with the category definition.
AAA: An obligation rated "AAA" has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
2
AA: An obligation rated "AA" differs from the highest-rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A: An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
SPECULATIVE GRADE
BB, B, CCC, CC, C: Obligations rated "BB", "B", "CCC", "CC" and "C" are
regarded as having significant speculative characteristics. "BB" indicates the
least degree of speculation and "C" the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC: An obligation rated "CCC" is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated "CC" is currently highly vulnerable to nonpayment.
C: A subordinated debt or preferred stock obligation rated "C" is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The "C" rating may be used to cover a situation
where a bankruptcy petition has been filed or similar action taken, but payments
on this obligation are being continued. A "C" also will be assigned to a
preferred stock issue in arrears on dividends or sinking fund payments, but that
is currently paying.
D: An obligation rated "D" is in payment default. The "D" rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
3
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating.
N.R.: This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular obligation as a matter of policy.
SHORT-TERM ISSUE CREDIT RATINGS
A S&P short-term rating is a current assessment of the likelihood of timely
payment of debt considered short-term in the relevant market.
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: A short-term obligation rated "A-1" is rated in the highest category
by S&P. The obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
A-2: A short-term obligation rated "A-2" is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B: A short-term obligation rated "B" is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C: A short-term obligation rated "C" is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
4
A short-term rating is not a recommendation to purchase, sell, or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor. Issue credit ratings are based on current
information furnished by the obligors or obtained by S&P from other sources it
considers reliable. S&P does not perform an audit in connection with any credit
rating and may, on occasion, rely on unaudited financial information. Credit
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option or
demand feature as part of their structure. The first rating addresses the
likelihood of repayment of principal and interest as due, and the second rating
addresses only the demand feature. The long-term debt rating symbols are used
for bonds to denote the long-term maturity and the commercial paper rating
symbols for the put option (for example, "AAA/A-1+"). With short-term demand
debt, S&P note rating symbols are used with the commercial paper rating symbols
(for example, "SP-1+/A-1+").
MOODY'S INVESTORS SERVICE INC. -- A brief description of the applicable
Moody's Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
LONG-TERM OBLIGATION RATINGS
Moody's long-term obligation ratings are opinions of the relative credit
risk of fixed-income obligations with an original maturity of one year or more.
They address the possibility that a financial obligation will not be honored as
promised. Such ratings reflect both the likelihood of default and any financial
loss suffered in the event of default.
MOODY'S LONG-TERM RATING DEFINITIONS:
Aaa: Obligations rated Aaa are judged to be of the highest quality, with
minimal credit risk.
Aa: Obligations rated Aa are judged to be of high quality and are subject
to very low credit risk.
A: Obligations rated A are considered upper-medium grade and are subject to
low credit risk.
Baa: Obligations rated Baa are subject to moderate credit risk. They are
considered medium-grade and as such may possess certain speculative
characteristics.
Ba: Obligations rated Ba are judged to have speculative elements and are
subject to substantial credit risk.
B: Obligations rated B are considered speculative and are subject to high
credit risk.
5
Caa: Obligations rated Caa are judged to be of poor standing and are
subject to very high credit risk.
Ca: Obligations rated Ca are highly speculative and are likely in, or very
near, default, with some prospect of recovery of principal and interest.
C: Obligations rated C are the lowest rated class of bonds and are
typically in default, with little prospect for recovery of principal or
interest.
Note: Moody's appends numerical modifiers 1, 2, and 3 to each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
MEDIUM-TERM NOTE RATINGS
Moody's assigns long-term ratings to individual debt securities issued from
medium-term note (MTN) programs, in addition to indicating ratings to MTN
programs themselves. Notes issued under MTN programs with such indicated ratings
are rated at issuance at the rating applicable to all pari passu notes issued
under the same program, at the program's relevant indicated rating, provided
such notes do not exhibit any of the characteristics listed below:
1. Notes containing features that link interest or principal to the
credit performance of any third party or parties
2. Notes allowing for negative coupons, or negative principal
3. Notes containing any provision that could obligate the investor to
make any additional payments
4. Notes containing provisions that subordinate the claim.
For notes with any of these characteristics, the rating of the individual
note may differ from the indicated rating of the program.
Market participants must determine whether any particular note is rated,
and if so, at what rating level. Moody's encourages market participants to
contact Moody's Ratings Desks or visit www.moodys.com directly if they have
questions regarding ratings for specific notes issued under a medium-term note
program. Unrated notes issued under an MTN program may be assigned an NR symbol.
6
SHORT-TERM RATINGS
Moody's short-term ratings are opinions of the ability of issuers to honor
short-term financial obligations. Ratings may be assigned to issuers, short-term
programs or to individual short-term debt instruments. Such obligations
generally have an original maturity not exceeding thirteen months, unless
explicitly noted. Moody's employs the following designations to indicate the
relative repayment ability of rated issuers:
P-1
Issuers (or supporting institutions) rated Prime-1 have a superior ability
to repay short-term debt obligations.
P-2
Issuers (or supporting institutions) rated Prime-2 have a strong ability to
repay short-term debt obligations.
P-3
Issuers (or supporting institutions) rated Prime-3 have an acceptable
ability to repay short-term obligations.
NP
Issuers (or supporting institutions) rated Not Prime do not fall within any
of the Prime rating categories.
NOTE: Canadian issuers rated P-1 or P-2 have their short-term ratings
enhanced by the senior-most long-term rating of the issuer, its guarantor or
support-provider.
7
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MARCH 18, 2005
STATEMENT OF ADDITIONAL INFORMATION
RELATING TO THE ACQUISITION OF THE ASSETS AND LIABILITIES OF
VAN KAMPEN INVESTMENT GRADE MUNICIPAL TRUST
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN MUNICIPAL TRUST
DATED [ ], 2005
This Statement of Additional Information is available to the shareholders
of Van Kampen Investment Grade Municipal Trust (the "Target Fund") in connection
with a proposed transaction (the "Reorganization") whereby Van Kampen Municipal
Trust (the "Acquiring Fund") will acquire substantially all of the assets and
assume substantially all of the liabilities of the Target Fund in exchange for
an equal aggregate net asset value of newly-issued common shares of beneficial
interest, par value $0.01 per share ("Acquiring Fund Common Shares"), and
newly-issued series [ ] auction preferred shares with a par value of
$0.01 per share and a liquidation preference of $25,000 per share ("Acquiring
Fund APS"). The Target Fund will distribute Acquiring Fund Common Shares to
holders of common shares of the Target Fund ("Target Fund Common Shares") and
series [ ] Acquiring Fund APS to holders of Remarketed Preferred Shares
of the Target Fund ("Target Fund RP"), and will then terminate its registration
under the Investment Company Act of 1940, as amended (the "1940 Act"), and
dissolve under applicable state law. A copy of a form of the Agreement and Plan
of Reorganization between the Target Fund and the Acquiring Fund is attached
hereto as Appendix A. Unless otherwise defined herein, capitalized terms have
the meanings given to them in the Proxy Statement/Prospectus.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Proxy Statement/Prospectus dated May , 2005
relating to the proposed Reorganization of the Target Fund into the Acquiring
Fund. A copy of the Proxy Statement/Prospectus may be obtained, without charge,
by writing to the Van Kampen Client Relations Department at 1 Parkview Plaza,
P.O. Box 5555, Oakbrook Terrace, Illinois 60181-5555 or by calling (800)
847-2424 (TDD users may call (800) 421-2833). The Acquiring Fund will provide,
without charge, upon the written or oral request of any person to whom this
Statement of Additional Information is delivered, a copy of any and all
documents that have been incorporated by reference in the registration statement
of which this Statement of Additional Information is a part.
This Statement of Additional Information is intended to provide Target Fund
shareholders with certain additional information about the Acquiring Fund, which
will hereinafter sometimes be referred to simply as the "Fund."
TABLE OF CONTENTS
<Table>
<Caption>
Page
----
Trustees and Officers....................................... S-1
Investment Advisory Agreement............................... S-12
Portfolio Managers.......................................... S-14
Portfolio Transactions and Brokerage Allocation............. S-16
Additional Information Relating to Auction Preferred Shares
of the Fund............................................... S-18
Financial Statements........................................ S-28
Appendix A Agreement and Plan of Reorganization............. A-1
Appendix B Certificate of Vote of Trustees.................. B-1
Appendix C Acquiring Fund Annual Report Dated [ ].... C-1
Appendix D Target Fund Annual Report Dated [ ]....... D-1
Appendix E Morgan Stanley Investment Management Proxy Voting
Policy and Procedures..................................... E-1
</Table>
TRUSTEES AND OFFICERS
GENERAL
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and executive officers of the Fund
and their principal occupations during the last five years, other directorships
held by trustees and their affiliations, if any, with Van Kampen Investments
Inc. ("Van Kampen Investments"), Van Kampen Asset Management (the "Adviser"),
Van Kampen Funds Inc. (the "Distributor"), Van Kampen Advisors Inc., Van Kampen
Exchange Corp. and Van Kampen Investor Services Inc. ("Investor Services"). The
term "Fund Complex" includes each of the investment companies advised by the
Adviser as of the date of this Statement of Additional Information. Trustees
serve until reaching their retirement age or until their successors are duly
elected and qualified. Officers are annually elected by the trustees.
INDEPENDENT TRUSTEES
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
David C. Arch (59) Trustee Trustee Chairman and Chief Executive 83 Trustee/Director/
Blistex Inc. since 2003 Officer of Blistex Inc., a Managing General
1800 Swift Drive consumer health care products Partner of funds in
Oak Brook, IL 60523 manufacturer. Director of the the Fund Complex.
Heartland Alliance, a
nonprofit organization serving
human needs based in Chicago.
Director of St. Vincent de
Paul Center, a Chicago based
day care facility serving the
children of low income
families. Board member of the
Illinois Manufacturers'
Association.
Jerry D. Choate (66) Trustee Trustee Prior to January 1999, 81 Trustee/Director/
33971 Selva Road since 1999 Chairman and Chief Executive Managing General
Suite 130 Officer of the Allstate Partner of funds in
Dana Point, CA 92629 Corporation ("Allstate") and the Fund Complex.
Allstate Insurance Company. Director of Amgen
Prior to January 1995, Inc., a
President and Chief Executive biotechnological
Officer of Allstate. Prior to company, and Director
August 1994, various of Valero Energy
management positions at Corporation, an
Allstate. independent refining
company.
</Table>
S-1
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Rod Dammeyer+ (64) Trustee Trustee President of CAC, L.L.C., a 83 Trustee/Director/
CAC, L.L.C. since 2003 private company offering Managing General
4350 LaJolla Village Drive capital investment and Partner of funds in
Suite 980 management advisory services. the Fund Complex.
San Diego, CA 92122-6223 Prior to February 2001, Vice Director of
Chairman and Director of Stericycle, Inc.,
Anixter International, Inc., a Ventana Medical
global distributor of wire, Systems, Inc., and
cable and communications GATX Corporation, and
connectivity products. Prior Trustee of The
to July 2000, Managing Partner Scripps Research
of Equity Group Corporate Institute and the
Investment (EGI), a company University of Chicago
that makes private investments Hospitals and Health
in other companies. Systems. Prior to
April 2004, Director
of TheraSense, Inc.
Prior to January
2004, Director of
TeleTech Holdings
Inc. and Arris Group,
Inc. Prior to May
2002, Director of
Peregrine Systems
Inc. Prior to
February 2001,
Director of IMC
Global Inc. Prior to
July 2000, Director
of Allied Riser
Communications Corp.,
Matria Healthcare
Inc., Transmedia
Networks, Inc., CNA
Surety, Corp. and
Grupo Azcarero Mexico
(GAM).
Linda Hutton Heagy (56) Trustee Trustee Managing Partner of Heidrick & 81 Trustee/Director/
Heidrick & Struggles since 1995 Struggles, an executive search Managing General
233 South Wacker Drive firm. Trustee on the Partner of funds in
Suite 7000 University of Chicago the Fund Complex.
Chicago, IL 60606 Hospitals Board, Vice Chair of
the Board of the YMCA of
Metropolitan Chicago and a
member of the Women's Board of
the University of Chicago.
Prior to 1997, Partner of Ray
& Berndtson, Inc., an
executive recruiting firm.
Prior to 1996, Trustee of The
International House Board, a
fellowship and housing
organization for international
graduate students. Prior to
1995, Executive Vice President
of ABN AMRO, N.A., a bank
holding company. Prior to
1992, Executive Vice President
of La Salle National Bank.
</Table>
S-2
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
R. Craig Kennedy (52) Trustee Trustee Director and President of the 81 Trustee/Director/
1744 R Street, NW since 1995 German Marshall Fund of the Managing General
Washington, DC 20009 United States, an independent Partner of funds in
U.S. foundation created to the Fund Complex.
deepen understanding, promote
collaboration and stimulate
exchanges of practical
experience between Americans
and Europeans. Formerly,
advisor to the Dennis Trading
Group Inc., a managed futures
and option company that
invests money for individuals
and institutions. Prior to
1992, President and Chief
Executive Officer, Director
and member of the Investment
Committee of the Joyce
Foundation, a private
foundation.
Howard J Kerr (69) Trustee Trustee Prior to 1998, President and 83 Trustee/Director/
736 North Western Avenue since 2003 Chief Executive Officer of Managing General
P.O. Box 317 Pocklington Corporation, Inc., Partner of funds in
Lake Forest, IL 60045 an investment holding company. the Fund Complex.
Director of the Marrow Director of the Lake
Foundation. Forest Bank & Trust.
Jack E. Nelson (68) Trustee Trustee President of Nelson Investment 81 Trustee/Director/
423 Country Club Drive since 1995 Planning Services, Inc., a Managing General
Winter Park, FL 32789 financial planning company and Partner of funds in
registered investment adviser the Fund Complex.
in the State of Florida.
President of Nelson Ivest
Brokerage Services Inc., a
member of the NASD, Securities
Investors Protection Corp. and
the Municipal Securities
Rulemaking Board. President of
Nelson Sales and Services
Corporation, a marketing and
services company to support
affiliated companies.
Hugo F. Sonnenschein+ (64) Trustee Trustee President Emeritus and 83 Trustee/Director/
1126 E. 59th Street since 2003 Honorary Trustee of the Managing General
Chicago, IL 60637 University of Chicago and the Partner of funds in
Adam Smith Distinguished the Fund Complex.
Service Professor in the Director of Winston
Department of Economics at the Laboratories, Inc.
University of Chicago. Prior
to July 2000, President of the
University of Chicago. Trustee
of the University of Rochester
and a member of its investment
committee. Member of the
National Academy of Sciences,
the American Philosophical
Society and a fellow of the
American Academy of Arts and
Sciences.
</Table>
S-3
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Suzanne H. Woolsey, Ph.D. (63) Trustee Trustee Chief Communications Officer 81 Trustee/Director/
815 Cumberstone Road since 1999 of the National Academy of Managing General
Harwood, MD 20776 Sciences/National Research Partner of funds in
Council, an independent, the Fund Complex.
federally chartered policy Director of Fluor
institution, from 2001 to Corp., an
November 2003 and Chief engineering,
Operating Officer from 1993 to procurement and
2001. Director of the construction
Institute for Defense organization, since
Analyses, a federally funded January 2004 and
research and development Director of Neurogen
center, Director of the German Corporation, a
Marshall Fund of the United pharmaceutical
States, Director of the Rocky company, since
Mountain Institute and Trustee January 1998.
of Colorado College. Prior to
1993, Executive Director of
the Commission on Behavioral
and Social Sciences and
Education at the National
Academy of Sciences/National
Research Council. From 1980
through 1989, Partner of
Coopers & Lybrand.
</Table>
S-4
INTERESTED TRUSTEES*
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Mitchell M. Merin* (51) Trustee, Trustee President and Chief Executive 81 Trustee/Director/
1221 Avenue of the Americas President since Officer of funds in the Fund Managing General
New York, NY 10020 and Chief 1999; Complex. Chairman, President, Partner of funds in
Executive President Chief Executive Officer and the Fund Complex.
Officer and Chief Director of the Adviser and Van
Executive Kampen Advisors Inc. since
Officer December 2002. Chairman,
since 2002 President and Chief Executive
Officer of Van Kampen Investments
since December 2002. Director of
Van Kampen Investments since
December 1999. Chairman and
Director of Van Kampen Funds Inc.
since December 2002. President,
Director and Chief Operating
Officer of Morgan Stanley
Investment Management since
December 1998. President and
Director since April 1997 and
Chief Executive Officer since
June 1998 of Morgan Stanley
Investment Advisors Inc. and
Morgan Stanley Services Company
Inc. Chairman, Chief Executive
Officer and Director of Morgan
Stanley Distributors Inc. since
June 1998. Chairman since June
1998, and Director since January
1998 of Morgan Stanley Trust.
Director of various Morgan
Stanley subsidiaries. President
of the Morgan Stanley Funds since
May 1999. Previously Chief
Executive Officer of Van Kampen
Funds Inc. from December 2002 to
July 2003, Chief Strategic
Officer of Morgan Stanley
Investment Advisors Inc. and
Morgan Stanley Services Company
Inc. and Executive Vice President
of Morgan Stanley Distributors
Inc. from April 1997 to June
1998. Chief Executive Officer
from September 2002 to April 2003
and Vice President from May 1997
to April 1999 of the Morgan
Stanley Funds.
Richard F. Powers, III* (58) Trustee Trustee Advisory Director of Morgan 83 Trustee/Director/
1221 Avenue of the Americas since 1999 Stanley. Prior to December 2002, Managing General
New York, NY 10020 Chairman, Director, President, Partner of funds in
Chief Executive Officer and the Fund Complex.
Managing Director of Van Kampen
Investments and its investment
advisory, distribution and other
subsidiaries. Prior to December
2002, President and Chief
Executive Officer of funds in the
Fund Complex. Prior to May 1998,
Executive Vice President and
Director of Marketing at Morgan
Stanley and Director of Dean
Witter, Discover & Co. and Dean
Witter Realty. Prior to 1996,
Director of Dean Witter Reynolds
Inc.
</Table>
S-5
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Wayne W. Whalen* (65) Trustee Trustee Partner in the law firm of 83 Trustee/Director/
333 West Wacker Drive since 1995 Skadden, Arps, Slate, Meagher & Managing General
Chicago, IL 60606 Flom LLP, legal counsel to funds Partner of funds in
in the Fund Complex. the Fund Complex.
Director of the
Abraham Lincoln
Presidential
Foundation.
</Table>
- ------------------------------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Messrs. Merin and Powers are interested persons of funds in
the Fund Complex and the Adviser by reason of their current or former
positions with Morgan Stanley or its affiliates. Mr. Whalen is an interested
person of certain funds in the Fund Complex by reason of he and his firm
currently providing legal services as legal counsel to such funds in the Fund
Complex.
+ Designated as Preferred Shares Trustee.
S-6
OFFICERS
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Stefanie V. Chang Yu (38) Vice President Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas and Secretary since 2003 Vice President and Secretary of funds in the Fund Complex.
New York, NY 10020
Amy R. Doberman (42) Vice President Officer Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas since 2004 Management; Managing Director of Morgan Stanley Investment
New York, NY 10020 Management, Inc., Morgan Stanley Investment Advisers Inc.
and the Adviser. Vice President of the Morgan Stanley
Institutional and Retail Funds since July 2004 and Vice
President of funds in the Fund Complex as of August 2004.
Previously, Managing Director and General Counsel of
Americas, UBS Global Asset Management from July 2000 to July
2004 and General Counsel of Aeltus Investment Management,
Inc from January 1997 to July 2000.
James W. Garrett (36) Chief Financial Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas Officer and since 2005 Chief Financial Officer and Treasurer of Morgan Stanley
New York, NY 10020 Treasurer Institutional Funds since 2002 and of funds in the Fund
Complex since 2005.
Joseph J. McAlinden (62) Executive Vice Officer Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas President and since 2002 Stanley Investment Advisors Inc., Morgan Stanley Investment
New York, NY 10020 Chief Investment Management Inc. and Morgan Stanley Investments LP and
Officer Director of Morgan Stanley Trust for over 5 years. Executive
Vice President and Chief Investment Officer of funds in the
Fund Complex. Managing Director and Chief Investment Officer
of Van Kampen Investments, the Adviser and Van Kampen
Advisors Inc. since December 2002.
Ronald E. Robison (66) Executive Vice Officer Executive Vice President and Principal Executive Officer of
1221 Avenue of the Americas President and since 2003 Funds in the Fund Complex since May 2003. Chief Executive
New York, NY 10020 Principal Officer and Chairman of Investor Services. Managing Director
Executive of Morgan Stanley. Chief Administrative Officer, Managing
Officer Director and Director of Morgan Stanley Investment Advisors
Inc., Morgan Stanley Services Company Inc. and Managing
Director and Director of Morgan Stanley Distributors Inc.
Chief Executive Officer and Director of Morgan Stanley
Trust. Executive Vice President and Principal Executive
Officer of the Institutional and Retail Morgan Stanley
Funds; Director of Morgan Stanley SICAV; previously Chief
Global Operations Officer and Managing Director of Morgan
Stanley Investment Management Inc.
John L. Sullivan (49) Chief Compliance Officer Chief Compliance Officer of funds in the Fund Complex since
1 Parkview Plaza Officer since 1996 August 2004. Prior August 2004, Director and Managing
Oakbrook Terrace, IL 60181 Director of Van Kampen Investments, the Adviser, Van Kampen
Advisors Inc. and certain other subsidiaries of Van Kampen
Investments, Vice President, Chief Financial Officer and
Treasurer of funds in the Fund Complex and head of Fund
Accounting for Morgan Stanley Investment Management. Prior
to December 2002, Executive Director of Van Kampen
Investments, the Adviser and Van Kampen Advisors Inc.
</Table>
- ---------------
COMPENSATION
Each trustee/director/managing general partner (hereinafter referred to in
this section as "trustee") who is not an affiliated person (as defined in the
1940 Act) of Van Kampen Investments, the Adviser or the Distributor (each a
"Non-Affiliated Trustee") is compensated by an annual retainer and meeting fees
for services to funds in the Fund Complex. Each fund in the Fund Complex (except
Van Kampen Exchange Fund) provides a deferred compensation plan to its
Non-Affiliated Trustees that allows trustees to defer receipt of their
compensation until retirement and earn a return on such deferred amounts.
Amounts deferred are retained by the Fund and earn a rate of return determined
S-7
by reference to the return on the common shares of the Fund or other funds in
the Fund Complex as selected by the respective Non-Affiliated Trustee. To the
extent permitted by the 1940 Act, the Fund may invest in securities of those
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general
assets of the Fund. Deferring compensation has the same economic effect as if
the Non-Affiliated Trustee reinvested his or her compensation into the funds.
Each fund in the Fund Complex (except Van Kampen Exchange Fund) provides a
retirement plan to its Non-Affiliated Trustees that provides Non-Affiliated
Trustees with compensation after retirement, provided that certain eligibility
requirements are met. Under the retirement plan, a Non-Affiliated Trustee who is
receiving compensation from the Fund prior to such Non-Affiliated Trustee's
retirement, has at least 10 years of service (including years of service prior
to adoption of the retirement plan) and retires at or after attaining the age of
60, is eligible to receive a retirement benefit per year for each of the 10
years following such retirement from the Fund. Non-Affiliated Trustees retiring
prior to the age of 60 or with fewer than 10 years but more than 5 years of
service may receive reduced retirement benefits from the Fund.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<Table>
<Caption>
Fund Complex
--------------------------------------------------------------
Aggregate Pension Aggregate Estimated
or Retirement Maximum Annual
Aggregate Benefits Accrued Benefits from the Total Compensation
Compensation as Part of Fund Complex before Deferral from
Name(1) from the Fund(2) Expenses(3) Upon Retirement(4) Fund Complex(5)
------- ---------------- ----------------- ------------------- --------------------
INDEPENDENT TRUSTEES
David C. Arch $ $ 35,277 $147,500 $192,530
Jerry D. Choate 82,527 126,000 200,002
Rod Dammeyer 63,782 147,500 208,000
Linda Hutton Heagy 24,465 142,500 184,784
R. Craig Kennedy 16,911 142,500 200,002
Howard J Kerr 140,743 147,500 208,000
Jack E. Nelson 97,294 109,500 200,002
Hugo F. Sonnenschein 64,476 147,500 208,000
Suzanne H. Woolsey 58,450 142,500 200,002
INTERESTED TRUSTEE
Wayne W. Whalen(1) 72,001 147,500 208,000
</Table>
- ------------------------------------
(1) Trustees not eligible for compensation are not included in the Compensation
Table. Mr. Whalen is an "interested person" (within the meaning of Section
2(a)(19) of the 1940 Act) of the Fund and certain other funds in the Fund
Complex. J. Miles Branagan retired as a member of the Board of Trustees of
the Fund and other funds in the Fund Complex on December 31, 2004.
(2) The amounts shown in this column represent the aggregate compensation before
deferral with respect to the Fund's fiscal year ended December 31, 2004. The
following Trustees deferred compensation from the Fund during the fiscal
year ended
S-8
December 31, 2004: Mr. Choate, $ ; Mr. Dammeyer, $ ; Ms.
Heagy, $ ; Mr. Nelson, $ ; Mr. Sonnenschein, $ ;
and Mr. Whalen, $ . The cumulative deferred compensation (including
interest) accrued with respect to each trustee, including former trustees,
from the Fund as of December 31, 2004 is as follows: Mr. Branagan,
$ ; Mr. Choate, $ ; Mr. Dammeyer, $ ; Ms. Heagy,
$ ; Mr. Kennedy, $ ; Mr. Miller, $ ; Mr. Nelson,
$ ; Mr. Robinson, $ ; Mr. Rooney, $ ; Mr. Sisto,
$ ; Mr. Sonnenschein, $ ; and Mr. Whalen, $ . The
deferred compensation plan is described above the Compensation Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits accrued by the operating funds in the Fund Complex for each of the
trustees for the funds' respective fiscal years ended in 2004. The
retirement plan is described above the Compensation Table.
(4) For each trustee, this is the sum of the estimated maximum annual benefits
payable by the funds in the Fund Complex for each year of the 10-year period
commencing in the year of such person's anticipated retirement. The
retirement plan is described above the Compensation Table.
(5) The amounts shown in this column represent the aggregate compensation paid
by all of the funds in the Fund Complex as of December 31, 2004 before
deferral by the trustees under the deferred compensation plan. Because the
funds in the Fund Complex have different fiscal year ends, the amounts shown
in this column are presented on a calendar year basis.
BOARD COMMITTEES
The Board of Trustees has three standing committees (an audit committee, a
brokerage and services committee and a governance committee). Each committee is
comprised solely of "Independent Trustees", which is defined for purposes herein
as trustees who: (1) are not "interested persons" of the Fund as defined by the
1940 Act and (2) are "independent" of the Fund as defined by the New York Stock
Exchange, American Stock Exchange and Chicago Stock Exchange listing standards.
The Board's audit committee consists of Jerry D. Choate, Rod Dammeyer and
R. Craig Kennedy. In addition to being Independent Trustees as defined above,
each of these trustees also meets the additional independence requirements for
audit committee members as defined by the New York Stock Exchange, American
Stock Exchange and Chicago Stock Exchange listing standards. The audit committee
makes recommendations to the Board of Trustees concerning the selection of the
Fund's independent registered public accounting firm, reviews with such
independent registered public accounting firm the scope and results of the
Fund's annual audit and considers any comments which the independent registered
public accounting firm may have regarding the Fund's financial statements, books
of account or internal controls. The Board of Trustees has adopted a formal
written charter for the audit committee which sets forth the audit committee's
responsibilities. The audit committee has reviewed and discussed the financial
statements of the Fund with management as well as with the independent
registered public accounting firm of the Fund, and discussed with the
independent registered public accounting firm the matters required to be
discussed under the Statement of Auditing Standards No. 61. The audit committee
has received the written disclosures and the
S-9
letter from the independent registered public accounting firm required under
Independence Standards Board Standard No. 1 and has discussed with the
independent registered public accounting firm its independence. Based on this
review, the audit committee recommended to the Board of Trustees of the Fund
that the Fund's audited financial statements be included in the Fund's annual
report to shareholders for the most recent fiscal year for filing with the SEC.
The Board's brokerage and services committee consists of Linda Hutton
Heagy, Hugo F. Sonnenschein and Suzanne H. Woolsey. The brokerage and services
committee reviews the Fund's allocation of brokerage transactions and
soft-dollar practices and reviews the transfer agency and shareholder servicing
arrangements with Investor Services.
The Board's governance committee consists of David C. Arch, Howard J Kerr
and Jack E. Nelson. In addition to being Independent Trustees as defined above,
each of these trustees also meets the additional independence requirements for
nominating committee members as defined by the New York Stock Exchange, American
Stock Exchange and Chicago Stock Exchange listing standards. The governance
committee identifies individuals qualified to serve as Independent Trustees on
the Board and on committees of the Board, advises the Board with respect to
Board composition, procedures and committees, develops and recommends to the
Board a set of corporate governance principles applicable to the Fund, monitors
corporate governance matters and makes recommendations to the Board, and acts as
the administrative committee with respect to Board policies and procedures,
committee policies and procedures and codes of ethics. The Independent Trustees
of the Fund select and nominate any other nominee Independent Trustees for the
Fund. While the Independent Trustees of the Fund expect to be able to continue
to identify from their own resources an ample number of qualified candidates for
the Board of Trustees as they deem appropriate, they will consider nominations
from shareholders to the Board. Nominations from shareholders should be in
writing and sent to the Independent Trustees as described below.
During the Fund's last fiscal year, the Board of Trustees held meetings.
During the Fund's last fiscal year, the audit committee of the Board held
meetings, the brokerage and services committee of the Board held meetings and
the governance committee held meetings.
SHARE OWNERSHIP
In addition to deferred compensation balances as described in the
Compensation Table, as of December 31, 2004, the most recently completed
calendar year prior to the date of this Statement of Additional Information,
each trustee of the Fund beneficially owned equity securities of the Fund and of
all of the funds in the Fund Complex overseen by the trustee in the dollar range
amounts specified below.
S-10
2004 TRUSTEE BENEFICIAL OWNERSHIP OF SECURITIES
INDEPENDENT TRUSTEES
<Table>
<Caption>
TRUSTEE
-----------------------------------------------------------------------------------------
ARCH CHOATE DAMMEYER HEAGY KENNEDY KERR NELSON SONNENSCHEIN WOOLSEY
-------- ------- -------- -------- -------- ------- ------- ------------ --------
Dollar range of equity securities
in the Fund.......................
Aggregate dollar range of equity
securities in all registered
investment companies overseen by
Trustee in the Fund Complex....... $50,001- $1- over $10,001- over $1- $1- $10,001- $10,001-
$100,000 $10,000 $100,000 $50,000 $100,000 $10,000 $10,000 $50,000 $50,000
</Table>
INTERESTED TRUSTEES
<Table>
<Caption>
TRUSTEE
----------------------------
MERIN POWERS WHALEN
-------- -------- --------
Dollar range of equity securities in the Fund...............
Aggregate dollar range of equity securities in all
registered investment companies overseen by Trustee in the
Fund Complex............................................... over over over
$100,000 $100,000 $100,000
</Table>
Including deferred compensation balances (which are amounts deferred and
thus retained by the Fund as described in the Compensation Table), as of
December 31, 2004, the most recently completed calendar year prior to the date
of this Statement of Additional Information, each trustee of the Fund had in the
aggregate, combining beneficially owned equity securities and deferred
compensation of the Fund and of all of the funds in the Fund Complex overseen by
the trustee, the dollar range of amounts specified below.
2004 TRUSTEE BENEFICIAL OWNERSHIP AND DEFERRED COMPENSATION
INDEPENDENT TRUSTEES
<Table>
<Caption>
TRUSTEE
--------------------------------------------------------------------------------------------
ARCH CHOATE DAMMEYER HEAGY KENNEDY KERR NELSON SONNENSCHEIN WOOLSEY
-------- -------- -------- -------- -------- -------- -------- ------------ --------
Dollar range of equity
securities and deferred
compensation in the Fund.......
Aggregate dollar range of equity
securities and deferred
compensation in all registered
investment companies overseen
by Trustee in Fund Complex..... $50,001- over over over over over over over $10,000-
$100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $50,001
</Table>
INTERESTED TRUSTEES
<Table>
<Caption>
TRUSTEE
------------------------------
MERIN POWERS WHALEN
-------- -------- --------
Dollar range of equity
securities and deferred
compensation in the Fund.......
Aggregate dollar range of equity
securities and deferred
compensation in all registered
investment companies overseen
by Trustee in the Fund
Complex........................ over over over
$100,000 $100,000 $100,000
</Table>
As of , 2005, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund.
S-11
CODE OF ETHICS
The Fund, the Adviser, and the Distributor have adopted a Code of Ethics
(the "Code of Ethics") that sets forth general and specific standards relating
to the securities trading activities of their employees. The Code of Ethics does
not prohibit employees from acquiring securities that may be purchased or held
by the Fund, but is intended to ensure that all employees conduct their personal
transactions in a manner that does not interfere with the portfolio transactions
of the Fund or other Van Kampen funds, or that such employees take unfair
advantage of their relationship with the Fund. Among other things, the Code of
Ethics prohibits certain types of transactions absent prior approval, imposes
various trading restrictions (such as time periods during which personal
transactions may or may not be made) and requires quarterly reporting of
securities transactions and other reporting matters. All reportable securities
transactions and other required reports are to be reviewed by appropriate
personnel for compliance with the Code of Ethics. Additional restrictions apply
to portfolio managers, traders, research analysts and others who may have access
to nonpublic information about the trading activities of the Fund or other Van
Kampen funds or who otherwise are involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. The Adviser obtains
and evaluates economic, statistical and financial information to formulate
strategy and implement the Fund's investment objective. The Adviser also
furnishes offices, necessary facilities and equipment, provides administrative
services to the Fund, renders periodic reports to the Fund's Board of Trustees
and permits its officers and employees to serve without compensation as trustees
or officers of the Fund if elected to such positions. The Fund, however, bears
the costs of its day-to-day operations, including service fees, distribution
fees, custodian fees, legal and independent registered public accounting firm
fees, the costs of reports and proxies to shareholders, compensation of trustees
of the Fund (other than those who are affiliated persons of the Adviser,
Distributor or Van Kampen Investments) and all other ordinary business expenses
not specifically assumed by the Adviser. The Advisory Agreement also provides
that the Adviser shall not be liable to the Fund for any actions or omissions in
the absence of willful misfeasance, bad faith, negligence or reckless disregard
of its obligations and duties under the Advisory Agreement.
The fee payable to the Adviser is reduced by any commissions, tender
solicitation and other fees, brokerage or similar payments received by the
Adviser or any other direct or indirect majority owned subsidiary of Van Kampen
Investments in connection with the purchase and sale of portfolio investments
less any direct expenses incurred by such subsidiary of Van Kampen Investments
in connection with obtaining such commissions, fees, brokerage or similar
payments. The Adviser agrees to use its best efforts to recapture tender
solicitation fees and exchange offer fees for the Fund's benefit and to advise
the trustees of the Fund of any other commissions, fees, brokerage or similar
payments which may be possible for the Adviser or any other direct or indirect
majority owned subsidiary
S-12
of Van Kampen Investments to receive in connection with the Fund's portfolio
transactions or other arrangements which may benefit the Fund.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Board of Trustees or (ii) by a
vote of a majority of the Fund's outstanding voting securities and (b) by a vote
of a majority of the trustees who are not parties to the agreement or interested
persons of any such party by votes cast in person at a meeting called for such
purpose. The Advisory Agreement provides that it shall terminate automatically
if assigned and that it may be terminated without penalty by either party on 60
days' written notice.
In approving the Advisory Agreement, the Board of Trustees, including the
non-interested trustees, considered the nature, quality and scope of the
services provided by the Adviser, the performance, fees and expenses of the Fund
compared to other similar investment companies, the Adviser's expenses in
providing the services and the profitability of the Adviser and its affiliated
companies. The Board of Trustees also reviewed the benefit to the Adviser of
receiving research paid for by Fund assets and the propriety of such an
arrangement and evaluated other benefits the Adviser derives from its
relationship with the Fund. The Board of Trustees considered the extent to which
any economies of scale experienced by the Adviser are shared with the Fund's
shareholders, and the propriety of existing and alternative breakpoints in the
Fund's advisory fee schedule. The Board of Trustees considered comparative
advisory fees of the Fund and other investment companies at different asset
levels, and considered the trends in the industry versus historical and
projected sales and redemptions of the Fund. The Board of Trustees reviewed
reports from third parties about the foregoing factors and considered changes,
if any, in such items since its previous approval. The Board of Trustees
discussed the financial strength of the Adviser and its affiliated companies and
the capability of the personnel of the Adviser. The Board of Trustees reviewed
the statutory and regulatory requirements for approval of advisory agreements.
The Board of Trustees, including the non-interested trustees, evaluated all of
the foregoing and determined, in the exercise of its business judgment, that
approval of the Advisory Agreement was in the best interests of the Fund and its
shareholders.
Prior to the date of this Statement of Additional Information, Van Kampen
Advisors Inc., an affiliate of the Adviser, acted as sub-adviser to the Fund.
Van Kampen Advisors Inc. was located at 40 Broad Street, Suite 915, Boston,
Massachusetts 02109. The Adviser paid to Van Kampen Advisors Inc. on a monthly
basis a portion of the net advisory fees that the Adviser received from the
Fund.
ADVISORY FEES
<Table>
<Caption>
FISCAL YEAR ENDED NOVEMBER 30,
---------------------------------------
2004 2003 2002
----------- ----------- -----------
The Adviser received the approximate advisory
fees of...................................... $ $ $
</Table>
S-13
PORTFOLIO MANAGERS
OTHER ACCOUNTS MANAGED BY THE PORTFOLIO MANAGERS
As of [ ], Thomas Byron managed [ ] registered investment
companies with a total of $[ ] billion in assets; [ ] pooled
investment vehicles other than registered investment companies with a total of
$[ ] million in assets; and [ ] other accounts with a total of
$[ ] billion in assets.
As of [ ], Robert Wimmel managed [ ] registered
investment companies with a total of $[ ] billion in assets;
[ ] pooled investment vehicles other than registered investment
companies with a total of $[ ] million in assets; and [ ]
other accounts with a total of $[ ] billion in assets.
As of [ ], John Reynoldson managed [ ] registered
investment companies with a total of $[ ] billion in assets;
[ ] pooled investment vehicles other than registered investment
companies with a total of $[ ] million in assets; and [ ]
other accounts with a total of $[ ] billion in assets.
Because the portfolio managers manage assets for other mutual funds, pooled
investment vehicles, institutional clients, pension plans and certain high net
worth individuals, there may be incentive to favor one client over another
resulting in conflicts of interest. For instance, the Adviser may receive fees
from certain accounts that are higher than the fee it receives from the Fund, or
it may receive a performance-based fee on certain accounts. In those instances,
the portfolio managers may have an incentive to favor the higher and/or
performance-based fee accounts over the Fund. The Adviser has adopted policies
and procedures reasonably designed to address these and other conflicts of
interest.
PORTFOLIO MANAGER COMPENSATION
BASE COMPENSATION. Generally, portfolio managers receive base compensation
based on the level of their position with the Adviser.
DISCRETIONARY COMPENSATION. In addition to base compensation, portfolio
managers may receive discretionary compensation. Discretionary compensation can
include:
- Cash Bonus;
- Morgan Stanley's Equity Incentive Compensation Program (EICP) awards--a
mandatory program that defers a portion of discretionary year-end
compensation into restricted stock units or other awards based on Morgan
Stanley common stock that are subject to vesting and other conditions;
- Investment Management Deferred Compensation Plan (IMDCP) awards--a
mandatory program that defers a portion of discretionary year-end
compensation and notionally invests it in certain Morgan Stanley Funds.
The award is subject to vesting and other conditions. Portfolio managers
must notionally invest a minimum of 25% to a maximum of 50% of the IMDCP
deferral into a combination of the [referenced] funds they manage or
directly support that are included in the IMDCP fund menu.
S-14
- Select Employees' Capital Accumulation Program (SECAP) awards--a
voluntary program that permits employees to elect to defer a portion of
their discretionary compensation and notionally invest the deferred
amount across a range of [referenced] investment funds, including Morgan
Stanley funds; and
- Voluntary Equity Incentive Compensation Program (VEICP) awards--a
voluntary program that permits employees to elect to defer a portion of
their discretionary compensation to invest in Morgan Stanley stock units.
Several factors determine discretionary compensation, which can vary by
portfolio management team and circumstances. In order of relative importance,
these factors include
- Investment performance. The majority of a portfolio manager's
compensation is linked to the Fund's pre-tax investment performance.
Investment performance is calculated for one-, three and five-year
periods measured against the Fund's benchmark, indexes and/or peer
groups. Generally, the greatest weight is placed on the three- and
five-year periods.
- The Fund's revenue.
- Contribution to the business objectives of the Adviser.
- The dollar amount of assets managed by the portfolio manager.
- Market/compensation survey.
- Other qualitative factors, such as contributions to client objectives.
- Performance of other affiliated entities, including Morgan Stanley and
Morgan Stanley Investment Management, and the Global Investor Group, a
division of Morgan Stanley Investment Management.
Occasionally, to attract new hires or to retain key employees, the total
amount of compensation will be guaranteed in advance of the fiscal year end
based on current market levels. In limited circumstances, the guarantee may
continue for more than one year. The guaranteed compensation comprises the same
factors as those comprising overall compensation described above.
The same methodology is used to determine portfolio manager compensation
for all accounts.
SECURITIES OWNERSHIP OF PORTFOLIO MANAGERS
As of the end of the Fund's most recently completed fiscal year, the dollar
range of securities beneficially owned by each portfolio manager in the Fund is
shown below:
<Table>
<Caption>
BYRON WIMMEL REYNOLDSON
- -------- -------- ----------
[ ] [ ] [ ]
</Table>
S-15
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions on such transactions. While
the Adviser will be primarily responsible for the placement of the Fund's
portfolio business, the policies and practices in this regard are subject to
review by the Fund's Board of Trustees.
As most transactions made by the Fund are principal transactions at net
prices, the Fund generally incurs little or no brokerage costs. The portfolio
securities in which the Fund invests are normally purchased directly from the
issuer or in the over-the-counter market from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers include a spread or markup to the dealer
between the bid and asked price. Sales to dealers are effected at bid prices.
The Fund may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid, or may purchase and
sell listed securities on an exchange, which are effected through brokers who
charge a commission for their services.
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker-dealers and in negotiating prices and any brokerage commissions
on such transactions, the Adviser considers the firm's reliability, integrity
and financial condition and the firm's execution capability, the size and
breadth of the market for the security, the size of and difficulty in executing
the order, and the best net price. There are many instances when, in the
judgment of the Adviser, more than one firm can offer comparable execution
services. In selecting among such firms, consideration may be given to those
firms which supply research and other services in addition to execution
services. The Adviser is authorized to pay higher commissions to brokerage firms
that provide it with investment and research information than to firms which do
not provide such services if the Adviser determines that such commissions are
reasonable in relation to the overall services provided. No specific value can
be assigned to such research services which are furnished without cost to the
Adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser to the Fund and still must be analyzed
and reviewed by its staff, the receipt of research information is not expected
to reduce its expenses materially. The investment advisory fee is not reduced as
a result of the Adviser's receipt of such research services. Services provided
may include (a) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing all of its advisory
accounts; not all of such services may be used by the Adviser in connection with
the Fund.
S-16
The Adviser also may place portfolio transactions, to the extent permitted
by law, with brokerage firms affiliated with the Fund and the Adviser if it
reasonably believes that the quality of execution and the commission are
comparable to that available from other qualified firms.
The Adviser may place portfolio transactions at or about the same time for
other advisory accounts, including other investment companies. The Adviser seeks
to allocate portfolio transactions equitably whenever concurrent decisions are
made to purchase or sell securities for the Fund and another advisory account.
In some cases, this procedure could have an adverse effect on the price or the
amount of securities available to the Fund. In making such allocations among the
Fund and other advisory accounts, the main factors considered by the Adviser are
the respective sizes of the Fund and other advisory accounts, the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and opinions of the persons responsible
for recommending the investment.
Certain broker-dealers, through which the Fund may effect securities
transactions, are affiliated persons (as defined in the 1940 Act) of the Fund or
affiliated persons of such affiliates, including Morgan Stanley or its
subsidiaries. The Fund's Board of Trustees has adopted certain policies
incorporating the standards of Rule 17e-1 issued by the SEC under the 1940 Act
which require that the commissions paid to affiliates of the Fund must be
reasonable and fair compared to the commissions, fees or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time.
The rule and procedures also contain review requirements and require the Adviser
to furnish reports to the trustees and to maintain records in connection with
such reviews. After consideration of all factors deemed relevant, the trustees
will consider from time to time whether the advisory fee for the Fund will be
reduced by all or a portion of the brokerage commission paid to affiliated
brokers.
S-17
Unless otherwise disclosed below, the Fund paid no commissions to
affiliated brokers during the last three fiscal years. The Fund paid the
following commissions to brokers during the fiscal years shown:
<Table>
<Caption>
AFFILIATED BROKERS
ALL BROKERS MORGAN STANLEY DW INC.
----------- ----------------------
COMMISSIONS PAID:
Fiscal year ended October 31, 2004..... 1 0
Fiscal year ended October 31, 2003..... 16 0
Fiscal year ended October 31, 2002..... 0 0
FISCAL YEAR 2004 PERCENTAGES:
Commissions with affiliate to total commissions..... 0%
Value of brokerage transactions with affiliate to
total transactions............................... 0%
</Table>
During the fiscal year ended October 31, 2004, the Fund paid no brokerage
commissions to brokers selected primarily on the basis of research services
provided to the Adviser.
ADDITIONAL INFORMATION
RELATING TO AUCTION PREFERRED SHARES OF THE FUND
The following is a brief description of the terms of the shares of each
series of APS of the Acquiring Fund. This description does not purport to be
complete and is subject to and qualified in its entirety by reference to Fund's
Declaration of Trust, including the Certificate of Vote establishing and fixing
the rights and preferences of the shares of such series of APS, attached hereto
as Appendix B (together, the "APS Provisions"). Capitalized terms not otherwise
defined below are defined in the Certificate of Vote.
The Declaration of Trust currently authorizes the issuance of an unlimited
number of shares of Common Shares and 100,000,000 Preferred Shares of beneficial
interest, par value $.01 per share (which may be issued from time to time in
such series and with such designations, preferences and other rights,
qualifications, limitations and restrictions as are determined in a resolution
of the Board of Trustees of the Fund). Under the APS Provisions, the Fund
currently has outstanding 12,000 APS. All shares of each series of APS have a
liquidation preference of $25,000 per share plus an amount equal to accumulated
but unpaid dividends (whether or not earned or declared). The shares of each
series of APS will 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 liquidation. So long as either Moody's or S&P is
rating the shares of any series of APS, the Fund may, without the vote of the
holders of APS, issue additional series of Preferred Shares, including APS,
subject to applicable provisions of the 1940 Act and to continuing compliance
with the 1940 Act APS Asset Coverage and the APS Basic Maintenance Amount,
provided that (1) any such additional series ranks on a parity with the then
Outstanding APS as to the payment of dividends and the distribution of assets
upon liquidation and (2) the Fund obtains written confirmation from Moody's or
S&P, or both, as the case may be, that the issuance of any such additional
series would not impair the rating then assigned by such rating agency to the
APS.
S-18
DIVIDENDS AND DIVIDEND PERIODS
Dividends on shares of each series of APS will accumulate at the Applicable
Rate per annum and will be payable, when, as and if declared by the Board of
Trustees of the Fund out of funds legally available therefor, on shares of APS
Series A on each Tuesday, on shares of APS Series B on each fourth Wednesday, on
shares of APS Series C on each Thursday and on shares of APS Series D on each
fourth Friday, in each case subject to certain exceptions. The Fund, subject to
certain conditions, may designate any 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 exceptions.
Dividends will be paid through the Securities Depository (The Depository
Trust Company or any successor) on each Dividend Payment Date in accordance with
its normal procedures, which now provide for it to distribute dividends in
next-day funds to Agent Members, who in turn are expected to distribute such
dividend payments to the persons for whom they are acting as agents. Each of the
initial Broker Dealers, however, has indicated to the Fund that such
Broker-Dealer or 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 such affiliate as Agent Member.
For each Dividend Period, the dividend rate for shares of each series of
APS will be the Applicable Rate per annum that the Auction Agent (Bankers Trust
Company or any successor) advises the Fund results from an Auction, except as
provided below. The dividend rate that results from an Auction for a series of
APS will not be greater than the Maximum Rate, which is:
(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 of such series and (2) the
Applicable Percentage on such Auction Date, unless such series of 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 for
such series (7 days with respect to APS Series A and APS Series C and
28 days with respect to APS Series B and APS Series D) after such
Special Dividend Period, in which case the higher of:
(A) the dividend rate on shares of such series of APS for the
then-ending Rate Period, and
(B) the product of-(x) the higher of (1) the "AA" Composite Commercial
Paper Rate on such Auction Date for the then-ending Rate Period of
such series, if such Rate Period is less than one year, or the
Treasury Rate on such Auction Date for such Rate Period, if such
Rate Period is one year or longer, and (11) the "AA" Composite
Commercial Paper Rate on such Auction Date for such Special
Dividend Period of such series, if such Special Dividend Period is
less than one year, or the Treasury Rate on such Auction Date for
such Special Dividend Period, if such Special Dividend Period is
one year or longer and (y) the Applicable Percentage on such
Auction Date; or
S-19
(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, the
product of (1) the highest of (x) the "AA" Composite Commercial Paper
Rate on such Auction Date for the then-ending Rate Period of such
series, if such Rate Period is less than one year, or the Treasury
Rate on such Auction Date for such Rate Period, if such Rate Period is
one year or longer, (y) the "AA" Composite Commercial Paper Rate on
such Auction Date for the Special Dividend Period of such series 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 longer, and (z) the "AA"
Composite Commercial Paper Rate on such Auction Date for a Minimum
Dividend Period and (2) the Applicable Percentage on such Auction
Date.
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" will be a percentage, determined as set forth
below, based on the prevailing rating of the APS in effect at the close of
business on the Business Day next preceding such Auction Date:
<Table>
<Caption>
APPLICABLE
PREVAILING RATING PERCENTAGE
- ----------------- ----------
"Aa3"/AA- or higher........................................ 110%
"A3"/A-.................................................... 125%
"Baa3"/BBB................................................. 150%
"Ba3"/BB-.................................................. 200%
Below "Ba3"/BB-............................................ 250%
</Table>
provided, however, that in the event the Fund has notified the Auction Agent of
its intent to allocate income that is taxable for federal income tax purposes to
the APS prior to any Auction, for purposes of determining the Maximum Rate with
respect to such Auction the Applicable Percentage in the foregoing table shall
be divided by the quantity 1 minus the maximum marginal regular federal
individual income tax rate applicable to ordinary income or the maximum marginal
regular federal corporate income tax rate, whichever is greater, provided,
however, 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 the APS. If the APS
are rated by only one rating agency, such rating will be the prevailing rating.
If the ratings for the APS are split between two of the foregoing categories,
the lower rating will determine the prevailing rating.
If an Auction for any Dividend Period of any series of APS is not held for
any reason or if the Fund fails to pay in a timely manner to the Auction Agent
the full amount of any dividend on, or Redemption Price of, shares of any series
of APS and such failure has not been cured as set forth below prior to any
succeeding Dividend Period thereof, then, subject to the next paragraph, the
dividend rate on the shares of such series for any such Dividend Period will be
the Maximum Rate for such series on the Auction Date for such Dividend Period.
S-20
If the 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 shares of any series
of APS during any Rate Period thereof (other than any Special Dividend Period
consisting of four or more Dividend Periods or any Rate Period succeeding any
Special Dividend Period consisting of four or more Dividend Periods during which
such a failure occurred that has not been cured), 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 or the Fund shall not have paid a late
charge, then Auctions for such series will be suspended until such failure is so
cured and the dividend rate for such shares of APS for each Dividend Period
thereof commencing after such failure to and including the 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 Dividend Period (but with the
prevailing rating for such shares, for purposes of determining such Maximum
Rate, being deemed to be "Below "Ba3"/BB-"). If the 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 shares of any series of APS during a Special Dividend
Period thereof consisting of four or more Dividend Periods, or during any
Dividend Period thereof succeeding any Special Dividend Period consisting of
four or more Dividend Periods during which such a failure occurred that has not
been cured, and such failure shall not have been cured as described herein, then
Auctions for such series will be suspended until such failure is so cured and
the dividend rate for such shares of APS for each Dividend Period thereof
commencing after such failure to and including the 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 Dividend Period (but with the
prevailing rating for such shares, for purposes of determining such Maximum
Rate, being deemed to be "Below "Ba3"/BB-").
DESIGNATION OF SPECIAL DIVIDEND PERIODS
The Fund, at its option, may designate any succeeding Dividend Period of
any series 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, shares of such series of APS shall have been cured as set
forth above (iii) Sufficient Clearing Bids for such series shall have existed in
an Auction held on the Auction Date immediately preceding the first day of such
proposed Special Dividend Period, (iv) if the Fund shall have mailed a notice of
redemption with respect to any shares of such series, 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 Dividend Period for
such series 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 to such series.
ADDITIONAL DIVIDENDS
Whenever the Fund intends to include any net capital gains or other income
that is taxable for federal income tax purposes in any dividend on shares of any
series of APS, the Fund will notify the Auction Agent of the amount to be so
included 15 days prior to the
S-21
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.
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 solely by reason of the fact that such
allocation is made as a result of the redemption of all or a portion of the
outstanding APS or the liquidation of the Fund (such allocation is referred to
herein as a "Retroactive Taxable Allocation"), the Fund will, within 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 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.
"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.
AUCTION PROCEDURES
On each Auction Date for each series of APS (the Business Day prior to the
beginning of each Rate Period), each Existing Holder may submit Orders through a
Broker-Dealer to the Auction Agent as follows:
- Hold Order-indicating its desire to hold without regard to the Applicable
Rate for the next Rate Period.
- Bid-indicating its desire to sell if the Applicable Rate for the next
Rate Period is less than the rate specified in such Bid.
S-22
- Sell Order-indicating its desire to sell without regard to the Applicable
Rate for the next Rate Period.
An Existing Holder may submit different types of Orders in an Auction with
respect to shares of APS then held by such Existing Holder. An Existing Holder
that offers to purchase additional shares of APS is, for purposes of such offer,
treated as a Potential Holder as described below. Bids of Existing Holders with
rates higher than the Maximum Rate on the Auction Date will be treated as Sell
Orders. A Hold Order will be deemed to have been submitted on behalf of an
Existing Holder if an Order is not submitted on behalf of such Existing Holder
for any reason, including the failure of a Broker-Dealer to submit such Existing
Holder's Order to the Auction Agent.
Potential Holders of shares of any series of APS may submit Bids in which
they will offer to purchase shares of such series of APS if the Applicable Rate
for the next Rate Period is not less than the rate specified in such Bid. A Bid
by a Potential Holder specifying a rate higher than the Maximum Rate will not be
accepted.
If Sufficient Clearing Bids exist (that is, the number of shares of a
particular series of APS subject to Bids by Potential Holders with rates equal
to or lower than the Maximum Rate is at least equal to the number of shares of
such series of APS subject to Sell Orders by Existing Holders), the Applicable
Rate for such series will be the lowest rate specified in the Submitted Bids
which, taking into account such rate and all lower rates bid by Existing Holders
and Potential Holders, would result in Existing Holders and Potential Holders
owning all the shares of such series of APS available for purchase in the
Auction. If Sufficient Clearing Bids do not exist, the Applicable Rate will be
the Maximum Rate on the Auction Date, and, in such event. Existing Holders that
have submitted Sell Orders may not be able to sell in such Auction all shares of
such series of APS subject to such Sell Orders. If all Existing Holders of
shares of such series of APS submit or are deemed to have submitted Hold Orders,
the Applicable Rate will be the product of (i) (1) the "AA" Composite Commercial
Paper Rate on such Auction Date for the Rate Period for which the Auction is
held, 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 longer 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 the 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
the APS for such Rate Period that represents the allocation of net capital gains
or other income 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).
The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of shares of APS that is fewer than
the number of shares of APS specified in its Order.
A Bid placed by an Existing Holder specifying a rate greater than the
Applicable Rate determined in the Auction or a Sell Order shall constitute an
irrevocable offer to sell the shares of such series of APS subject thereto, in
each case at a price per share equal to
S-23
$25,000. A Bid placed by a Potential Holder shall constitute an irrevocable
offer to purchase the shares of such series of APS subject thereto at a price
per share equal to $25,000 if the rate specified in such Bid is less than or
equal to the Applicable Rate determined in the Auction. Settlement of purchases
and sales will be made on the next Business Day (also a Dividend Payment Date)
after the Auction Date through the Securities Depository. Purchasers will make
payment through their Agent Members in same-day funds to the Securities
Depository against delivery to their respective Agent Members. The Securities
Depository will make payment to the sellers' Agent Members in accordance with
the Securities Depository's normal procedures, which now provide for payment
against delivery by their Agent Members in same-day funds.
ASSET MAINTENANCE
Under the Fund's Declaration of Trust, including the Certificate of Vote
establishing and fixing the rights and preferences of the shares of such series
of APS on file with the Secretary of State of The Commonwealth of Massachusetts
(together, the "APS Provisions"), the Fund must maintain (i) assets having in
the aggregate a Discounted Value at least equal to the APS Basic Maintenance
Amount, and (ii) 1940 Act APS Asset Coverage of at least 200%.
The Discount Factors and guidelines for calculating the Discounted Value of
the Fund's portfolio for purposes of determining whether the APS Basic
Maintenance Amount has been satisfied have been established by Moody's and S&P
in connection with the Fund's receipt of ratings on the shares of each series of
APS of "Aaa" from Moody's and AAA from S&P.
MINIMUM LIQUIDITY LEVEL
So long as any of the APS are Outstanding and S&P is rating the APS, the
Fund will be required under the APS Provisions to maintain as of each Valuation
Date certain Dividend Coverage Assets with a value not less than the Dividend
Coverage Amount (the "Minimum Liquidity Level").
MANDATORY REDEMPTION
If the APS Basic Maintenance Amount or the 1940 Act APS Asset Coverage is
not maintained or restored as specified herein, the APS will be subject to
mandatory redemption on a date specified by the Board of Trustees, out of funds
legally available therefor, at the redemption price of $25,000 per share plus an
amount equal to accumulated but unpaid dividends thereon (whether or not earned
or declared) to the date fixed for redemption. Any such redemption will be
limited to the number of APS necessary to restore the APS Basic Maintenance
Amount or the 1940 Act APS Asset Coverage, as the case may be.
OPTIONAL REDEMPTION
Except as described in the APS Provisions shares of each series of APS are
redeemable, in whole or in part, at the option of the Fund, on the next
succeeding scheduled Dividend Payment Date applicable to the shares of such
series of APS called
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for redemption, out of funds legally available therefor, at the Optional
Redemption Price of $25,000 per share plus (in the case of a Special Dividend
Period only) a premium, if any, resulting from the designation of a Premium Call
Period, plus an amount equal to dividends thereon (whether or not earned or
declared) accumulated but unpaid to the date fixed for redemption; provided that
during a Special Dividend Period of 365 days or more no share of such series of
APS will be subject to optional redemption during any Non-Call Period to which
such series of APS may be subject.
LIQUIDATION PREFERENCE
The liquidation preference of the shares of each series of APS is $25,000
per share plus accumulated but unpaid dividends, if any, thereon (whether or not
earned or declared).
VOTING RIGHTS
The 1940 Act requires that the holders of APS, voting as a separate class,
have the right to elect at least two Trustees at all times and to elect a
majority of the Trustees at any time that two years' dividends on the APS are
unpaid. The holders of APS will vote as a separate class or classes on certain
other matters as required under the APS Provisions, the 1940 Act and
Massachusetts law. In addition, each series of APS may vote as a separate series
under certain circumstances.
MASTER PURCHASER'S LETTER
Each prospective purchaser of shares of any series of APS or its
Broker-Dealer will be required to sign and deliver a Master Purchaser's Letter
to the Auction Agent in which such prospective purchaser or its Broker-Dealer
will agree, among other things, that (i) dispositions of shares of such series
of APS may be made only pursuant to a Bid or a Sell Order placed in an Auction,
or to or through a Broker-Dealer or to a person that has delivered a signed
Master Purchaser's Letter to the Auction Agent, provided that in the case of all
transfers other than those pursuant to Auctions, the Existing Holder of the
shares so transferred, its Agent Member or its Broker-Dealer advises the Auction
Agent of such transfer, and (ii) ownership of shares of such series of APS will
be maintained in book entry form by the Securities Depository for the account of
such prospective purchaser's Agent Member, which in turn will maintain records
of such prospective purchaser's beneficial ownership.
Each prospective purchaser should ask its Broker-Dealer whether such
prospective purchaser should sign a Master Purchaser's Letter. If the
Broker-Dealer submits Orders for such prospective purchaser listing the
Broker-Dealer as the Existing Holder or the Potential Holder, a Master
Purchaser's Letter signed by such prospective purchaser may not be required.
Execution by a prospective purchaser or its Broker-Dealer of a Master
Purchaser's Letter is not a commitment to purchase shares of APS in the offering
being made by this Prospectus or in any Auction, but is a condition precedent to
such purchaser's purchasing shares of APS. In addition, acceptance of a Master
Purchaser's Letter is not a guarantee that shares of APS will be available for
purchase.
S-25
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 Quotations system.
RATING AGENCY GUIDELINES
The Fund intends that, so long as shares of any series of APS are
Outstanding, the composition of its portfolio will reflect guidelines
established by Moody's and S&P in connection with the Fund's receipt on the Date
of Original Issue of the shares of each series of APS 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 Fund will pay certain fees to Moody's
and S&P for rating shares of the APS. The guidelines 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 Fund in
order to satisfy current requirements necessary for Moody's and S&P to issue the
above-described ratings for shares of each series of 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 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 1940 Act. A rating agency's guidelines will
apply to shares of any series of APS only so long as such rating agency is
rating such shares.
The 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 shares of any series of 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 Fund's total assets.
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
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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 Fund 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.
Upon any failure to maintain the required Discounted Value, the 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, shares of each series of APS will be subject to
redemption if either Moody's or S&P is rating such shares.
The 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 shares of any series of 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 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 any series of APS. A rating agency's
guidelines will apply to shares of any series of APS only so long as such rating
agency is rating such shares.
The ratings on any series of the APS are not recommendations to purchase,
hold or sell shares of any series of 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 shares
of any series 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 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.
OTHER INFORMATION
PRINCIPAL SHAREHOLDERS
As of [specify date no more than 30 days prior to filing of registration
statement or amendment to it], 2005, no person was known by the Fund to own
beneficially or to hold of record 5% or more of the outstanding common shares or
preferred shares of the Fund, except as follows:
<Table>
<Caption>
APPROXIMATE PERCENTAGE OF
OWNERSHIP ON
NAME AND ADDRESS OF HOLDER CLASS OF SHARES [ ], 2005
- -------------------------- --------------- -------------------------
</Table>
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CUSTODY OF ASSETS
Except for segregated assets held by a futures commission merchant pursuant
to rules and regulations promulgated under the 1940 Act, all securities owned by
the Fund and all cash, including proceeds from the sale of shares of the Fund
and of securities in the Fund's investment portfolio, are held by State Street
Bank and Trust Company, 225 West Franklin Street, Boston, Massachusetts 02110,
as custodian. The custodian also provides accounting services to the Fund.
PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD
The Fund's Proxy Voting Policy and Procedures are included as Appendix E to
this Statement of Additional Information. Information on how the Fund voted
proxies relating to portfolio securities during the most recent twelve-month
period ended June 30 is available without charge, upon request, by calling (800)
847-2424 or by visiting our web site at www.vankampen.com. This information is
also available on the SEC's web site at http://www.sec.gov.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
An independent registered public accounting firm for the Fund performs an
annual audit of the Fund's financial statements. The Fund's Board of Trustees
has engaged [ ], located at [ ], to be the
Fund's independent registered public accounting firm.
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
[ ], as included in Appendix C hereto and (ii) the audited financial
statements of the Target Fund for fiscal year ended [ ], as included in
Appendix D hereto.
S-28
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 Investment Grade Municipal Trust, a registered
closed-end investment company, File No. 811-05786 (the "Target Fund") and Van
Kampen Municipal Trust (the "Acquiring Fund"), a registered closed-end
investment company, File No. 811-06362, 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 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, 2004, and the audited financial statements
appearing therein, having been audited by [ ], independent
registered public accounting firm, fairly present the
financial position of the Acquiring Fund as of the respective
dates indicated, in conformity with accounting principles
generally accepted in the United States applied on a
consistent basis.
(d) An unaudited statement of assets, liabilities and capital of
the Acquiring Fund and an unaudited schedule of investments of
the Acquiring Fund, each as of the Valuation Time (as defined
in Section 5(d) of this Agreement), will be furnished to the
Target Fund, at or prior to the Closing Date for the purpose
of determining the number of Acquiring Fund Common Shares, and
Acquiring Fund APS to be issued pursuant to Section 6 of this
Agreement; each will fairly present the financial position of
the Acquiring Fund as of the Valuation Time in conformity with
generally accepted accounting principles applied on a
consistent basis.
(e) The Acquiring Fund has full power and authority to enter into
and perform its obligations under this Agreement. The
execution, delivery and performance of this Agreement has been
duly authorized by all necessary action of its Board of
Trustees, and this Agreement constitutes a valid and binding
contract enforceable in accordance with its terms, subject
to the effects of bankruptcy, insolvency, moratorium,
fraudulent conveyance and similar
A-1
laws relating to or affecting creditors' rights generally and
court decisions with respect thereto.
(f) There are no material legal, administrative or other
proceedings pending or, to the knowledge of the Acquiring
Fund, threatened against it which assert liability on the part
of the Acquiring Fund or which materially affect its financial
condition or its ability to consummate the Reorganization. The
Acquiring Fund is not charged with or, to the best of its
knowledge, threatened with any violation or investigation of
any possible violation of any provisions of any federal, state
or local law or regulation or administrative ruling relating
to any aspect of its business.
(g) The Acquiring Fund is not obligated under any provision of its
Declaration of Trust, as amended, or its by-laws, as amended,
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 Closing Date, insofar as it relates
to the Acquiring Fund (i) complied or will comply in all
material respects with the provisions of the 1933 Act, the
1934 Act and the 1940 Act and the rules and regulations
thereunder and (ii) did not or will not contain any 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
A-2
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 $.0l per share. The Board of Trustees of
the Acquiring Fund has designated 12,000 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 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 Closing Date, the Acquiring Fund Common
Shares to be transferred to the Target Fund for distribution
to the shareholders of the Target Fund on the Closing Date
will be duly qualified for offering to the public in all
states of the United States in which the sale of shares of the
Funds presently are qualified, and there will be a sufficient
number of such shares registered under the 1933 Act and, as
may be necessary, with each pertinent state securities
commission to permit the transfers contemplated by this
Agreement to be consummated.
(o) At or prior to the Closing Date, the Acquiring Fund APS to be
transferred to the Target Fund on the Closing Date will be
duly qualified for offering to the public in all states of the
United States in which the sale of RP of the Target Fund
presently are qualified, and there are a sufficient number of
Acquiring Fund APS registered under the 1933 Act and with each
pertinent state securities commission to permit the transfers
contemplated by this Agreement to be consummated.
(p) At or prior to the Closing Date, the Acquiring Fund will have
obtained any and all regulatory, Trustee and shareholder
approvals necessary to issue the Acquiring Fund Common Shares
and the Acquiring Fund APS to the Target Fund.
(q) The Acquiring Fund has filed, or intends to file, or has
obtained extensions to file, all federal, state and local tax
returns which are required to be filed by it, and has paid or
has obtained extensions to pay, all federal, state and local
taxes shown on said returns to be due and owing and all
assessments received by it, up to and including the taxable
year in which the Closing Date occurs. All tax liabilities of
the Acquiring Fund have been adequately provided for on its
books, and no tax deficiency or liability of the Acquiring
Fund has been asserted and no question with respect thereto
has been raised by the Internal Revenue Service or by any
state or local tax authority for taxes in excess of those
already paid, up to and including the taxable year in which
the Closing Date occurs.
A-3
(r) The Acquiring Fund has elected to qualify and has qualified as
a RIC as of and since its inception; has been a RIC under the
Internal Revenue Code at all times since the end of its first
taxable year when it so qualified; qualifies and will continue
to qualify as a RIC under the Internal Revenue Code; and has
satisfied the distribution requirements imposed by the
Internal Revenue Code for each of its taxable years.
2. Representations and Warranties of the Target Fund.
The Target Fund represents and warrants to, and agrees with, the
Acquiring Fund that:
(a) The Target Fund is a trust, with transferable shares, duly
organized, validly existing and in good standing in conformity
with the laws of the jurisdiction of its organization, and has
the power to own all of its assets and to carry out this
Agreement. The Target Fund has all necessary federal, state
and local authorizations to carry on its business as it is now
being conducted and to carry out this Agreement.
(b) The Target Fund is duly registered under the 1940 Act as a
diversified, closed-end management investment company (File
No. 811-05786), 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, 2004, and the audited financial statements
appearing therein, having been audited by [ ], independent
registered public accounting firm, fairly present the
financial position of the Target Fund as of the respective
dates indicated, in conformity with accounting principles
generally accepted in the United States applied on a
consistent basis.
(f) An unaudited statement of assets, liabilities and capital of
the Target Fund and an unaudited schedule of investments of
the Target Fund, each as of the Valuation Time, will be
furnished to the Acquiring Fund at or prior to the Closing
Date for the purpose of determining the number of shares of
Acquiring Fund Common Shares and Acquiring Fund APS to be
issued to the Target Fund pursuant to Section 3 of this
Agreement; each will fairly present the financial position of
the Target Fund as of the Valuation Time in conformity with
generally accepted accounting principles applied on a
consistent basis.
A-4
(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 [ ], 2005 and those incurred in
connection with the Reorganization. As of the Valuation Time,
the Target Fund will advise the Acquiring Fund in writing of
all known liabilities, contingent or otherwise, whether or not
incurred in the ordinary course of business, existing or
accrued as of such time.
(k) The Target Fund has filed, or intends to file, or has obtained
extensions to file, all federal, state and local tax returns
which are required to be filed by it, and has paid or has
obtained extensions to pay, all federal, state and local taxes
shown on said returns to be due and owing and all assessments
received by it, up to and including the taxable year in which
the Closing Date occurs. All tax liabilities of the Target
Fund have been adequately provided for on its books, and no
tax deficiency or liability of the Target Fund has been
asserted and no question with respect thereto has been raised
by the Internal Revenue Service or by any state or local tax
authority for taxes in excess of those already paid, up to and
including the taxable year in which the Closing Date occurs.
(l) At both the Valuation Time and the Closing Date, the Target
Fund will have full right, power and authority to sell,
assign, transfer and deliver the Target Fund Investments. At
the Closing Date, subject only to the obligation to deliver
the Target Fund Investments as contemplated by this Agreement,
the Target Fund will have good and marketable title to all of
the Target Fund Investments, and the Acquiring Fund will
acquire all of the Target Fund Investments free and clear of
any encumbrances, liens or security interests and without any
restrictions upon the transfer thereof (except those imposed
by the federal or state securities laws and those
imperfections of title or encumbrances as do not materially
detract from the value or use of the Target Fund Investments
or materially affect title thereto).
(m) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the
Target Fund of the Reorganization, except such as may be
required under the 1933 Act, the 1934 Act, the 1940 Act or
state securities laws.
A-5
(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 Closing Date, insofar as it
relates to the Target Fund (i) complied or will comply in all
material respects with the provisions of the 1933 Act, the
1934 Act and the 1940 Act and the rules and regulations
thereunder, and (ii) did not or will not contain any untrue
statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the
statements therein not misleading; and the 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 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 250 preferred shares as
Remarketed Preferred Shares. Each outstanding common share of
beneficial interest and each outstanding Remarketed 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 RP were offered for sale and sold in
conformity with all applicable federal and state securities
laws.
(q) The books and records of the Target Fund made available to the
Acquiring Fund and/or its counsel are substantially true and
correct and contain no material misstatements or omissions
with respect to the operations of the Target Fund.
(r) The Target Fund will not sell or otherwise dispose of any of
the Acquiring Fund Common Shares or Acquiring Fund APS to be
received in the Reorganization, except in distribution to the
shareholders of the Target Fund, as provided in Section 3 of
this Agreement.
(s) The Target Fund has elected to qualify and has qualified as
"regulated investment company" under the Internal Revenue Code
(a "RIC") as of and since its inception; has been a RIC under
the Internal Revenue Code at all times since the end of its
first taxable year when it so qualified; qualifies and will
continue to qualify as a RIC under the Internal Revenue Code
for its taxable year ending upon its liquidation; and has
satisfied the distribution requirements imposed by the
Internal Revenue Code for each of its taxable years.
3. The Reorganization.
(a) Subject to receiving the requisite approvals of the
shareholders of the Target Fund, and to the other terms and
conditions contained herein, (i) the Target Fund agrees to
convey, transfer and deliver to the Acquiring Fund and the
Acquiring Fund agrees to acquire from the Target Fund, on the
Closing Date, all of the Target Fund Investments (including
interest accrued as of the Valuation Time on debt
instruments), and assume substantially all of the liabilities
of the Target Fund, in exchange solely for that number of
Acquiring
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Fund Common Shares and Acquiring Fund APS provided in Section
4 of this Agreement; Pursuant to this Agreement, as soon as
practicable after the Closing Date, the Target Fund will
distribute all Acquiring Fund Common Shares and Acquiring Fund
APS received by it to its shareholders in exchange for their
Target Fund Common Shares and Target Fund RP. Such
distributions shall be accomplished by the opening of
shareholder accounts on the share ledger records of the
Acquiring Fund in the amounts due the shareholders of the
Target Fund based on their respective holdings in the Target
Fund as of the Valuation Time.
(b) If it is determined that the portfolios of the Target Fund and
the Acquiring Fund, when aggregated, would contain investments
exceeding certain percentage limitations imposed upon the
Acquiring Fund with respect to such investments, the Target
Fund, if requested by the Acquiring Fund, will dispose of a
sufficient amount of such investments as may be necessary to
avoid violating such limitations as of the Closing Date.
Notwithstanding the foregoing, (a) nothing herein will require
the Target Fund to dispose of any portfolios, securities or
other investments, if, in the reasonable judgment of the
Target Fund's trustees or investment adviser, such disposition
would adversely affect the tax-free nature of the
Reorganization for federal income tax purposes or would
otherwise not be in the best interests of the Target Fund and
(b) nothing will permit the Target Fund to dispose of any
portfolio securities or other investments if, in the
reasonable judgment of the Acquiring Fund's trustees or
investment adviser, such disposition would adversely affect
the tax-free nature of the Reorganization for federal income
tax purposes or would otherwise not be in the best interests
of the Target Fund.
(c) The Valuation Time shall be 4:00 p.m., Eastern time, on [ ],
2005, or such earlier or later day and time as may be mutually
agreed upon in writing (the "Valuation Time").
(d) 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.
(e) The Target Fund will be terminated following the Closing Date
by terminating its registration under the 1940 Act and its
organization under Massachusetts law and will withdraw its
authority to do business in any state where it is required to
do so.
(f) 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
A-7
liquidation preference and value of which will equal the aggregate liquidation
preference and value of the Target Fund RP, determined as set forth below.
The net asset value of each of the Funds and the liquidation preference
and value of the Preferred Shares 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 [ ], relating to the Acquiring Fund
Common Shares and (ii) the prospectus of the Acquiring Fund, dated [ ], 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 or RP 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 RP 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 RP on the basis of such holder's proportionate interest in the
aggregate liquidation preference and value of the RP of the Target Fund. With
respect to any Target Fund shareholder holding certificates evidencing ownership
of Target Fund Common Shares as of the Closing Date, and subject to the
Acquiring Fund being informed thereof in writing by the Target Fund, the
Acquiring Fund will not permit such shareholder to receive new certificates
evidencing ownership of the Acquiring Fund Common Shares or Acquiring Fund APS,
exchange Acquiring Fund Common Shares or Acquiring Fund APS credited to such
shareholder's account for shares of other investment companies managed by the
Adviser or any of its affiliates, or pledge or redeem such Acquiring Fund Common
Shares or Acquiring Fund APS, in any case, until notified by the Target Fund or
its agent that such shareholder has surrendered his or her outstanding
certificates evidencing ownership of Target Fund Common Shares or Target Fund RP
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
RP, as the case may be, or post adequate bond therefore.
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
A-8
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.
5. Payment of Expenses.
(a) With respect to expenses incurred in connection with the
Reorganization, the Target Fund and the Acquiring Fund will
share, in proportion to their respective projected 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.
6. Covenants of the Funds.
(a) Each Fund covenants to operate its business as presently
conducted between the date hereof and the Closing Date.
(b) The Target Fund agrees that following the consummation of the
Reorganization, it will terminate in accordance with the laws
of The Commonwealth of Massachusetts and any other applicable
law, it will not make any distributions of any Acquiring Fund
Common Shares or Acquiring Fund APS other than to its
respective shareholders and without first paying or adequately
providing for the payment of all of its respective liabilities
not assumed by the Acquiring Fund, if any, and on and after
the Closing Date it shall not conduct any business except in
connection with its termination.
(c) The Target Fund undertakes that if the Reorganization is
consummated, it will file an application pursuant to Section
8(f) of the 1940 Act for an order declaring that the Target
Fund has ceased to be a registered investment company.
(d) The Acquiring Fund will file the N-14 Registration Statement
with the Securities and Exchange Commission (the "Commission")
and will use its best efforts to provide that the N-14
Registration Statement becomes effective as promptly as
practicable. Each Fund agrees to cooperate fully with the
other, and each will furnish to the other the information
relating to itself to be set forth in the N-14 Registration
Statement as required by the 1933 Act, the 1934 Act the 1940
Act, and the rules and regulations thereunder and the state
securities laws.
(e) The Acquiring Fund has no plan or intention to sell or
otherwise dispose of the Target Fund Investments, except for
dispositions made in the ordinary course of business.
A-9
(f) Each of the Funds agrees that by the Closing Date all of its
federal and other tax returns and reports required to be filed
on or before such date shall have been filed and all taxes
shown as due on said returns either have been paid or adequate
liability reserves have been provided for the payment of such
taxes.
The intention of the parties is that the transaction contemplated by
this Agreement will qualify as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code. Neither the Acquiring Fund nor the Target
Fund shall take any action or cause any action to be taken (including, without
limitation, the filing of any tax return) that is inconsistent with such
treatment or results in the failure of the transaction to qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code. At or prior to the Closing Date, the Acquiring Fund and the Target Fund
will take such action, or cause such action to be taken, as is reasonably
necessary to enable Skadden, Arps, Slate, Meagher & Flom LLP, special counsel to
the Funds, to render the tax opinion required herein (including, without
limitation, each party's execution of representations reasonably requested by
and addressed to Skadden, Arps, Slate, Meagher & Flom LLP).
In connection with this covenant, the Funds agree to cooperate with
each other in filing any tax return, amended return or claim for refund,
determining a liability for taxes or a right to a refund of taxes or
participating in or conducting any audit or other proceeding in respect of
taxes. The Acquiring Fund agrees to retain for a period of ten (10) years
following the Closing Date all returns, schedules and work papers and all
material records or other documents relating to tax matters of the Target Fund
for each of such Fund's taxable period first ending after the Closing Date and
for all prior taxable periods.
After the Closing Date, the Target Fund shall prepare, or cause its
agents to prepare, any federal, state or local tax returns required to be filed
by such Fund with respect to its final taxable year ending with its complete
liquidation and for any prior periods or taxable years and further shall cause
such tax returns to be duly filed with the appropriate taxing authorities.
Notwithstanding the aforementioned provisions of this subsection, any expenses
incurred by the Target Fund (other than for payment of taxes) in connection with
the preparation and filing of said tax returns after the Closing Date shall be
borne by such Fund to the extent such expenses have been accrued by such Fund in
the ordinary course without regard to the Reorganization; any excess expenses
shall be borne by 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 diversified, closed-end management
investment company registered under the 1940 Act.
7. Closing Date.
(a) Delivery of the assets of the Target Fund to be transferred,
together with any other Target Fund Investments, and the
Acquiring Fund Common Shares and Acquiring Fund APS to be
issued as provided in this Agreement, shall be made at such
place and time as the Funds shall mutually agree on the next
full business day following the Valuation Time, or at such
other time and date agreed to by the Funds, the date and time
upon which such delivery is to take place being referred to
herein as the "Closing Date." To the extent that any Target
Fund Investments, for any reason, are not transferable on the
Closing Date,
A-10
the Target Fund shall cause such Target Fund Investments to be
transferred to the Acquiring Fund's account with its custodian
at the earliest practicable date thereafter.
(b) The Target Fund will deliver to the Acquiring Fund on the
Closing Date confirmation or other adequate evidence as to the
tax basis of the Target Fund Investments delivered to the
Acquiring Fund hereunder, certified by [ ].
(c) As soon as practicable after the close of business on the
Closing Date, the Target Fund shall deliver to the Acquiring
Fund a list of the names and addresses of all of the
shareholders of record of the Target Fund on the Closing Date
and the number of shares of Target Fund Common Shares and
Target Fund RP owned by each such shareholder, certified to
the best of its knowledge and belief by the transfer agent for
the Target Fund or by its President.
8. Conditions of the Target Fund.
The obligations of the Target Fund hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the 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 Target Fund RP, 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 Closing Date,
certifying that as of the Valuation Time and as of the Closing
Date there has been no material adverse change in the
financial position of the Target Fund since the date of such
Fund's most recent Annual or Semi-Annual Report 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
Closing Date, certifying that, as of the Valuation Time and as
of the Closing Date all representations and warranties of the
Acquiring Fund made in this Agreement are true and correct in
all material respects with the same effect as if made at and
as of such dates, and that the Acquiring Fund has complied
with all of the agreements and satisfied all of the conditions
on its part to be performed or satisfied at or prior to each
of such dates.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) The Target Fund shall have received the opinion(s) of Skadden,
Arps, Slate, Meagher & Flom LLP, counsel for the Acquiring
Fund, dated as of the Closing Date, addressed to the Target
Fund substantially in the form and to the effect that: (i) the
Acquiring Fund is duly formed and validly existing under the
laws of its state of organization; (ii) the Acquiring Fund is
registered as a closed-end, management investment company
under the 1940 Act;
A-11
(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; (v) the Acquiring Fund
Common Shares and Acquiring Fund APS have each been duly
authorized and, upon issuance thereof in accordance with this
Agreement, each will be validly issued and fully paid; and
(vi) 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, 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
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 Internal
Revenue 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.
A-12
9. Acquiring Fund Conditions.
The obligations of the Acquiring Fund hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the Board of
Trustees of the Acquiring Fund and 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 Closing Date, certifying that as of
the Valuation Time and as of the Closing Date there has been
no material adverse change in the financial position of the
Target Fund since the date of such Fund's most recent Annual
Report or Semi-Annual Report, as applicable, other than
changes in the Target Fund Investments since that date or
changes in the market value of the Target Fund Investments.
(c) That the Target Fund shall have furnished to the Acquiring
Fund a certificate signed by such Fund's President (or any
Vice President) and its Treasurer, dated the Closing Date,
certifying that as of the Valuation Time and as of the Closing
Date all representations and warranties of the Target Fund
made in this Agreement are true and correct in all material
respects with the same effect as if made at and as of such
dates and the Target Fund has complied with all of the
agreements and satisfied all of the conditions on its part to
be performed or satisfied at or prior to such dates.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) That the Acquiring Fund shall have received the opinion of
Skadden, 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 reorganization provided for
herein and the execution of this Agreement have been duly
authorized by all requisite action of the Target Fund and this
Agreement has been duly executed and delivered by the Target
Fund and (assuming 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,
A-13
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, 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 Internal
Revenue 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 Closing 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 Closing Date, if
any (computed without regard to any deduction for dividends
paid), and all of its net capital gain, if any, realized to
and including the Closing Date. In this regard, the last
dividend period for the Target Fund RP may be shorter than the
dividend period for such APS determined as set forth in the
applicable Certificate of Vote.
10. Termination, Postponement and Waivers.
(a) Notwithstanding anything contained in this Agreement to the
contrary, this Agreement may be terminated and the
Reorganization abandoned at any time (whether before or after
adoption thereof by the shareholders of the Funds) prior to
the Closing Date, or the
A-14
Closing 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
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 [ ], this Agreement automatically shall
terminate on that date, unless a later date is mutually agreed
to by the Boards of Trustees of the Funds.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no
further effect, and there shall not be any liability on the
part of any Fund or persons who are their directors, trustees,
officers, agents or shareholders in respect of this Agreement.
(d) At any time prior to the Closing Date, any of the terms or
conditions of this Agreement may be waived by the Board of
Trustees of any Fund (whichever is entitled to the benefit
thereof), if, in the judgment of such Board after consultation
with its counsel, such action or waiver will not have a
material adverse effect on the benefits intended under this
Agreement to the shareholders of their respective fund, on
behalf of which such action is taken. 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 Closing Date. This
provision shall not protect any officer, trustee, agent or
shareholder of either Fund against any liability to the entity
for which that officer, trustee, agent or shareholder so acts
or to its shareholders, to which that officer, trustee, agent
or shareholder otherwise would be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless
disregard of the duties in the conduct of such office.
(f) If any order or orders of the Commission with respect to this
Agreement shall be issued prior to the Closing Date and shall
impose any terms or conditions which are determined by action
of the Boards of Trustees of the Funds to be acceptable, such
terms and conditions shall be binding as if a part of this
Agreement without further vote or approval of the shareholders
of the Funds unless such terms and conditions shall result in
a change in the method of computing the number of Acquiring
Fund Common Shares or Acquiring Fund APS to be issued to the
Acquired Funds, as applicable, in which event, unless such
terms and conditions shall have been included in the proxy
solicitation materials furnished to the shareholders of the
Funds prior to the meetings at which the Reorganization shall
have been approved, this Agreement shall not be consummated
and shall terminate unless the Funds promptly shall call a
special meeting of shareholders at which such conditions so
imposed shall be submitted for approval.
11. Indemnification.
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(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, judgments,
assessments, costs and expenses in respect of which indemnity
may be sought hereunder. The Indemnified Party shall give
written notice to Indemnitor within the earlier of ten (10)
days of receipt of written notice to Indemnified Party or
thirty (30) days from discovery by Indemnified Party of any
matters which may give rise to a claim for indemnification or
reimbursement under this Agreement. The failure to give such
notice shall not affect the right of Indemnified Party to
indemnity hereunder unless such failure has materially and
adversely affected the rights of the Indemnitor; provided that
in any event such notice shall have been given prior to the
expiration of the Survival Period. At any time after ten (10)
days from the giving of such notice, Indemnified Party may, at
its option, resist, settle or otherwise compromise, or pay
such claim unless it shall have received notice from
Indemnitor that Indemnitor intends, at Indemnitor's sole cost
and expense, to assume the defense of any such matter, in
which case Indemnified Party shall have the right, at no cost
or expense to Indemnitor, to participate in such defense. If
Indemnitor does not assume the defense of such matter, and in
any event until Indemnitor states in writing that it will
assume the defense, Indemnitor shall pay all costs of
Indemnified Party arising out of the defense until the defense
is assumed; provided, however, that Indemnified Party shall
consult with Indemnitor and obtain indemnitor's prior written
consent to any payment or settlement of any such claim.
Indemnitor shall keep Indemnified Party fully apprised at all
times as to the status of the defense. If Indemnitor does not
assume the defense, Indemnified Party shall keep Indemnitor
apprised at all times as to the status of the defense.
Following indemnification as provided for hereunder,
Indemnitor shall be subrogated to all rights of Indemnified
Party with respect to all third parties, firms or corporations
relating to the matter for which indemnification has been
made.
12. Other Matters.
(a) 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
A-16
UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED EXCEPT TO THE VAN KAMPEN MUNICIPAL TRUST
(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 Closing 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 Asset Management, 1221 Avenue of the
Americas, New York, New York 10020, Attention: General
Counsel, or at such other address as the Target Fund may
designate by written notice to the Acquiring Fund. Notice to
the Acquiring Fund shall be addressed to the Acquiring Fund
c/o Van Kampen Asset Management, 1221 Avenue of the Americas
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 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.
A-17
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 INVESTMENT GRADE
MUNICIPAL TRUST
------------------------------------
[Name]
[Title]
Attest: [Name]
[Title]
VAN KAMPEN MUNICIPAL TRUST
-----------------------------------
[Name]
[Title]
Attest: [Name]
[Title]
A-18
APPENDIX B
FEDERAL IDENTIFICATION NO. 36-3779776
THE COMMONWEALTH OF MASSACHUSETTS
OFFICE OF THE MASSACHUSETTS SECRETARY OF STATE
MICHAEL J. CONNOLLY, SECRETARY
ONE ASHBURTON PLACE, BOSTON, MASS. 02108
CERTIFICATE OF VOTE OF TRUSTEES ESTABLISHING
FOUR SERIES OF PREFERRED SHARES
I, Ronald A. Nyberg, Secretary, of Van Kampen Merritt Municipal Trust
(the "Fund") located at One Parkview Plaza, Oakbrook Terrace, IL 60181, do
hereby certify that at a meeting of the trustees of the Fund held on November
13, 1991, the following vote establishing and designating four series of
preferred shares of beneficial interest and determining the relative rights and
preferences thereof was duly adopted:
First: Pursuant to authority expressly vested in the Board of Trustees
of the Fund by Article I 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 four series of 6,000 shares of its authorized preferred shares of
beneficial interest, par value $.01 per share ("Preferred Shares"), liquidation
preference of $50,000 per share, designated, respectively, Auction Preferred
Shares, Series A ("APS Series A"), Auction Preferred Shares, Series B ("APS
Series B"), Auction Preferred Shares, Series C ("APS Series C") and Auction
Preferred Shares, Series D ("APS Series D") (collectively the APS Series A, APS
Series B, APS Series C and APS Series D are referred to herein as "APS").
Second: The preferences, voting powers, qualifications, and special or
relative rights or privileges of each such series of preferred shares of
beneficial interest are as follows:
DESIGNATION
APS SERIES A: A series of 1,500 preferred shares of beneficial
interest, $.0l par value, liquidation preference $50,000 per share, is hereby
designated "Auction Preferred Shares, Series A" (hereinafter, "APS Series A").
Each share of APS Series A shall be issued on December 10, 1991; have an
Applicable Rate for its Initial Dividend Period equal to 4.50% per annum; have
an Initial Dividend Payment Date of January 7, 1992; and have such other
preferences, limitations and relative voting rights, in addition to those
required by applicable law or set forth in the Declaration of Trust applicable
to preferred shares of beneficial interest of the Fund, as are set forth in Part
I and Part II of this Certificate of Vote. The APS Series A shall constitute a
separate series of Preferred Shares of beneficial interest of the Fund, and each
share of APS Series A shall be identical except as provided in Section 3 of Part
I of this Certificate of Vote.
B-1
APS SERIES B: A series of 1,500 preferred shares of beneficial
interest, par value $.01 per share, liquidation preference $50,000 per share, is
hereby designated "Auction Preferred Shares, Series B" (hereinafter, "APS Series
B"). Each share of APS Series B shall be issued on December 10, 1991; have an
Applicable Rate for its Initial Dividend Period equal to 4.50% per annum; have
an Initial Dividend Payment Date of January 15, 1992; and have such other
preferences, limitations and relative voting rights, in addition to those
required by applicable law or set forth in the Declaration of Trust applicable
to preferred shares of beneficial interest of the Fund, as are set forth in Part
I and Part II of this Certificate of Vote. The APS Series B shall constitute a
separate series of Preferred Shares of the Fund, and each share of APS Series B
shall be identical except as provided in Section 3 of Part I of this Certificate
of Vote.
APS SERIES C: A series of 1,500 preferred shares of beneficial
interest, par value $.01 per share, liquidation preference $50,000 per share, is
hereby designated "Auction Preferred Shares, Series C" (hereinafter, "APS Series
C"). Each share of APS Series C shall be issued on December 10, 1991; have an
Applicable Rate for its Initial Dividend Period equal to 4.50% per annum; have
an Initial Dividend Payment Date of January 9, 1992; and have such other
preferences, limitations and relative voting rights, in addition to those
required by applicable law or set forth in the Declaration of Trust applicable
to preferred shares of beneficial interest of the Fund, as are set forth in Part
I and Part II of this Certificate of Vote. The APS Series C shall constitute a
separate series of Preferred Shares of the Fund, and each share of APS Series C
shall be identical except as provided in Section 3 of Part I of this Certificate
of Vote.
APS SERIES D: A series of 1,500 preferred shares of beneficial
interest, par value $.01 per share, liquidation preference $50,000 per share, is
hereby designated "Auction Preferred Shares, Series D." Each share of APS Series
D shall be issued on December 10, 1991; have an Applicable Rate for its Initial
Dividend Period equal to 4.50% per annum; have an Initial Dividend Payment Date
of January 10, 1992; and have such other preferences, limitations and relative
voting rights, in addition to those required by applicable law or set forth in
the Declaration of Trust applicable to preferred shares of beneficial interest
of the Fund, as are set forth in Part I and Part II of this Certificate of Vote.
The APS Series D shall constitute a separate series of Preferred Shares of the
Fund, and each share of APS Series D shall be identical except as provided in
Section 3 of Part I of this Certificate of Vote.
No holder of any series of APS shall have, solely by reason of being
such a holder of any series of APS, any right to acquire, purchase or subscribe
for any APS, common shares of beneficial interest, par value $.01 per share, of
the Fund or other securities of the Fund which it may hereafter issue or sell
(whether out of the number of shares authorized by the Declaration of Trust, or
out of any shares acquired by the Fund after the issuance thereof, or
otherwise).
ARTICLE I.
Number of Shares; Ranking. (a) No fractional APS shall be
issued.
2. 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, without designation as to series.
The shares of each series of APS shall rank on a parity with shares of
any other series of Preferred Shares (including any other series of APS) as to
the payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Fund.
Dividends. (a) The Holder of shares of any series of APS shall
be entitled to receive, when, as and if declared by the Board of Trustees, out
of funds legally available therefor, cumulative cash dividends at the Applicable
Rate per annum thereof, determined as set forth in paragraph (c) of this
B-2
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 shares
of any series of APS shall accumulate at the Applicable Rate per annum from the
Date of Original Issue thereof.
(i) Dividends shall be payable subject to subparagraph (b) (ii) of this
Section 2, on shares of:
(i) APS Series A, on Tuesday, January 7, 1992, and on each
Tuesday thereafter,
(ii) APS Series B, on Wednesday, January 15, 1992, and on each
fourth Wednesday thereafter,
(iii) APS Series C, on Thursday, January 9, 1992, and on each
Thursday thereafter, and
(iv) APS Series D, on Friday, January 10, 1992, and on each
fourth Friday thereafter,
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 91 days, the day after the last day thereof, (2) with respect to a
Special Dividend Period of 91 days or more and fewer than 365 days, the 92nd day
thereof, the 183rd day thereof, if any, the 247th day thereof, if any, and the
day after the last day, thereof and (3) with respect to a Special Dividend
Period of 365 or more days, on such date in each quarterly period after the
commencement thereof as is determined by the Board of Trustees.
After any Special Dividend Period, dividends on shares of such series of APS
shall be payable, subject to subparagraph (b)(ii) of this Section 2, on each
succeeding Tuesday if such series is APS Series A, each fourth succeeding
Wednesday if such series is APS Series B, each succeeding Thursday if such
series is APS Series C, and each fourth succeeding Friday if such series is APS
Series D, 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.
In the case of dividends that would be payable on a Monday, Tuesday,
Wednesday, Thursday or Friday as determined by subparagraph (b) (i) of this
Section 2, including clause (1), (2) or (3) of the proviso thereto, if (i) the
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 Monday or Tuesday, or (ii) the Wednesday, Thursday or Friday
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 or Friday.
The Fund shall pay to the Auction Agent not later than 12:00 Noon, New
York City time, on the Business Day next preceding each Dividend Payment Date
for shares of such series, an aggregate amount of funds available on the next
Business Day in The City of New York, New York, equal to the dividends to be
paid to all Holders of shares of such series on such Dividend Payment Date.
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
B-3
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.
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.
1. (i) The dividend rate on shares of any series of APS during
the period from and after the Date of Original Issue thereof to and including
the last day of the Initial Dividend Period therefor shall be equal to the rate
per annum set forth with respect to such series under "Designation," above. For
each Subsequent Dividend Period of any series of APS outstanding thereafter, the
dividend rate on shares of such series shall be equal to the rate per annum that
results from an Auction for such series on the Auction Date next preceding such
Subsequent Dividend Period; provided, however, that if an Auction for any
Subsequent Dividend Period of any series of APS is not held for any reason or if
a Failure to Deposit occurs and such failure has not been cured as set forth
below prior to any succeeding Subsequent Dividend Period thereof, then, subject
to the next succeeding provision, the dividend rate on the shares of such series
for any such Subsequent Dividend Period shall be the Maximum Rate (as defined
herein) for such series on the Auction Date for such Subsequent Dividend Period;
provided, further, however, that if (A) any Failure to Deposit shall have
occurred with respect to shares of any series of APS during any Rate Period
thereof (other than any Special Dividend Period consisting of four or more
Dividend Periods or any Rate Period succeeding any Special Dividend Period
consisting of four or more Dividend Periods during which a Failure to Deposit
occurred that has not been cured), and prior to 12:00 noon, New York City time,
on the third Business Day next succeeding the date on which such Failure to
Deposit occurred, such Failure to Deposit shall not have been cured in
accordance with the next succeeding sentence or the Fund shall not have paid to
the Auction Agent a late charge equal to the sum of (1) if such Failure to
Deposit consisted of the failure timely to pay to the Auction Agent the full
amount of dividends with respect to any Dividend Period on the shares of such
series, an amount computed by multiplying (x) 200% of the "AA" Composite
Commercial Paper Rate for the Rate Period during which such Failure to Deposit
occurs on the Dividend Payment Date for such Dividend Period by (y) a fraction,
the numerator of which shall be the number of days for which such Failure to
Deposit has not been cured in accordance with the next succeeding sentence
(including the day such Failure to Deposit occurs and excluding the day such
Failure to Deposit is cured) and the denominator of which shall be 365, and
applying the rate obtained against the aggregate liquidation preference of the
outstanding shares of such series of APS and (2) if such Failure to Deposit
consisted of the failure timely to pay to the Auction Agent the Redemption Price
of the shares of such series of APS, if any, for which Notice of Redemption has
been given by the Fund pursuant to paragraph (b) of Section 3 of this Part I, an
amount computed by multiplying (x) 200% of the "AA" Composite Commercial Paper
Rate 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, or (B) any Failure
to Deposit shall have occurred with respect to shares of any series of APS
during a Special Dividend Period thereof consisting of four or more Dividend
Periods, or during any Rate Period thereof succeeding any Special Dividend
Period consisting of four or more Dividend Periods during which a Failure to
Deposit occurred that has not been cured, and such Failure to Deposit shall not
have been cured in accordance with the next
B-4
succeeding sentence during such Special Dividend Period or such other Rate
Period, then the dividend rate for shares of such series of APS for each
Subsequent Dividend Period thereof commencing after such failure to and
including the Subsequent Dividend Period, if any, during which such Failure to
Deposit is so cured shall be a rate per annum equal to the Maximum Rate on the
Auction Date for such Subsequent Dividend Period (but with the prevailing rating
for such shares, for purposes of determining such Maximum Rate, being deemed to
be "Below "ba3"/BB-") (the rate per annum at which dividends are payable on the
APS for any Rate Period for such shares being herein referred to as the
"Applicable Rate" for such shares). A Failure to Deposit with respect to shares
of any series of APS shall have been cured (if such Failure to Deposit is not
solely due to the willful failure of the Fund to make the required payment to
the Auction Agent) with respect to any Rate Period if, not later than 12:00
Noon, New York City time, on the fourth Business Day preceding the Auction Date
for the Rate Period subsequent to such Rate Period the Fund shall have paid to
the Auction Agent (A) all accumulated and unpaid dividends on the shares of such
series of APS and (B) without duplication, the Redemption Price for the APS, if
any, for which Notice of Redemption has been given by the Fund pursuant to
paragraph (b) of Section 3 of this Part 1.
(b) The amount of dividends per share payable on shares of any
series of APS on any date on which dividends shall be payable on shares
of such series shall be computed by multiplying the respective
Applicable Rate for such series in effect for such Dividend Period or
Dividend Periods or part thereof for which dividends have not been paid
by a fraction, the numerator of which shall be the number of days in
such Dividend Period or Dividend Periods or part thereof and the
denominator of which shall be 365 if such Dividend Period is a Rate
Period, or is contained in a Rate Period, of less than one year and 360
for all other Dividend Periods, and applying the rate obtained against
$50,000.
3. Any dividend payment made on the APS shall first be
credited against the earliest accumulated but unpaid dividends due with respect
to such APS.
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 shares of each series of APS through the most recent
Dividend Payment Date for each such series. When dividends are not paid in full
upon the APS through their most recent respective Dividend Payment Dates or upon
the shares of any other class or series of shares ranking on a parity as to the
payment of dividends with the APS through their most recent respective dividend
payment dates, all dividends declared upon the APS and any other such class or
series of shares ranking on a parity as to the payment of dividends with the APS
shall be declared pro rata so that the amount of dividends declared per share on
the APS and such other class or series of shares shall in all cases bear to each
other the same ratio that accumulated dividends per share on the APS and such
other class or series of shares bear to each other (for purposes of this
sentence, the amount of dividends declared per share shall be based on the
Applicable Rate for such shares for the Dividend Periods during which dividends
were not paid in full). Holders of the APS shall not be entitled to any
dividend, whether payable in cash, property or shares, in excess of full
cumulative dividends, as herein provided, on the APS. No interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend payment
or payments on the APS which may be in arrears, and, except to the extent set
forth in subsection (c)(i) of this Section 2, no additional sum of money shall
be payable in respect of any such arrearage.
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.
B-5
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.
A. Redemption. (a)(i) Upon giving a Notice of Redemption, as
provided below, the Fund at its option may redeem shares of
any series of APS, in whole or in part, on the Second Business
Day next preceding any Dividend Payment Date applicable to
those shares of APS called for redemption, out of funds
legally available therefor, at the Optional Redemption Price;
provided that during a Special Dividend Period of 365 days or
more no share of APS will be subject to optional redemption
during any Non-Call Period; provided, that shares of any
series of APS may not be redeemed in part if after such
partial redemption fewer than 250 shares of such series remain
outstanding.
If fewer than all of the outstanding shares of any series of APS are to
be redeemed pursuant to subparagraph (a)(i) of this Section 3, the number of
shares of such series to be redeemed shall be determined by the Board of
Trustees, and such shares shall be redeemed pro rata from the Holders of such
series in proportion to the number of such shares held by such Holders.
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.
The Fund shall 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 1940 Act APS Asset
Coverage in accordance with the requirements of the rating agency or agencies
then rating the APS and such failure is not cured on or before the APS Basic
Maintenance Cure Date or the 1940 Act Cure Date, as the case may be. The number
of APS to be redeemed shall be equal to the lesser of (i) the minimum number of
APS the redemption of which, if deemed to have occurred immediately prior to the
opening of business on the Cure Date, together with all other Preferred Shares
subject to redemption or retirement, would result in the satisfaction of the APS
Basic Maintenance Amount or the 1940 Act APS Asset Coverage, as the case may be,
on such Cure Date (provided that, if there is no such minimum number of APS and
other Preferred Shares the redemption of which would have such result, all the
APS and Preferred Shares then outstanding shall be redeemed), and (ii) the
maximum number of APS, together with all other Preferred Shares subject to
redemption or retirement, that can be redeemed out of funds expected to be
legally available therefor. In determining the APS required to be redeemed in
accordance with the foregoing, the Fund shall allocate the number required to be
redeemed to satisfy the APS Basic Maintenance Amount or the 1940 Act APS Asset
Coverage, as the case may be, pro rata among each series of APS and other
Preferred Shares subject to redemption provisions similar to those contained in
this subparagraph (a)(iv) of this
B-6
Section 3. The Fund shall effect such redemption not earlier than 20 days and
not later than 40 days after such Cure Date, except that if the Fund does not
have funds legally available for the redemption of all of the required number of
APS and other Preferred Shares which are subject to redemption provisions
similar to those contained in this subparagraph (a)(iv) of this Section 3 or the
Fund otherwise is unable to effect such redemption on or prior to 40 days after
such Cure Date, the Fund shall redeem those APS and other Preferred Shares which
it was unable to redeem on the earliest practicable date on which it is able to
effect such redemption. If fewer than all of the outstanding shares of any
series of APS are to be redeemed pursuant to this Section 3(a)(iv), the number
of shares of such series to be redeemed shall be redeemed pro rata from the
Holders of such shares in proportion to the number of shares held by such
Holders.
2. The Fund is required to give 30 days Notice of Redemption.
In the event the Fund obtains appropriate exemptive or no-action relief from the
Securities and Exchange Commission, the number of days' notice required for a
mandatory redemption may be reduced by the Board of Trustees of the Fund to as
few as two Business Days if Moody's and S&P each has agreed in writing that the
revised notice provision would not adversely affect its then-current ratings of
the APS. The Auction Agent will use its reasonable efforts to provide telephonic
notice to each holder of APS called for redemption not later than the close of
business on the Business Day on which the Auction Agent determines the shares to
be redeemed (as described above) (or, during the occurrence of a Failure to
Deposit with respect to such shares, not later than the close of business on the
Business Day immediately following the day on which the Auction Agent receives
Notice of Redemption from the Fund). Such telephonic notice will be confirmed
promptly in writing not later than the close of business on the third Business
Day preceding the redemption date by notice sent by the Auction Agent to each
holder of record of APS called for redemption, the Broker-Dealers and the
Securities Depository. Every Notice of Redemption and other redemption notice
with respect to APS will state: (1) the redemption date, (2) the number of APS
to be redeemed, (3) the redemption price, (4) that dividends on the APS to be
redeemed will cease to accumulate as of such redemption date and (5) the
provision of the APS Provisions pursuant to which such shares are being
redeemed. No defect in the Notice of Redemption or other redemption notice or in
the transmittal or the mailing thereof will affect the validity of the
redemption proceedings, except as required by applicable law. If fewer than all
shares of any series held by any Holder are to be redeemed, the Notice of
Redemption mailed to such Holder shall also specify the number of shares of such
series to be redeemed from such Holder.
3. Notwithstanding the provisions of paragraph (a) of this
Section 3, if any dividends on shares of any series of APS are in arrears, no
shares of such series of APS shall be redeemed unless all outstanding shares of
such series of APS are simultaneously redeemed, and the Fund shall not purchase
or otherwise acquire any shares of such series of APS; provided, however, that
the foregoing shall not prevent the purchase or acquisition of all outstanding
shares of such series of APS pursuant to the successful completion of an
otherwise lawful purchase or exchange offer made on the same terms to, and
accepted by, Holders of all outstanding shares of such series of APS.
4. 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
B-7
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.
5. 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.
6. 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.
7. 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 in accordance with the
1940 Act and Massachusetts law.
8. 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.
B. Designation of Special Dividend Periods. (a) The Fund, at its
option, may designate any succeeding Subsequent Dividend
Period of any series of APS as a Special Dividend Period;
provided, however, that such designation shall be effective
only if (A) notice thereof shall have been given in accordance
with paragraph (b) and clause (i) of paragraph (c) of this
Section 4, (B) any Failure to Deposit that shall have occurred
with respect to shares of such series during any Dividend
Period shall have been cured in accordance with the provisions
of the third sentence of paragraph (c)(i) of Section 2 of this
Part I, (C) Sufficient Clearing Bids (as defined in Section 1
of Part II hereof) for such series shall have existed in an
Auction held on the Auction Date immediately preceding the
first day of such proposed Special Dividend Period, (D) if any
Notice of Redemption shall have been mailed by the Fund
pursuant to paragraph (b) of Section 3 of this Part I with
respect to any shares of such series of APS, the Redemption
Price with respect to such shares shall have been deposited
with the Auction Agent and (E) in the event the Fund wishes to
designate any succeeding Subsequent Dividend Period for such
series as a Special Dividend Period consisting of more than 28
Rate Period Days, the Fund has
B-8
received written confirmation from S&P (if S&P is then rating
the APS) and Moody's (if Moody's is then rating the APS) that
such designation would not affect the rating then assigned by
S&P and Moody's to such series.
2. If the Fund proposes to designate any succeeding Subsequent
Dividend Period of any series of APS as a Special Dividend Period pursuant to
paragraph (a) of this Section 4, not less than 20 nor more than 30 days prior to
the date the Fund proposes to designate as the first day of such Special
Dividend Period (which shall be such day that would otherwise be the first day
of a Minimum Dividend Period), notice shall be (i) published or caused to be
published by the Fund in a newspaper of general circulation to the financial
community in The City of New York, New York, which carries financial news, and
(ii) communicated by the Fund by telephonic or other means to the Auction Agent
and confirmed in writing promptly thereafter. Each such notice shall state (A)
that the Fund may exercise its option to designate a succeeding Subsequent
Dividend Period of such series of APS as a Special Dividend Period, specifying
the first day thereof and (B) that the Fund will by 11:00 A.M., New York City
time, on the second Business Day next preceding such date notify the Auction
Agent of either (x) its determination, subject to certain conditions, to
exercise such option, in which case the Fund shall specify the Special Dividend
Period designated and the terms of the Specific Redemption Provisions, if any,
or (y) its determination not to exercise such option.
3. 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 as to which notice has been given as set forth in paragraph (b) of this
Section 4, the Fund shall deliver to the Auction Agent either:
(a) a notice stating (A) that the Fund has determined
to designate the next succeeding Dividend Period of such series as a
Special Dividend Period, specifying the same and the first day thereof,
(B) the Auction Date immediately prior to the first day of such Special
Dividend Period, (C) the terms of the Specific Redemption Provisions,
if any, for such series, (D) that such Special Dividend Period shall
not commence if (1) on such Auction Date Sufficient Clearing Bids for
such series shall not exist or (2) a Failure to Deposit shall have
occurred prior to the first day of such Special Dividend Period with
respect to shares of such series and (E) the scheduled Dividend Payment
Dates for such series of APS during such Special Dividend Period; such
notice to 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
calculating Moody's Eligible Assets, in connection with an APS Basic
Maintenance Report required to be prepared pursuant to this Section
4(c)(i), a Moody's Exposure Period of "eight weeks or less but greater
than seven weeks" (if Moody's is then rating such series) and (2) S&P
Eligible Assets (if S&P is then rating such series) each at least equal
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
(b) a notice stating that the Fund has determined not
to exercise its option to designate a Special Dividend Period for such
series of APS and that the next succeeding Dividend Period of such
series shall be a Minimum Dividend Period.
If the Fund fails to deliver either such notice (and, in the case of the notice
described in clause (i) of the preceding sentence, an APS Basic Maintenance
Report to the effect set forth in clause (i) (if either Moody's or S&P is then
rating shares of the series in question)) 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
B-9
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.
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.
2. 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:
(a) 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
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.
(i) As soon as practicable after the accrual of any right of the holders of
Preferred Shares to elect additional trustees as described in paragraph (b) of
this Section 5, the Fund shall notify the Auction Agent and the Auction Agent
shall call a special meeting of such holders, by mailing a notice of such
special meeting to such holders, such meeting to be held not less than 10 nor
more than 20 days after the date of mailing of such notice. If the Fund fails to
send such notice to the Auction Agent or if the Auction Agent does not call such
a special meeting, it may be called by any such holder on like notice. The
record date for determining the holders entitled to notice of and to vote at
such special meeting shall be the close of business on the fifth Business Day
preceding the day on which such notice is mailed. At any such special meeting
and at each meeting of holders of Preferred Shares held during a Voting Period
at which trustees are to be elected, such holders, voting together as a class
(to the exclusion of the holders of all other securities and classes of capital
shares of the Fund), shall be entitled to elect the number of trustees
prescribed in paragraph (b) of this Section 5 on a one-vote-per-share basis.
B-10
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.
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.
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.
(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)(49) of the 1940 Act (voting separately as one class):
(a) authorize, create or issue any class or series of shares of beneficial
interest ranking prior to or on a parity with the APS with respect to the
payment of dividends or the distribution of assets upon dissolution, liquidation
or winding up of the affairs of the Fund, or increase the authorized amount of
any series of APS (except that, notwithstanding the foregoing, but subject to
the provisions of Section 13, the Board of Trustees, without the vote or consent
of the Holders of APS, may from time to time authorize and create, and the Fund
may from time to time issue, classes or series of Preferred Shares, including
APS, ranking on a parity with the APS with respect to the payment of dividends
and the distribution of assets upon dissolution, liquidation or winding up of
the affairs of the Fund, subject to continuing compliance by the Fund with 1940
Act APS Asset Coverage and APS Basic Maintenance Amount requirements, provided
that the Fund obtains written confirmation from Moody's (if Moody's is then
rating APS) and S&P (if S&P is then rating APS) that the issuance of such class
or series would not impair the rating then assigned by such rating agency to the
APS, (b) amend, alter or repeal the provisions of the Declaration of Trust,
including this Certificate of Vote, whether by merger, consolidation or
otherwise, so as to affect any 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.
B-11
(a) 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 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 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:
APS Basic
Maintenance Amount
APS Basic
Maintenance Cure Date
APS Basic
Maintenance Report
Deposit Securities
Discounted Value
Dividend Coverage Amount
Dividend Coverage Assets
Market Value
Maximum Potential
Gross-up
Payment Liability
Minimum Liquidity Level
Moody's Discount Factor
Moody's Eligible
Asset Moody's Exposure Period
1940 Act Cure Date
1940 Act APS
Asset Coverage
Quarterly Valuation Date
Receivables for Municipal
Securities Sold
S&P Discount Factor
S&P Eligible Asset
S&P Exposure Period
Valuation Date
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
B-12
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.
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.
Right to Vote with Respect to Certain Other Matters. The affirmative vote
of the holders of a majority (unless a higher percentage vote is required under
the Declaration of Trust or under this Certificate of Vote) of the outstanding
shares of each series of APS, each voting as a separate class, is required with
respect to any matter that materially affects the series in a manner different
from that of other series of classes of the Fund's shares, including without
limitation any proposal to do the following: (1) increase or decrease the
aggregate number of authorized shares of the series; (2) effect an exchange,
reclassification, or cancellation of all or part of the shares of the series;
(3) effect an exchange, or create a right of exchange, of all or any part of the
shares of the series; (4) change the rights or preferences of the shares of the
series; (5) change the shares of the series, whether with or without par value,
into the same or a different number of shares, either with or without par value,
of the same or another class or series; (6) create a new class or series of
shares having rights and preferences prior and superior to the shares of the
series, or increase the rights and preferences or the number of authorized
shares of a series having rights and preferences prior or superior to the shares
of the series; or (7) cancel or otherwise affect distributions on the shares of
the series that have accrued but have not been declared. To the extent that the
interests of a series of APS affected by a matter are substantially identical to
the interests of another series of APS affected by such matter (e.g., a vote of
shareholders required under Section 13(a) of the 1940 Act), each such series
shall vote together collectively as one class. The vote of holders of APS
described above will in each case be in addition to a separate vote of the
requisite percentage of Common Shares and APS necessary to authorize the action
in question.
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.
3. 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.
B-13
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.
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.
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.
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 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.
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.
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).
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
B-14
(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.
Within ten Business Days after the date of delivery of an APS Basic
Maintenance Report in accordance with paragraph (b) of this Section 9 relating
to a Quarterly Valuation Date, the Fund shall cause the Independent Accountant
to confirm in writing to S&P (if S&P is then rating the APS), Moody's (if
Moody's is then rating the APS) and the Auction Agent (if either S&P or Moody's
is then rating the APS) (i) the mathematical accuracy of the calculations
reflected in such Report (and in any other APS Basic Maintenance Report,
randomly selected by the Independent Accountant, that was delivered by the Fund
during the quarter ending on such Quarterly Valuation Date) and (ii) that, in
such Report (and in such randomly selected Report), the Fund determined in
accordance with this Certificate of Vote whether the Fund had, at such Quarterly
Valuation Date (and at the Valuation Date addressed in such randomly-selected
Report), S&P Eligible Assets (if S&P is then raring 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").
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.
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.
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 reflected thereon equals
or exceeds the APS Basic Maintenance Amount reflected thereon.
B-15
Minimum Liquidity Level. So long as S&P is rating the APS, the Fund
shall have, as of each Valuation Date, Dividend Coverage Assets, with respect to
each then Outstanding share of each series of APS, having a value not less than
the Dividend Coverage Amount with respect to such share (the "Minimum Liquidity
Level"). If, as of each Valuation Date, the Fund does not have the required
Dividend Coverage Assets, the Fund shall, as soon as practicable, adjust its
portfolio in order to meet the Minimum Liquidity Level, but only so long as S&P
is rating the APS. So long as S&P is rating the APS, the Fund shall notify S&P
on any Valuation Date which the Fund does not have the required Dividend
Coverage Assets and does not adjust its portfolio as described in the
immediately preceding sentence.
Restrictions on Certain Distributions. For so long as any of the APS
is Outstanding, and except as set forth in Sections 2(e) and 6(d) of this Part
I, (A) the Fund shall not declare, pay or set apart for payment any dividend or
other distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase, Common Shares or other
shares, if any, ranking junior to the APS as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up) in respect
of the Common Shares or any other shares of the Fund ranking junior to or on a
parity with the APS as to the payment of dividends or the distribution of assets
upon dissolution, liquidation or winding up, or call for redemption, redeem,
purchase or otherwise acquire for consideration any Common Shares or any other
such junior shares (except by conversion into or exchange for shares of the Fund
ranking junior to the APS as to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up), or any such parity shares
(except by conversion into or exchange for shares of the Fund ranking junior to
or on a parity with APS as to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up), unless (i) full cumulative
dividends on shares of each series of APS through its most recently ended
Dividend Period shall have been paid or shall have been declared and sufficient
funds for the payment thereof deposited with the Auction Agent and (ii) the Fund
has redeemed the full number of shares of each series of APS required to be
redeemed by any provision for mandatory redemption pertaining thereto, and (B)
if either Moody's or S&P is rating the APS, the Fund shall not declare, pay or
set apart for payment any dividend or other distribution (other than a dividend
or distribution paid in shares of, or options, warrants or rights to subscribe
for or purchase, Common Shares or other shares, if any, ranking junior to the
APS as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up) in respect of 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.
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 solely by reason of the fact that such allocation is made
as a result of the redemption of all or a portion of the outstanding APS or the
liquidation of the Fund (such allocation being referred to herein as a
"Retroactive Taxable Allocation"), the Fund shall, within 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.
B-16
Certain Other Restrictions. (a) For so long as any of the APS is
outstanding and Moody's is then rating such shares, the Fund will not, unless it
has received written confirmation from Moody's that any such action would not
impair the ratings then assigned by Moody's to the APS, engage in any one or
more of the following transactions:
(a) transactions in options on securities, futures contracts or
options on futures contracts except that in connection with Moody's Hedging
Transactions: (A) the Fund may buy call or put option contracts on
securities; (B) the Fund may write covered call options on securities; (C)
the Fund may write put options on securities; (D) the Fund may enter into
positions in futures contracts based on the Municipal Index provided that
the Fund shall not engage in any such transaction which would cause the
Fund at the time of such transaction to own or have sold (1) outstanding
futures contracts based on the Municipal Index exceeding in number 10% of
the rolling average number of daily traded futures contracts based on the
Municipal Index in the 30 calendar days prior to the time of effecting such
transaction as reported by The Wall Street Journal or (2) outstanding
futures contracts based on the Municipal Index and options on such futures
contracts having an aggregate fair market value (taking into account the
fair market value of futures contracts based on Treasury Bonds) exceeding
the fair market value of Moody's Eligible Assets owned by the Fund; (E) the
Fund may enter into futures contracts on Treasury Bonds provided that the
Fund shall not engage in any such transaction which would cause the Fund at
the time of such transaction to own or have sold (1) outstanding futures
contracts based on Treasury Bonds and options on such futures contracts
having an aggregate fair market value (taking into account the fair market
value of futures contracts based on the Municipal Index) exceeding 40% of
the aggregate fair market value of Moody's Eligible Assets owned by the
Fund and rated Aa by Moody's (or, if not rated by Moody's but rated by S&P,
rated AAA by S&P) or (2) outstanding futures contracts based on Treasury
Bonds and options on such futures contracts having an aggregate fair market
value (taking into account the fair market value of futures contracts based
on the Municipal Index) exceeding 80% of the aggregate fair market value of
Moody's Eligible Assets owned by the Fund and rated Baa or A by Moody's
(or, if not rated by Moody's but rated by S&P, rated A or AA by S&P); for
purposes of the foregoing clauses (D) and (E), the Fund shall be deemed to
own the number of futures contracts that underlie any outstanding option
written by the Fund; and (F) the Fund may buy call or put options on
futures contracts on the Municipal Index or Treasury Bonds, may write put
options on such futures contracts (provided, that if the contract would
require delivery of a security, that security must be held by the Fund) and
may write call options on such futures if it owns the futures contract
subject to the option. For so long as the APS are rated by Moody's, the
Fund will engage in Closing Transactions to close out any outstanding
futures contract based on the Municipal Index if the open interest with
respect to such futures contracts based on the Municipal Index as reported
by The Wall Street Journal is less than 5,000. For so long as the APS are
rated by Moody's, the Fund will engage in a Closing Transaction to close
out any outstanding futures contract by no later than the fifth Business
Day of the month in which such contract expires and will engage in a
Closing Transaction to close out any outstanding option on a futures
contract by no later than the first Business Day of the month in which such
option expires. For so long as the APS are rated by Moody's, the Fund will
engage in transactions with respect to futures contracts or options thereon
having only the next settlement date or the settlement date immediately
thereafter. For purposes of valuation of Moody's Eligible Assets: (A) if
the Fund writes a call option, the underlying asset will be valued as
follows: (1) if the option is exchange-traded and may be offset readily or
if the option expires before the earliest possible redemption of the APS,
at the Discounted Value of the
B-17
underlying security 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 lessor of (1) exercise price and (2) the Discounted Value of
the underlying security; (C) if the Fund is a seller under a futures
contract, the underlying security will be valued at the lower of (1)
settlement price and (2) the Discounted Value of the underlying security;
if a contract matures within the Moody's Exposure Period, the security may
be valued at the settlement price; (D) if the Fund is the buyer under a
futures contract, the underlying security will be valued at the lower of
(1) the settlement price and (2) the Discounted Value of the underlying
security; if the contract matures within the Moody's Exposure Period, the
security may be valued at its Discounted Value and (E) call or put option
contracts which the Fund buys have no value. For so long as APS are rated
by Moody's: (A) the Fund will not engage in options and futures
transactions for leveraging or speculative purposes; (B) the Fund will not
write any anticipatory call options 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 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 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 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; (1) 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
incur any indebtedness in a principal amount in excess of the lesser of
$10,000,000 or 10% of the aggregate liquidation preference of APS Outstanding,
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; or
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
4. For so long as any of the APS is Outstanding and S&P is rating such
shares, the Fund will not, unless the Fund has received written confirmation
from S&P that any such action would not impair the rating then assigned by such
rating agency to the APS, engage in any one or more of the following
transactions:
B-18
transactions in any reverse repurchase agreements; or
lend portfolio securities; or
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
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
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
engage in short sale transactions; or
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 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
B-19
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.
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.
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:
1. "'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.
"Accountant's Confirmation" shall have the meaning set forth in paragraph
(c) of Section 9 of this Part I.
"Additional Dividends" means payment to a Holder of APS of an amount which,
when taken together with the aggregate amount of Retroactive Taxable Allocations
made to such Holder with respect to the taxable year in question, would cause
such Holder's dividends in dollars (after federal income tax
B-20
consequences) from the aggregate of both the Retroactive Taxable Allocations and
the Additional Dividends to be equal to the dollar amount of the dividends which
would have been received by such Holder if the amount of the aggregate
Retroactive Taxable Allocations would have been excludable from the gross income
of such Holder. Such Additional Dividends shall be calculated (i) without
consideration being given to the time value of money; (ii) assuming that no
Holder of APS is subject to the federal alternative minimum tax with respect to
dividends received from the Fund; and (iii) assuming that each Retroactive
Taxable Allocation would be taxable in the hands of each Holder of APS at the
maximum marginal regular federal individual income tax rate applicable to
ordinary income or net capital gains, as applicable, or the maximum marginal
regular federal corporate income tax rate, whichever is greater, in effect
during the taxable year in question.
"Anticipation Notes" means the following municipal securities: tax
anticipation notes, revenue anticipation notes and tax and revenue anticipation
notes.
"Applicable Rate" shall have the meaning specified in subparagraph (c)(i)
of Section 2 of this Part 1.
"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 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 within the
Moody's Exposure Period and are either securities issued or guaranteed by the
United States Government or have a rating assigned by Moody's of P-1, VMIG-1 or
MIG-1 (or, with respect to S&P, SP-1+ or A-1+) or (B) the Discounted Value of
such assets. For purposes of the APS Basic Maintenance Amount in connection with
S&P's ratings of the APS, with respect to any transactions by the Fund in
futures contracts, the Fund shall include as liabilities (i) 30% of the
aggregate settlement value, as marked to market, of any outstanding futures
contracts based on the Municipal Index which are owned by the Fund plus (ii) 25%
of the aggregate settlement value, as marked to market, of any outstanding
futures contracts based on Treasury Bonds which contracts are owned by the Fund.
For purposes of the APS Basic Maintenance Amount in connection with Moody's
rating of the APS, with respect to any transactions by the Fund in securities
options, the Fund shall include as liabilities (i) 10% of the exercise price of
a call option written by the Fund and (ii) the exercise price of any written put
option.
"APS Basic Maintenance Cure Date," with respect to the failure by the Fund
to satisfy the APS Basic Maintenance Amount (as required by paragraph (a) of
Section 9 of this Part I) as of a given Valuation Date, shall mean the third
Business Day following such Valuation Date.
"APS Basic Maintenance Report" shall mean a report signed by the President,
Treasurer or any Senior Vice President or Vice President of the Fund which sets
forth, as of the related Valuation Date, the assets of the Fund, the Market
Value and the Discounted Value thereof (seriatim and in aggregate), and the APS
Basic Maintenance Amount.
B-21
"Auction" shall mean each periodic implementation of the Auction
Procedures.
"Auction Agency Agreement" shall mean the agreement between the Fund and
the Auction Agent which provides, among other things, that the Auction Agent
will follow the Auction Procedures for purposes of determining the Applicable
Rate for each series of APS so long as the Applicable Rate for such series is to
be based on the results of an Auction.
"Auction Agent" shall mean the entity appointed as such by a resolution of
the Board of Trustees in accordance with Section 7 of this Part I.
"Auction Date," with respect to any Rate Period, shall mean the Business
Day next preceding the first day of such Rate Period.
"Auction Procedures" shall mean the procedures for conducting Auctions set
forth in Part II hereof.
"Board of Trustees" shall mean the Board of Trustees of the Fund or any
duly authorized committee thereof.
"Business Day" shall mean a day on which the New York Stock Exchange is
open for trading and which is neither a Saturday, Sunday nor any other day on
which banks in The City of New York, New York, are authorized by law to close.
"Closing Transactions" means the termination of a futures contract or
option position by taking an equal position opposite thereto in the same
delivery month as such initial position being terminated.
"Commercial Paper Dealers" shall mean Goldman, Sachs& Co., Lehman
Commercial Paper Incorporated, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Smith Barney, Harris Upham & Co. or, in lieu of any thereof,
their respective affiliates or successors, if such entity is a commercial paper
dealer.
"Common Shares" shall mean the common shares of beneficial interest, par
value $.01 per share, of the Fund.
"Cure Date" shall mean the APS Basic Maintenance Cure Date or the 1940 Act
Cure Date, as the case may be.
"Date of Original Issue," with respect to any series of APS, shall mean the
date on which the Fund initially issued shares of such series of APS.
"Deposit Securities" shall mean cash and municipal securities rated at
least A-1+ or SP-1+ by S&P, except that, for purposes of Section 3(a)(iii) of
this Part I, such municipal securities shall be considered "Deposit Securities"
only if they are also rated P-1, MIG-1 or VMIG-1 by Moody's.
"Discounted Value" shall mean (i) with respect to an S&P Eligible Asset,
the quotient of the Market Value thereof divided by the applicable S&P Discount
Factor and (ii) with respect to a Moody's Eligible Asset, the quotient of the
Market Value thereof divided by the applicable Moody's Discount Factor, provided
that with respect to a Moody's Eligible Asset, Discounted Value shall not exceed
the par value of such Asset at any time.
"Dividend Coverage Amount," as of any Valuation Date, shall mean, with
respect to each of the APS, (i) the aggregate amount of dividends that will
accumulate on such APS to (but not including) the first
B-22
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.
"Dividend Coverage Assets," as of any Valuation Date, shall mean, with
respect to each of the APS, Deposit Securities with maturity or tender dates not
later than the day preceding the first Dividend Payment Date for such share that
follows such Valuation Date and having a value not less than the Dividend
Coverage Amount with respect to such share.
"Dividend Payment Date," with respect to any series of APS, shall mean any
date on which dividends on shares of such series of APS are payable pursuant to
the provisions of paragraph (b) of Section 2 of this Part I.
"Dividend Period," with respect to any series of APS, shall mean the period
from and including the Date of Original Issue of such series to but excluding
the initial Dividend Payment Date for such series and any period thereafter from
and including one Dividend Payment Date for such series to but excluding the
next succeeding Dividend Payment Date for such series.
"Fund" shall mean Van Kampen Merritt Municipal Trust, a Massachusetts
business trust, which is the issuer of the APS.
"Failure to Deposit," with respect to any series of APS, shall mean a
failure by the Fund to pay to the Auction Agent, not later than 12:00 noon, New
York City time, (A) on the Business Day next preceding any Dividend Payment Date
for such series, in funds available on such Dividend Payment Date in The City of
New York, New York, the full amount of any dividend (whether or not earned or
declared) to be paid on such Dividend Payment Date on any share of such series
or (B) on the Business Day next preceding any redemption date in funds available
on such redemption date for such series in The City of New York, New York, the
Redemption Price to be paid on such redemption date for any share of such series
after notice of redemption is given pursuant to paragraph (b) of Section 3 of
this Part 1.
"Holder," with respect to any series of APS, shall mean the registered
holder of shares of such series of APS as the same appears on the share books of
the Fund.
"Independent Accountant" shall mean a nationally recognized accountant, or
firm of accountants, that is with respect to the Fund an independent public
accountant or firm of independent public accountants under the Securities Act of
1933, as amended from time to time.
"Initial Dividend Period," with respect to any series of APS, shall mean
the period from and including the Date of Original Issue thereof to but
excluding the initial Dividend Payment Date therefor.
"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.
"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.
"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
B-23
which quotations are not readily available are valued at fair value as
determined by the pricing service using methods which include consideration of
yields or prices of municipal bonds of comparable quality, type of issue,
coupon, maturity and rating; indications as to value from dealers; and general
market conditions. The pricing service may employ electronic data processing
techniques and/or a matrix system to determine valuations.
"Mandatory Redemption Price" means $50,000 per share of APS plus an amount
equal to accumulated but unpaid dividends thereon to the date fixed for
redemption (whether or not earned or declared).
"Master Purchaser's Letter" has the meaning specified in Section 1 of Part
II hereof.
"Maximum Potential Additional Dividends Liability," as of any Valuation
Date, shall mean the aggregate amount of Additional Dividends that would be due
if the Fund were to make Retroactive Taxable Allocations, with respect to any
fiscal year, estimated based upon dividends paid and the amount of undistributed
realized net capital gains and other taxable income earned by the Fund, as of
the end of the calendar month immediately preceding such Valuation Date, and
assuming such Additional Dividends are fully taxable.
"Minimum Liquidity Level" shall have meaning set forth in Section 10 of
this Part I.
"Minimum Dividend Period" shall mean (i) with respect to APS Series A and
APS Series C, any Rate Period consisting of 7 Rate Period Days and (ii) with
respect to APS Series B and APS Series D, any Rate Period with 28 Rate Period
Days, in each case subject to certain exceptions.
"Moody's" shall mean Moody's Investors Service, Inc., a Delaware
corporation, and its successors.
"Moody's Discount Factor" shall mean, for purposes of determining the
Discounted Value of any Moody's Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest Exposure Period set forth
opposite such rating that is the same length as or is longer than the Moody's
Exposure Period, in accordance with the table set forth below:
Rating Category
----------------------------------------------------------------------------------
Exposure Period(4) Aaa Aa(1) A(1) Baa(1) Other(2) (V)MIG-1(3)(4) SP-1+(3)
- ------------------ --- --- -- ---- ------ ----------- ------
7 weeks........................ 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but greater than 154 164 173 205 235 137 149
seven weeks....................
9 weeks or less but greater than 158 169 179 209 242 138 150
eight weeks....................
(1) Moody's rating.
(2) Municipal securities not rated by Moody's but rated BBB by S&P.
(3) Municipal securities rated MIG-1 or VMIG-1 or, if not rated by Moody's,
rate 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.
B-24
Notwithstanding the foregoing, (i) the Moody's Discount Factor for
short-term municipal securities will be 115%, so long as such municipal
securities are rated at least MIG-1, VMIG-1 or P-1 by Moody's and mature or have
a demand feature at par exercisable within the Moody's Exposure Period or 125%
as long as such municipal securities are rated at least A-1-/AA or SP-1+/AA by
S&P and mature or have a demand feature at par exercisable within the Moody's
Exposure Period and (ii) no Moody's Discount Factor will be applied to cash or
to Receivables for Municipal Securities Sold.
"Moody's Eligible Asset" shall mean cash, Receivables for Municipal
Securities Sold or a municipal security that (i) pays interest in cash, (ii) is
publicly rated Baa or higher by Moody's or, if not rated by Moody's but rated by
S&P, is rated at least BBB by S&P (provided that, for purposes of determining
the Moody's Discount Factor applicable to any such S&P-rated municipal security,
such municipal security (excluding any short-term municipal security) shall be
deemed to have a Moody's rating which is one full rating category lower than its
S&P rating), (iii) does not have its Moody's rating suspended by Moody's; and
(iv) is part of an issue of municipal securities of at least $10,000,000.
Municipal securities issued by any one issuer and rated BBB by S&P may comprise
no more than 4% of total Moody's Eligible Assets; such BBB-rated municipal
securities, if any, together with any municipal securities issued by the same
issuer and rated Baa by Moody's or A by S&P, may comprise no more than 6% of
total Moody's Eligible Assets; such BBB, Baa and A-rated municipal securities,
if any, together with any municipal securities issued by the same issuer and
rated A by Moody's or AA by S&P, may comprise no more than 10% of total Moody's
Eligible Assets; and such BBB, Baa, A and AA rated municipal securities, if any,
together with any municipal securities issued by the same issuer and rated Aa by
Moody's or AAA by S&P, may comprise no more than 20% of total Moody's Eligible
Assets. For purposes of the foregoing sentence, any municipal security backed by
the guaranty, letter of credit or insurance issued by a third party shall be
deemed to be issued by such third party if the issuance of such third party
credit is the sole determinant of the rating on such municipal security.
Municipal securities issued by issuers located within a single state or
territory and rated BBB by S&P may comprise no more than 12% of total Moody's
Eligible Assets; such BBB-rated municipal securities, if any, together with any
municipal securities issued by issuers located within the same state or
territory and rated Baa by Moody's or A by S&P may comprise no more than 20% of
total Moody's Eligible Assets; such BBB, Baa and A rated municipal securities,
if any, together with any municipal securities issued by issuers located within
the same state or territory and rated A by Moody's or AA by S&P, may comprise no
more than 40% of total Moody's Eligible Assets; and such BBB, Baa, A and
AA-rated municipal securities, if any, together with any municipal securities
issued by issuers located within the same state or territory and rated Aa by
Moody's or AAA by S&P, may comprise no more than 60% of total Moody's Eligible
Assets. For purposes of applying the foregoing requirements, a municipal
security shall be deemed to be rated BBB by S&P if rated BBB or BBB+ by S&P.
Moody's Eligible Assets shall be calculated without including cash and municipal
securities rated MIG-1 or VMIG-1 or, if not rated by Moody's, rated SP-1+ by
S&P, which either mature or have a demand feature at par exercisable within the
Moody's Exposure Period. Municipal securities which constitute Moody's Eligible
Assets subject to a repurchase agreement will constitute Moody's Eligible
Assets. Cash receivable by the Fund pursuant to a repurchase agreement that
obligates the other party thereto to repurchase municipal securities will only
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.
Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset to the extent that is has been 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
B-25
advanced to the Fund by Van Kampen Merritt Investment Advisory Corp., the
Administrator, State Street Bank and Trust Company or the Auction Agent and (d)
Liens by virtue of any repurchase agreement.
"Moody's Exposure Period" shall mean the period commencing on a given
Valuation Date and ending 46 days thereafter.
"Moody's Hedging Transactions" shall mean transactions in options on
securities, futures contracts based on the Municipal Index or Treasury Bonds and
options on such futures contracts.
"Municipal Index" shall mean The Bond Buyer Municipal Bond Index.
"1940 Act" shall mean the Investment Company Act of 1940, as amended
from time to time.
"1940 Act APS Asset Coverage" shall mean asset coverage, as defined in
Section 18(h) of the 1940 Act, of at least 200% with respect to all outstanding
senior securities of the Fund which are stock, including all outstanding APS (or
such other asset coverage as may in the future be specified in or under the 1940
Act as the minimum asset coverage for senior securities which are stock of a
closed-end investment company as a condition of declaring dividends on its
common stock).
"1940 Act Cure Date," with respect to the failure by the Fund to
maintain the 1940 Act APS Asset Coverage (as required by Section 8 of this Part
I) as of the last Business Day of each month, shall mean the last Business Day
of the following month.
"Non-call Period" shall have the meaning set forth below under
"Specific Redemption Provisions."
"Notice of Redemption" shall mean any notice with respect to the
redemption of the APS pursuant to Section 3 of this Part I.
"Optional Redemption Price" shall mean (i) $50,000 per share of APS in
the case of a 7-day or 28-day Dividend Period or a Special Dividend Period of
less than 365 days or (ii) with respect to a Special Dividend Period of 365 days
or more the Optional Redemption Price set forth in the Specific Redemption
Provisions in connection therewith; in each case plus an amount equal to
accumulated but unpaid dividends thereon to the date of redemption (whether or
not earned or declared).
"Preferred Shares" shall mean the authorized preferred shares of
beneficial interest, par value $.01 per share, of the Fund, and includes the
APS.
"Premium Call Period" shall have the meaning set forth below under
"Specific Redemption Provisions."
"Pricing Service" means Van Kampen Merritt Investment Advisory Corp.,
acting pursuant to a Fund Pricing Agreement between the Fund and Van Kampen
Merritt Investment Advisory Corp. and any successor pricing service approved in
writing by Moody's (if Moody's is then rating the APS) and S&P (if S&P is then
rating the APS).
"Projected Dividend Amount" means, with respect to the shares of any
series of APS, on any Valuation Date in the event the then current Dividend
Period will end within 47 calendar days of such date, from and after the last
day of such Dividend Period until 47 calendar days less the number of days
remaining in the current Dividend Period at an Applicable Rate equal to the
Maximum Rate for such Dividend Period multiplied by the larger of the factors
(currently 304%) that the Fund has been informed
B-26
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.
"Quarterly Valuation Date" shall mean the last Business Day of each
fiscal quarter of the Fund in each fiscal year of the Fund, commencing February
29, 1992.
"Rate Period," with respect to any series of APS, shall mean the
Initial Dividend Period thereof and any Subsequent Dividend Period, including
any Special Dividend Period, for such series.
"Rate Period Days," for any Rate Period consisting of less than four
Dividend Periods, shall mean the number of days (without giving effect to
subparagraph (b)(ii) of Section 2 of this Part 1) in such Rate Period.
"Receivables for Municipal Securities Sold" shall mean (A) for purposes
of calculation of Moody's Eligible Assets as of any Valuation Date, no more than
the aggregate of the following: (i) the book value of receivables for municipal
securities sold as of or prior to such Valuation Date if such receivables are
due within five business days of such Valuation Date, and if the trades which
generated such receivables are (x) settled through clearing house firms with
respect to which the Fund has received prior written authorization from Moody's
or (y) with counterparties having a Moody's long-term debt rating of at least
Baa3; and (ii) the Moody's Discounted Value of municipal securities sold as of
or prior to such Valuation Date which generated receivables, if such receivables
are due within the Moody's Exposure Period but do not comply with either of the
conditions specified in (i) above, and (B) for purposes of calculation of S&P
Eligible Assets as of any Valuation Date, the book value of receivables for
municipal securities sold as of or prior to such Valuation Date if such
receivables are due within five business days of such Valuation Date.
"Redemption Price" shall mean the Optional Redemption Price or the
Mandatory Redemption Price, as applicable.
"Retroactive Taxable Allocation" shall have the meaning set forth in
Section 12 hereof.
"S&P" shall mean Standard & Poor's Fund, a New York corporation, and
its successors.
"S&P Discount Factor" shall mean, for purposes of determining the
Discounted Value of any S&P Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest Exposure Period set forth
opposite such rating that is the same length as or is longer than the S&P
Exposure Period, in accordance with the table set forth below:
Rating Category
--------------------------------------
Exposure Period AAA* AA* A* BBB*
- --------------- --- --- -- ----
40 Business Days.......................... 190% 195% 210% 250%
22 Business Days.......................... 170 175 190 230
10 Business Days.......................... 155 160 175 215
7 Business Days........................... 150 155 170 210
3 Business Days........................... 130 135 150 190
* S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for
short-term municipal securities will be 115%, so long as such municipal
securities are rated A-1+ or SP-1+ by S&P and mature or have a
B-27
demand feature exercisable within 30 days or less, or 125% if such municipal
securities are not rated by S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's;
provided, however, that any such Moody's rated short-term municipal securities
which have demand features exercisable within 30 days or less must be backed by
a letter of credit, liquidity facility or guarantee from a bank or other
financial institution with a short-term rating of at least A-1+ from S&P; and
further provided that such Moody's rated short-term municipal securities may
comprise no more than 50% of short-term municipal securities that qualify as S&P
Eligible Assets and (ii) no S&P Discount Factor will be applied to cash or to
Receivables for Municipal Securities Sold. For purposes of the foregoing,
Anticipation Notes rated SP1+ or, if not rated by S&P, rated MIG-1 or VMIG-1 by
Moody's, which do not mature or have a demand feature at par exercisable in 30
days and which do not have a long-term rating, shall be considered to be
short-term municipal securities.
"S&P Eligible Asset" shall mean cash (excluding any cash
irrevocably deposited by the Fund for the payment of any liabilities within the
mean of APS Basic Maintenance Amount), Receivables for Municipal Securities Sold
or a municipal security owned by the Fund that (i) is interest bearing and pays
interest at least semi-annually; (ii) is payable with respect to principal and
interest in U.S. Dollars; (iii) is publicly rated BBB or higher by S&P or, if
not rated by S&P but rated by Moody's, is rated at least A by Moody's (provided
that such Moody's-rated municipal securities will be included in S&P Eligible
Assets only to the extent the Market Value of such municipal securities does not
exceed 50% of the aggregate Market Value of S&P Eligible Assets; and further
provided that, for purposes of determining the S&P Discount Factor applicable to
any such Moody's-rated municipal security, such municipal security will be
deemed to have an S&P rating which is one full rating category lower than its
Moody's rating); (iv) is not part of a private placement of municipal
securities; and (v) is part of an issue of municipal securities with an original
issue size of at least $20 million or, if an issue with an original issue size
below $20 million (but in no event below $10 million), is issued by an issuer
with a total of at least $50 million of securities outstanding. Solely for
purposes of this definition, the term "municipal securities" means any
obligation the interest on which is exempt from regular Federal income taxation
and which issued by any of the fifty United States, the District of Columbia or
any of the territories of the United States, their subdivisions, counties,
cities, towns, villages, school districts and agencies (including authorities
and special districts created by the states), and federally sponsored agencies
such as local housing authorities. Notwithstanding the foregoing limitations:
(1) Municipal securities of any one issuer or guarantor
(excluding bond insurers) shall be considered S&P Eligible Assets only to the
extent the Market Value of such municipal securities does not exceed 10% of the
aggregate Market Value of S&P Eligible Assets provided that 2% is added to the
applicable S&P Discount Factor for every 1% by which the Market Value of such
municipal securities exceeds 5% of the aggregate Market Value of S&P Eligible
Assets;
(2) Municipal securities guaranteed or insured by any one bond
insurer shall be considered S&P Eligible Assets only to the extent the Market
Value of such municipal securities does not exceed 25% of the aggregate Market
Value of S&P Eligible Assets; and
(3) Long-term municipal securities issued by issuers in any
one state or territory shall be considered S&P Eligible Assets only to the
extent the Market Value of such municipal securities does not exceed 20% of the
aggregate Market Value of S&P Eligible Assets.
"S&P Exposure Period" shall mean the maximum period of time
following a Valuation Date that the Fund has under this Certificate of Vote to
cure any failure to maintain, as of such Valuation Date, the Discounted Value
for its portfolio at least equal to the APS Basic Maintenance Amount (as
described in paragraph (a) of Section 9 of this Part I).
B-28
"S&P Hedging Transactions" means futures contracts based on the Municipal
Index or Treasury Bonds, put and call options on such contracts purchased by the
Fund and covered call options and secured put options on portfolio securities
written by the Fund.
"Special Dividend Period," with respect to any series of APS, shall mean
any Subsequent Dividend Period commencing on the date designated by the Fund in
accordance with Section 4 of this Part I and ending on the last day of the last
Dividend Period thereof, with such number of consecutive days or whole years as
the Board of Trustees shall specify, including the terms of any Specific
Redemption Provisions, if any.
"Specific Redemption Provisions" means, with respect to any Special
Dividend Period of 365 or more days, either, or any combination of, (i) period
(a "Non-Call Period") determined by the Board of Trustees, after consultation
with the Broker-Dealers, during which the shares subject to such Special
Dividend Period are not subject to redemption at the option of the Fund and (ii)
a period (a "Premium Call Period"), consisting of a number of whole years and
determined by the Board of Trustees, after consultation with the Broker-Dealers,
during each year of which the shares subject to such Special Dividend Period
shall be redeemable at the Fund's option at a price per share equal to $50,000
plus accumulated but unpaid dividends plus a premium expressed as a percentage
of $50,000 as determined by the Board of Trustees after consultation with the
Broker-Dealers; provided, that during any Special Dividend Period of 365 or more
days if on the date of determination of the Applicable Rate for such series,
such Applicable Rate equaled or exceeded the Treasury Rate, the Fund may redeem
APS without regard to any Non-Call Period or Premium Call Period at the
Mandatory Redemption Price.
"Subsequent Dividend Period," with respect to any series of APS, shall mean
the period from and including the first day following the Initial Rate Period
thereof to but excluding the next Dividend Payment Date for such series and any
period thereafter from and including one Dividend Payment Date for such series
to but excluding the next succeeding Dividend Payment Date for such series;
provided, however, that if any Subsequent Dividend Period is also a Special
Dividend Period, such term shall mean the period commencing on the first day of
such Special Dividend Period and ending on the last day of the last Dividend
Period thereof.
"Substitute Commercial Paper Dealer" shall mean The First Boston Company or
Morgan Stanley & Co. Incorporated or their respective affiliates or successors,
if such entity is a Commercial Paper Dealer; provided that none of such entities
shall be a Commercial Paper Dealer.
"Substitute U.S. Government Securities Dealer" shall mean The First Boston
Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated or their
respective affiliates or successors, if such entity is a U.S. Government
securities dealer; provide that none of such entities shall be a U.S. Government
Securities Dealer.
"Treasury Bonds" shall mean United States Treasury Bonds backed by the full
faith and credit of the United States government with remaining maturities of 10
years or more.
"Treasury Rate," on any date for any Rate Period, shall mean (i) the yield
on the most recently auctioned non-callable direct obligations of the U.S.
Government (excluding "flower" bonds) with a remaining maturity within three
months of the duration of such Rate Period, as quoted in The Wall Street Journal
on such date for the Business Day next preceding such date; or (ii) in the event
that any such rate is not published by The Wall Street Journal, then the
arithmetic average of the yields (expressed as an interest equivalent in the
case of a Rate Period consisting of four Dividend Periods and express 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
B-29
months of the duration of such Rate Period as quoted on a discount basis or
otherwise by the U.S. Government Securities Dealers to the Auction Agent for the
close of business on the Business Day immediately preceding such date. If any
U.S. Government Securities Dealer does not quote a rate required to determine
the Treasury Rate, the Treasury Rate shall be determined on the basis of the
quotation or quotations furnished by the remaining U.S. Government Securities
Dealer or U.S. Government Securities Dealers and any Substitute U.S. Government
Securities Dealers selected by the Fund to provide such rate or rates not being
supplied by any U.S. Government Securities Dealer or U.S. Government Securities
Dealers, as the case may be, or, if the Fund does not select any such Substitute
U.S. Government Securities Dealer or Substitute U.S. Government Securities
Dealers, by the remaining U.S. Government Securities Dealer or U.S. Government
Securities Dealers.
"U.S. Government Securities Dealer" shall mean Goldman, Sachs & Co.,
Lehman Government Securities Incorporated, Smith Barney, Harris Upham & Co. and
Morgan Guaranty Trust Company of New York or their respective affiliates or
successors, if such entity is a U.S. Government securities dealer.
"Valuation Date" shall mean, for purposes of determining whether the
Fund is maintaining the APS Basic Maintenance Amount and the Minimum Liquidity
Level, each Business Day.
"Variation Margin" shall mean, in connection with outstanding purchase
or sale positions in futures contracts and outstanding sales positions with
respect to options thereon, the amount of cash and securities paid to and
received from a futures commission merchant (subsequent to the Initial Margin
payment) from time to time as the value of such position fluctuates.
"Voting Period" shall have the meaning set forth in paragraph (b) of
Section 5 of this Part I.
ARTICLE
B. 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:
1. "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.
2. "Agent Member" shall mean a member of or participant in the
Securities Depository that will act on behalf of a Bidder and is identified as
such in such Bidder's Master Purchaser's Letter.
"Applicable Percentage" for any series of APS on any Auction Date shall
mean the percentage, determined as set forth below, based on the prevailing
rating of such series in effect at the close of business on the Business Day
next preceding such Auction Date.
<Table>
<Caption>
PREVAILING RATING PERCENTAGE
----------------- ----------
"aa3"/AA- or higher............................... 110%
"a3"/A-........................................... 125%
"baa3"/BBB........................................ 150%
"ba3"/BB-......................................... 200%
Below "ba3"/BB-................................... 250%
</Table>
B-30
provided, however, that in the event the Fund has notified the Auction Agent of
its intent to allocate income taxable for federal income tax purposes to the APS
prior to the Auction establishing the Applicable Rate for such shares the
applicable percentage in the foregoing table shall be divided by the quantity 1
minus the maximum marginal regular federal individual income tax rate applicable
to ordinary income or the maximum marginal regular federal corporate income tax
rate, whichever is greater, provided further, however, that the Applicable
Percentage shall be divided in the foregoing manner only to the extent of the
portion of the dividend on the APS for such Rate Period that represents the
allocation of taxable income to the APS.
For purposes of this definition, the "prevailing rating" of shares of a
series of APS shall be (i) "aa3"/AA- or higher if shares of such series of APS
have a rating of "aa3" or better by Moody's and AA- or better by S&P or the
equivalent of such ratings by such agencies or a substitute rating agency or
substitute rating agencies selected as provided below, (ii) if not "aa3"/AA- or
higher, then "a3"/A- if the shares of such series of APS have a rating of "a3"
or better by Moody's and A- or better by S&P or the equivalent of such ratings
by such agencies or a substitute rating agency or substitute rating agencies
selected as provided below, (iii) if not "aa3 "/AA- or higher or "a3"/A-, then
"baa3"BBB- if the shares of such series of APS have a rating of "baa3" or better
by Moody's and BBB- or better by S&P or the equivalent of such ratings by such
agencies or a substitute rating agency or substitute rating agencies selected as
provided below, (iv) if not "aa3"/AA- or higher, "a3"/A- or "baa3"BBB-, then
"ba3"BB- if the shares of such series of APS have a rating of "ba3" or better by
Moody's and BB- or better by S&P or the equivalent of such ratings by such
agencies or substitute rating agency or substitute rating agencies selected as
provided below, and (v) if not "aa3"/AA- or higher, "a3"/A-, "baa3"BBB- or
"ba3"BB-, then Below "ba3"BB-, provided, however, that if the APS are rated by
only one rating agency, the prevailing rating will be determined without
reference to the rating of any other rating agency. The Fund shall take all
reasonable action necessary to enable either S&P or Moody's to provide a rating
for each series of APS. If neither S&P nor Moody's shall make such a rating
available, Goldman, Sachs & Co. or Smith Barney, Harris Upham & Co. Incorporated
or their successors as Broker-Dealers shall select a nationally recognized
statistical rating organization (as that term is used in the rules and
regulations of the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended from time to time) to act as a substitute
rating agency in respect of the APS and the Fund shall take all reasonable
action to enable such rating agency or agencies to provide a rating for shares
of such series.
"Available APS" shall have the meaning specified in paragraph (a) of
Section 4 of this Part II.
"Bid" and "Bids" shall have the respective meanings specified in
paragraph (a) of Section 2 of this Part II.
"Bidder" and "Bidders" shall have the respective meanings specified in
paragraph (a) of Section 2 of this Part II.
"Broker-Dealer" shall mean any broker-dealer, commercial bank or other
entity permitted by law to perform the functions required of a Broker-Dealer in
this Part II, that is a member of, or a participant in, the Securities
Depository or is an affiliate of such member or participant, has been selected
by the Fund and has entered into a Broker-Dealer Agreement that remains
effective.
"Broker-Dealer Agreement" shall mean an agreement between the Auction
Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow
the procedures specified in this Part II.
B-31
"Existing Holder," when used with respect to shares of any series of
APS, shall mean a Person who has signed a Master Purchaser's Letter and is
listed as the beneficial owner of such APS in the records of the Auction Agent.
"Hold Order" and "Hold Orders" shall have the respective meanings
specified in paragraph (a) of Section 2 of this Part II.
"Master Purchaser's Letter" shall mean a letter, addressed to the Fund,
the Auction Agent, a Broker-Dealer and an Agent Member in which a Person agrees,
among other things, to offer to purchase, to purchase, to offer to sell and/or
to sell APS as set forth in this Part II.
"Maximum Rate," for any series of APS on any Auction Date, shall mean:
(a) in the case of any Auction Date which is not the
Auction Date immediately prior to the first day of any proposed
Special Dividend Period designated by the Fund pursuant to Section 4
of Part I of the Certificate of Vote, the product of (A) the "AA"
Composite Commercial Paper Rate on such Auction Date for the next
Rate Period of such series and (B) the Applicable Percentage on such
Auction Date, unless such series has or had a Special Dividend
Period (other than a Special Dividend Period of 28 Rate Period Days
or less) and an Auction at which Sufficient Clearing Bids existed
has not yet occurred for a Minimum Dividend Period of such series
after such Special Dividend Period, in which case the higher of:
the dividend rate on shares of such series for the then-ending Rate
Period, and
the product of (1) the higher of (x) the "AA" Composite Commercial Paper
Rate on such Auction Date for the then-ending Rate Period of such series, if
such Rate Period consists of less than four Dividend Periods, or the Treasury
Rate on such Auction Date for such Rate Period, if such Rate Period consists of
four or more Dividend Periods, and (y) the "AA" Composite Commercial Paper Rate
on such Auction Date for such Special Dividend Period of such series, if such
Special Dividend Period consists of less than four Dividend Periods, or the
Treasury Rate on such Auction Date for such Special Dividend Period, if such
Special Dividend Period consists of four or more Dividend Periods and (2) the
Applicable Percentage on such Auction Date; or
in the case of any Auction Date which is 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 highest of (1) the "AA" Composite Commercial Paper Rate on such Auction Date
for the then-ending Rate Period of such series, if such Rate Period consists of
less than four Dividend Periods, or the Treasury Rate on such Auction Date for
such Rate Period, if such Rate Period consists of four or more Dividend Periods,
(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 consists of less than four Dividend Periods 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 consists of four or more Dividend
Periods, and (3) the "AA" Composite Commercial Paper Rate on such Auction Date
for Minimum Dividend Periods and (B) the Applicable Percentage on such Auction
Date.
"Order" and "Orders" shall have the respective meanings specified in
paragraph (a) of Section 2 of this Part II.
B-32
"Outstanding" shall mean, as of any Auction Date with respect to shares
of any series of APS, the number of shares of such series theretofore issued by
the Fund except, without duplication, (i) any shares of such series of APS
theretofore cancelled or delivered to the Auction Agent for cancellation or
redeemed by the Fund or as to which a notice of redemption shall have been given
by the Fund, (ii) any shares of such series of APS as to which the Fund or any
Affiliate thereof shall be an Existing Holder and (iii) any shares of such
series of APS represented by any certificate in lieu of which a new certificate
has been executed and delivered by the Fund.
"Person" shall mean and include an individual, a partnership, a fund, a
trust, an unincorporated association, a joint venture or other entity or a
government or any agency or political subdivision thereof.
"Potential Holder," when used with respect to shares of any series of
APS, shall mean any Person, including any Existing Holder of shares of such
series of APS, (i) who shall have executed a Master Purchaser's Letter and (ii)
who may be interested in acquiring shares of such series of APS (or, in the case
of an Existing Holder of shares of such series of APS, additional shares of such
series of APS).
"Securities Depository" shall mean The Depository Trust Company and its
successors and assigns or any other securities depository selected by the Fund
which agrees to follow the procedures required to be followed by such securities
depository in connection with the APS.
"Sell Order" and "Sell Orders" shall have the respective meanings
specified in paragraph (a) of Section 2 of this Part II.
"Submission Deadline" shall mean 1:30 p.m., New York City time, on any
Auction Date or such other time on any Auction Date by which Brokers-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction Agent
from time to time.
"Submitted Bid" and "Submitted Bids" shall have the respective meanings
specified in paragraph (a) of Section 4 of this Part II.
"Submitted Hold Order" and "Submitted Hold Orders" shall have the
respective meanings specified in paragraph (a) of Section 4 of this Part IL
"Submitted Order" and "Submitted Orders" shall have the respective
meanings specified in paragraph (a) of Section 4 of this Part II.
"Submitted Sell Order" and "Submitted Sell Orders" shall have the
respective meanings specified in paragraph (a) of Section 4 of this Part II.
"Sufficient Clearing Bids" shall have the meaning specified in
paragraph (a) of Section 4 of this Part 11.
"Winning Bid Rate" shall have the meaning specified in paragraph (a) of
Section 4 of this Part 11.
Orders by Existing Holders and Potential Holders. (a) Prior to
the Submission Deadline on each Auction Date:
(a) each Existing Holder of shares of any series of APS
subject to an Auction on such Auction Date may submit to a
Broker-Dealer by telephone or otherwise information as to:
B-33
the number of Outstanding shares, if any, of such series of APS held by
such Existing Holder which such Existing Holder desires to continue to hold
without regard to the Applicable Rate for such series for the next succeeding
Rate Period of such series;
the number of Outstanding shares, if any, of such series of APS which
such Existing Holder offers to sell if the Applicable Rate for such series for
the next succeeding Rate Period of such series shall be less than the rate per
annum specified by such Existing Holder; and/or
the number of Outstanding shares, if any, of such series of APS held by
such Existing Holder which such Existing Holder offers to sell without regard to
the Applicable Rate for such series for the next succeeding Rate Period of such
series;
and
one or more Broker-Dealers, using lists of Potential Holders, shall in
good faith for the purpose of conducting a competitive Auction in a commercially
reasonable manner, contact Potential Holders (by telephone or otherwise),
including Persons that are not Existing Holders, on such lists to determine the
number of shares, if any, of such series of APS which each such Potential Holder
offers to purchase if the Applicable Rate for such series for the next
succeeding Rate Period of such series shall not be less than the rate per annum
specified by such Potential Holder.
For the purposes hereof, the communication to a Broker-Dealer of information
referred to in clause (i)(A), (i)(B), (i)(C) or (ii) of this paragraph (a) is
hereinafter referred to as an "Order" and collectively as "Orders" and each
Existing Holder and each Potential Holder placing an Order is hereinafter
referred to as a "Bidder" and collectively as "Bidders"; an Order containing the
information referred to in clause (i)(A) of this paragraph (a) is hereinafter
referred to as a "Hold Order" and collectively as "Hold Orders"; an Order
containing the information referred to in clause (i)(B) or (ii) of this
paragraph (a) is hereinafter referred to as a "Bid" and collectively as "Bids";
and an Order containing the information referred to in clause (i)(C) of this
paragraph (a) is hereinafter referred to as a "Sell Order" and collectively as
"Sell Orders."
2. (i) A bid by an Existing Holder of shares of any series of
APS subject to an Auction on any Auction Date shall constitute an irrevocable
offer to sell:
the number of Outstanding shares of such series of APS specified in
such Bid if the Applicable Rate for such series determined on such Auction Date
shall be less than the rate specified therein:
such number or a lesser number of Outstanding shares of such series of
APS to be determined as set forth in clause (iv) of paragraph (a) of Section 5
of this Part II if the Applicable Rate for such series determined on such
Auction Date shall be equal to the rate specified therein; or
the number of Outstanding shares of such series of APS specified in
such Bid if the rate specified therein shall be higher than the Maximum Rate for
such series, or such number or a lesser number of Outstanding shares of such
series of APS to be determined as set forth in clause (iii) of paragraph (b) of
Section 5 of this Part 11 if the rate specified therein shall be higher than the
Maximum Rate for such series and Sufficient Clearing Bids for such series do not
exist.
(b) A Sell Order by an Existing Holder of shares of
any series of APS subject to an Auction on any Auction Date shall constitute an
irrevocable offer to sell:
B-34
(i) the number of Outstanding shares of such series of APS
specified in such Sell Order; or
such number or a lesser number of Outstanding shares of such series of APS
as set forth in clause (iii) of paragraph (b) of Section 5 of this Part II if
Sufficient Clearing Bids for such series do not exist.
A Bid by a Potential Holder of shares of any series of APS subject to an
Auction on any Auction Date shall constitute an irrevocable offer to purchase:
the number of Outstanding shares of such series of APS specified in such
Bid if the Applicable Rate for such series determined on such Auction Date shall
be higher than the rate specified therein; or
such number or a lesser number of Outstanding shares of such series of APS
as set forth in clause (v) of paragraph (a) of Section 5 of this Part II if the
Applicable Rate for such series determined on such Auction Date shall be equal
to the rate specified therein.
No Order for any number of shares of any series of APS other than whole
shares shall be valid.
Submission of Orders by Broker-Dealers to Auction Agent. (a) Each
Broker-Dealer shall submit in writing to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders for shares of any series of
APS subject to an Auction on such Auction Date obtained by such Broker-Dealer
and shall specify with respect to each Order for such shares:
(b) the name of the Bidder placing such Order;
the aggregate number of shares of such series of APS that are the subject
of such Order;
to the extent that such Bidder is an Existing Holder of shares of such
series of APS:
the number of shares, if any, of such series of APS subject to any Hold
Order placed by such Existing Holder;
the number of shares, if any, of such series of APS subject to any Bid
placed by such Existing Holder and the rate specified in such Bid; and
the number of shares, if any, of such series of APS subject to any Sell
Order placed by such Existing Holder; and
to the extent such Bidder is a Potential Holder of shares of such series of
APS, the rate and number of shares of such series of APS specified in such
Potential Holder's Bid.
2. 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%.
If an Order or Orders covering all of the Outstanding shares of any series
of APS held by any Existing Holder is not submitted to the Auction Agent prior
to the Submission Deadline, the Auction Agent shall deem a Hold Order to have
been submitted on behalf of such Existing Holder covering the number of
B-35
Outstanding shares of such series of APS held by such Existing Holder and not
subject to Orders submitted to the Auction Agent.
If any Existing Holder submits through a Broker-Dealer to the Auction Agent
one or more Orders covering in the aggregate more than the number of Outstanding
shares of any series of APS subject to an Auction held by such Existing Holder,
such Orders shall be considered valid in the following order of priority:
(a) all Hold Orders for shares of such series of APS shall be
considered valid, but only up to and including in the aggregate the
number of Outstanding shares of such series of APS held by such
Existing Holder, and if the number of shares of such series of APS
subject to such Hold Orders exceeds the number of Outstanding shares of
such series of APS held by such Existing Holder, the number of shares
subject to each such Hold Order shall be reduced pro rata to cover the
number of Outstanding shares of such series of APS held by such
Existing Holder;
(A) any Bid for shares of such series of APS shall be considered valid up
to and including the excess of the number of Outstanding shares of such series
of APS held by such Existing Holder over the number of shares of such series of
APS subject to any Hold Orders referred to in clause (i) above;
(ii) subject to subclause (A), if more than one Bid for
shares of such series of APS with the same rate is submitted on behalf
of such Existing Holder and the number of Outstanding shares of such
series of APS subject to such Bids is greater than such excess, such
Bids shall be considered valid up to and including the amount of such
excess, and the number of shares of such series of APS subject to each
Bid with the same rate shall be reduced pro rata to cover the number of
shares of such series of APS equal to such excess;
subject to subclauses (A) and (B), if more than one Bid for shares of such
series of APS with different rates is submitted on behalf of such Existing
Holder, such Bids shall be considered valid in the ascending order of their
respective rates up to and including the amount of such excess; and
in any such event, the number, if any, of such Outstanding shares of such
series of APS subject to any portion of Bids considered not valid in whole or in
part under the clause (ii) shall be treated as the subject of a Bid for shares
of such series of APS by a Potential Holder at the rate therein specified; and
all Sell Orders for shares of such series of APS shall be considered valid
up to and including the excess of the number of Outstanding shares of such
series of APS held by such Existing Holder over the sum of the APS subject to
valid Hold Orders referred to in clause (i) above and valid Bids by such
Existing Holder referred to in clause (ii) above.
If more than one Bid for one or more shares of any series of APS is
submitted on behalf of any Potential Holder, each such Bid submitted shall be a
separate Bid with the rate and number of shares therein specified.
An Order submitted by a Broker-Dealer to the Auction Agent prior to the
Submission Deadline on any Auction Date shall be irrevocable.
B-36
Determination of Sufficient Clearing Bids Winning Bid Rate and
Applicable Rate. (a) Not earlier than the Submission Deadline on each Auction
Date, the Auction Agent shall assemble all valid Orders submitted or deemed
submitted to it by the Broker-Dealers (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order;" as the
case may be, or as a "Submitted Order" and collectively as "Submitted Hold
Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders" and shall for each series of APS for which an Auction is
being held determine:
(a) the excess of the number of Outstanding shares of such
series of APS over the number of Outstanding shares of such series of
APS subject to Submitted Hold Orders (such excess being hereinafter
referred to as the "Available APS" of such series);
from the Submitted Orders for such series whether:
(i) the number of Outstanding shares of such series of APS
subject to Submitted Bids by Potential Holders specifying one or more
rates equal to or lower than the Maximum Rate for such series exceeds
or is equal to the sum of
the number of Outstanding shares of such series of APS subject to Submitted
Bids by Existing Holders specifying one or more rates higher than the Maximum
Rate for such series; and
the number of Outstanding shares of such series of APS subject to Submitted
Sell Orders
(in the event such excess or such equality exists (other than because the number
of shares of such series of APS in subclauses (B) and (C) above is zero because
all of the Outstanding shares of such series of APS are subject to Submitted
Hold Orders), such Submitted Bids in subclause (A) above being hereinafter
referred to collectively as "Sufficient Clearing Bids" for such series); and
if Sufficient Clearing Bids for such series exist, the lowest rate
specified in such Submitted Bids (the "Winning Bid Rate" for such series) which
if:
(I) each such Submitted Bid from Existing Holders specifying such lowest
rate and (II) all other such Submitted Bids from Existing Holders specifying
lower rates were rejected, thus entitling such Existing Holders to continue to
hold the shares of such series of APS that are subject to such Submitted Bids;
and
(J) each such Submitted Bid from Potential Holders specifying such lowest
rate and (II) all other such Submitted Bids from Potential Holders specifying
lower rates were accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding shares of such series of
APS which, when added to the number of Outstanding shares of such series of APS
to be purchased by such Potential Holders described in subclause (B) above,
would equal not less than the Available APS of such series.
2. Promptly after the Auction Agent has made the determinations
pursuant to paragraph (a) of this Section 4, the Auction Agent shall advise the
Fund of the Maximum Rate for each series of APS for which an Auction is being
held on the Auction Date and, based on such determination, the Applicable Rate
for each such series for the next succeeding Rate Period thereof as follows:
B-37
(b) if Sufficient Clearing Bids for such series exist, that
the Applicable Rate for such series for the next succeeding Rate Period
thereof shall be equal to the Winning Bid Rate for such series to
determined;
if Sufficient Clearing Bids for such series do not exist (other than
because all of the Outstanding shares of such series of APS are subject to
Submitted Hold Orders), that the Applicable Rate for such series for the next
succeeding Rate Period thereof shall be equal to the Maximum Rate for such
series; or
if all of the Outstanding shares of such series of APS are subject to
Submitted Hold Orders, that the Applicable Rate for such series for the next
succeeding Rate Period thereof shall be equal to the product of (A) (1) the "AA"
Composite Commercial Paper Rate on such Auction Date for such Rate Period, if
such Rate Period consists of less than four Dividend Periods or (II) the
Treasury Rate on such Auction Date for such Rate Period, if such Rate Period
consists of four or more Dividend Periods and (B) 1 minus the maximum marginal
regular federal individual income tax rate applicable to ordinary income or the
maximum marginal regular federal corporate income tax rate, whichever is
greater; provided, however, that if the Fund has notified the Auction Agent of
its intent to allocate to the APS in such Rate Period any net capital gains or
other income taxable for Federal income tax purposes, the Applicable Rate in
respect of that portion of the dividend on the APS for such Rate Period that
represents the allocation of net capital gains or other income taxable for
Federal income tax purposes shall be the rate described in the preceding clause
(A)(I) or (II), as applicable, without being multiplied by the factor set forth
in the preceding clause (B).
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:
1. If Sufficient Clearing Bids for any series of APS have been made,
all Submitted Sell Orders shall be accepted and, subject to the provisions of
paragraphs (d) and (e) of this Section 5, Submitted Bids shall be accepted or
rejected as follows in the following order of priority and all other Submitted
Bids for such series shall be rejected:
(a) Existing Holders' Submitted Bids for shares of such series
of APS specifying any rate that is higher than the Winning Bid Rate for
such series shall be accepted, thus requiring each such Existing Holder
to sell the APS subject to such Submitted Bids;
Existing Holders' Submitted Bids for shares of such series of APS
specifying any rate that is lower than the Winning Bid Rate for such series
shall be rejected, thus entitling each such Existing Holder to continue to hold
the APS subject to such Submitted Bids;
Potential Holders' Submitted Bids for shares of such series of APS
specifying any rate that is lower than the Winning Bid Rate shall be accepted;
each Existing Holder's Submitted Bid for shares of such series of APS
specifying a rate that is equal to the Winning Bid Rate for such series shall be
rejected, thus entitling such Existing Holder to continue to hold the APS
subject to such Submitted Bid, unless the number of Outstanding shares of such
series of APS subject to all such Submitted Bids shall be greater than
B-38
the number of shares of such series of APS ("remaining shares") in the excess of
the Available APS of such series over the number of the APS subject to Submitted
Bids described in clauses (ii) and (iii) of this paragraph (a), in which event
such Submitted Bid of such Existing Holder shall be rejected in part, and such
Existing Holder shall be entitled to continue to hold the APS subject to such
Submitted Bid, but only in an amount equal to the number of shares of such
series of APS obtained by multiplying the number of remaining shares by a
fraction, the numerator of which shall be the number of Outstanding shares of
such series of APS held by such Existing Holder subject to such Submitted Bid
and the denominator of which shall be the aggregate number of Outstanding shares
of such series of APS subject to such Submitted Bids made by all such Existing
Holders that specified a rate equal to the Winning Bid Rate for such series; and
each Potential Holder's Submitted Bid for shares of such series of APS
specifying a rate that is equal to the Winning Bid Rate for such series shall be
accepted but only in an amount equal to the number of shares of such series of
APS obtained by multiplying the number of shares in the excess of the Available
APS of such series over the number of the APS subject to Submitted Bids
described in clauses (ii) through (iv) of this paragraph (a) by a fraction, the
numerator of which shall be the number of Outstanding shares of such series of
APS subject to such Submitted Bid and the denominator of which shall be the
aggregate number of Outstanding shares of such series of APS subject to such
Submitted Bids made by all such Potential Holders that specified a rate equal to
the Winning Bid Rate for such series; and
If Sufficient Clearing Bids for any series of APS have not been made (other
than because all of the Outstanding shares of such series of APS are subject to
Submitted Hold Orders), subject to the provisions of paragraph (d) of this
Section 5, Submitted Orders for such series shall be accepted or rejected as
follows in the following order of priority and all other Submitted Bids for such
series shall be rejected:
(a) Existing Holders' Submitted Bids for shares of such series
of APS specifying any rate that is equal to or lower than the Maximum Rate
for such series shall be rejected, thus entitling such Existing Holders to
continue to hold the APS subject to such Submitted Bids;
Potential Holders' Submitted Bids for shares of such series of APS
specifying any rate that is equal to or lower than the Maximum Rate for such
series shall be accepted; and
Each Existing Holder's Submitted Bid for shares of such series of APS
specifying any rate that is higher than the Maximum Rate of such series and the
Submitted Sell Orders for shares of such series of APS of each Existing Holder
shall be accepted, thus entitling each Existing Holder that submitted any such
Submitted Bid or Submitted Sell Order to sell the shares of such series of APS
subject to such Submitted Bid or Submitted Sell Order, but in both cases only in
an amount equal to the number of shares of such series of APS obtained by
multiplying the number of shares of such series of APS subject to Submitted Bids
described in clause (ii) of this paragraph (b) by a fraction, the numerator of
which shall be the number of Outstanding shares of such series of APS held by
such Existing Holder subject to such Submitted Bid or Submitted Sell Order and
the denominator of which shall be the aggregate number of Outstanding shares of
such series of APS subject to all such Submitted Bids and Submitted Sell Orders.
If all of the Outstanding shares of any series of APS are subject to
Submitted Hold Orders, all Submitted Bids for such series shall be rejected.
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
B-39
Holder would be entitled or required to purchase, a fraction of a share of APS
of any series on any Auction Date, the Auction Agent shall, in such manner as it
shall determine in its sole discretion, round up or down the number of shares of
such series of APS to be purchased or sold by any Existing Holder or Potential
Holder on such Auction Date as a result of such procedures so that the number of
shares of such series so purchased or sold by each Existing Holder or Potential
Holder on such Auction Date shall be whole shares of APS.
If, as a result of the procedures described in clause (v) of paragraph (a)
of this Section 5, any Potential Holder would be entitled or required to
purchase less than a whole share of any series of APS on any Auction Date, the
Auction Agent shall, in such manner as it shall determine in its sole
discretion, allocate shares of such series of APS for purchase among Potential
Holders so that only whole shares of such series of APS are purchased on such
Auction Date as a result of such procedures by any Potential Holder, even if
such allocation results in one or more Potential Holders not purchasing the APS
on such Auction Date.
Based on the results of each Auction for a series of APS, the Auction Agent
shall determine the aggregate number of shares of such series of APS to be
purchased and the aggregate number of shares of such series of APS to be sold by
Potential Holders and Existing Holders on whose behalf each Broker-Dealer
submitted Bids or Sell Orders and, with respect to each Broker-Dealer, to the
extent that such aggregate number of shares to be purchased and such aggregate
number of shares to be sold differ, determine to which other Broker-Dealer or
Broker-Dealers acting for one or more purchasers of shares of such series of APS
such Broker-Dealer shall deliver, or from which other Broker-Dealer or
Broker-Dealers acting for one or more sellers of shares of such series of APS
such Broker-Dealer shall receive, as the case may be, shares of such series of
APS.
Notification of Allocations. 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.
Miscellaneous. (a) To the extent permitted by applicable law,
the Board of Trustees may interpret or adjust the provisions of this Certificate
of Vote to resolve any inconsistency or ambiguity or to remedy any formal
defect, and may amend this Certificate of Vote with respect to any series of APS
prior to the issuance of such series.
2. 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 Il 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.
All of the shares of each series of APS outstanding from time to time shall
be represented by one global certificate registered in the name of the
Securities Depository or its nominee.
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-40
IN WITNESS WHEREOF, the undersigned has caused this Certificate of Vote
to be executed as of December 5, 1991.
---------------------
Ronald A. Nyberg
Secretary
State of )
) ss
County of )
Then personally appeared before me Ronald A. Nyberg, who acknowledged
the foregoing instrument to be his free act and deed and the free act and deed
in his capacity as Secretary of Van Kampen Merritt Municipal Trust.
Before me,
Notary public
My commission Expires:
---------------------
B-41
ARTICLES OF AMENDMENT TO
THE CERTIFICATE OF VOTE OF TRUSTEES
ESTABLISHING FOUR SERIES OF PREFERRED SHARES OF
VAN KAMPEN MUNICIPAL TRUST
Van Kampen Municipal Trust, a Massachusetts business trust (the "Fund")
certifies to the Secretary of State of the Commonwealth of Massachusetts as
follows:
FIRST: On October 8, 1998, the Board of Trustees, pursuant to the
provisions of Article VI of the Amended and Restated Declaration of Trust (the
"Declaration of Trust") of the Fund and Section 5 of Part I and Section 7 of
Part 11 of the Certificate of Vote of Trustees Establishing Four Series of
Preferred Shares (the "Certificate of Vote") of the Fund, authorized and
declared a 2-for-1 split of the preferred shares of beneficial Interest of the
Fund, par value $.01 per share, liquidation preference $50,000 per share,
designated, respectively, Auction Preferred Shares, Series A ("APS Series A"),
Auction Preferred Shares, Series B ("APS Series B"), Auction Preferred Shares,
Series C ("APS Series C") and Auction Preferred Shares, Series D ("APB Series
D") (collectively, the APS Series A, APB Series B, APS Series C and APB Series D
are referred to as "APS"). The stock split is to be effected by means of a
division of each outstanding share of APS into two preferred shares of
beneficial interest, par value $.01 per share, liquidation preference $25,000
per share.
SECOND: Pursuant to the provisions of Article VI of the Declaration of
Trust and Section 5 of Part I and Section 7 of Part II of the Certificate of
Vote, the following amendments to the Certificate of Vote have been duly adopted
and approved by a majority of the Trustees of the Fund.
(a) The first paragraph of the vote establishing four series of
preferred shares of beneficial interest is hereby amended by
replacing such paragraph with the following:
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 four series of 12,000 shares of Its authorized
preferred shares of beneficial interest, par value $.01 per
share ("Preferred Shares"), liquidation preference of $25,000
per share, designated, respectively, Auction Preferred Shares,
Series A ("APS Series A"), Auction Preferred Shares, Series B
("APB Series B"), Auction Preferred Shares, Series C ("APS
Series C") and Auction Preferred Shares, Series D ("APB Series
D") (collectively, the APS Series A, APS Series B, APS Series
C and APS Series D are referred to as "APB").
(b) The first four paragraphs under the heading "DESIGNATION"
of the Certificate of Vote are hereby amended by replacing such paragraphs with
the following:
APS SERIES A: A series of 3,000 preferred shares of beneficial
interest, $.01 par value, liquidation preference $25,000 per
share, is hereby designated "Auction Preferred Shares, Series
A" (hereinafter, "APB Series A"). Each share of APS Series A
shall be issued on December 10, 1991; have an Applicable Rate
for its Initial Dividend Period equal to 4.50% per annum, have
an Initial Dividend Payment Date of January 7, 1992; and have
such other preferences, limitations and relative voting
rights, in addition to those required by applicable law or set
forth in the Declaration of Trust applicable to preferred
shares of beneficial interest of the Fund, as are set forth in
Part I and Part II of this Certificate of Vote. The APS Series
A shall constitute a separate series of Preferred Shares of
B-42
beneficial interest of the Fund, and each share of APS Series
A shall be Identical except as provided in Section 3 of Part I
of this Certificate of Vote.
APS SERIES B: A series of 3,000 preferred shares of beneficial
Interest, $.01 par value, liquidation preference $25,000 per
share, is hereby designated "Auction Preferred Shares, Series
B" (hereinafter, "APS Series B"). Each share of APS Series B
shall be issued on December 10, 1991; have an Applicable Rate
for its Initial Dividend Period equal to 4.50% per annum, have
an Initial Dividend Payment Date of January 15, 1992; and have
such other preferences, limitations and relative voting
rights, In addition to those required by applicable law or set
forth in the Declaration of Trust applicable to preferred
shares of beneficial interest of the Fund, as are set forth in
Part I and Part II of this Certificate of Vote. The APS Series
B shall constitute a separate series of Preferred Shares of
beneficial interest of the Fund, and each share of APS Series
B shall be Identical except as provided in Section 3 of Part I
of this Certificate of Vote.
APS SERIES C: A series of 3,000 preferred shares of beneficial
Interest, $.01 par value, liquidation preference $25,000 per
share, is hereby designated "Auction Preferred Shares, Series
C" (hereinafter, "APS Series C"). Each share of APS Series C
shall be Issued on December 10, 1991; have an Applicable Rate
for its Initial Dividend Period equal to 4.50% per annum, have
an Initial Dividend Payment Date of January 9, 1992; and have
such other preferences, limitations and relative voting
rights, in addition to those required by applicable law or set
forth In the Declaration of Trust applicable to preferred
shares of beneficial interest of the Fund, as are set forth in
Part I and Part II of this Certificate of Vote. The APS Series
C shall constitute a separate series of Preferred Shares of
beneficial interest of the Fund, and each share of APS Series
C shall be Identical except as provided in Section 3 of Part I
of this Certificate of Vote.
APS SERIES D: A series of 3,000 preferred shares of beneficial
interest, $.01 par value, liquidation preference $25,000 per
share, is hereby designated "Auction Preferred Shares, Series
D" (hereinafter, "APS Series D"). Each share of APS Series D
shall be Issued on December 10, 1991; have an Applicable Rate
for Its Initial Dividend Period equal to 4.50% per annum, have
an Initial Dividend Payment Date of January 10, 1992; and have
such other preferences, limitations and relative voting
rights, In addition to those required by applicable law or set
forth in the Declaration of Trust applicable to preferred
shares of beneficial interest of the Fund, as are set forth In
Part I and Part II of this Certificate of Vote. The APS Series
D shall constitute a separate series of Preferred Shares of
beneficial interest of the Fund, and each share of APS Series
D shall be identical except as provided in Section 3 of Part I
of this Certificate of Vote.
(c) Section 2(c)(ii) of Part I of the Certificate of Vote is
hereby amended to replace such section with the following:
The amount of dividends per share payable on shares of any
series of APS on any date on which dividends shall be payable
on shares of such series shall be computed by multiplying the
respective Applicable Rate in effect for such series in effect
for such Dividend Period or Dividend Periods or part thereof
for which dividends have not been paid by a fraction, the
numerator of which shall be the number of days in such
Dividend Period or Dividend Periods or part thereof and the
denominator of which shall be 365 if such Dividend Period is a
Rate Period, or is contained in a Rate Period, of less that
one year and 360 for all other Dividend Periods, and applying
the rate obtained against $25,000.
B-43
(d) Section 3(a)(i) of Part I of the Certificate of Vote is
hereby amended to replace such section with the following:
After the Initial Dividend Period with respect to any series
of APB and upon giving a Notice of Redemption, as provided
below, the Fund at its option may redeem shares of any series
of APS, in whole or in part, on the second Business Day next
preceding any Dividend Payment Date applicable to those shares
of APS called for redemption, out of funds legally available
therefor, at the Optional Redemption Price; provided that
during a Special Dividend Period of 365 days or more no share
of APS will be subject to optional redemption during any
Non-Call Period; provided, that shares of any series of APS
may not be redeemed in part of any such partial redemption
fewer than 500 shares of such series remain outstanding.
(e) Section 5(g) of Part I of the Certificate of Vote is
hereby amended to replace such section with the following:
Right to Vote with Respect to Certain Other Matters. If the
Fund has more than one series of APB outstanding, the
affirmative vote of the holders of a majority (unless a higher
percentage vote is required under the Declaration of Trust or
under this Certificate of Vote) of the outstanding shares of
each series of APB, each voting as a separate class, is
required with respect to any matter that materially affects
the series In a manner different from that of other. series of
classes of the Fund's shares, including without limitation any
proposal to do the following: (1) increase or decrease the
aggregate number of authorized shares of the series; (2)
effect any 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, of the same or another
class or series; (6) create a new class or series of shares
having rights and preferences prior and superior to the shares
of the series, or Increase the rights and preferences or the
number of authorized shares of a series having rights and
preferences prior or superior to the shares of the series; or
(7) cancel or otherwise affect distributions on the shares of
the series that have accrued but have not been declared. To
the extent that the interest of a series of APB 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 each series 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.
(f) Section 6(a) of Part I of the Certificate of Vote is
hereby amended to replace such section with the following:
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 $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
payments
B-44
required to be made pursuant to Section 12 in connection with
the liquidation of the Fund.
(g) Section 15(f) of Part I of the Certificate of Vote is
hereby amended to replace such section with the following:
"APB 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 $25,000; (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 Dale; (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 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) thorough (i)(G) if such assets mature within the
Moody's Exposure Period and are either securities issued or
guaranteed by the United States Government or have a rating
assigned by Moody's of P1, VMIG-1 or MIG-1 (or, with respect
to S&P, SP-1+ or A-1+) or (B) the Discounted Value of such
assets. For purposes of the APS Basic Maintenance Amount In
connection with S&P's ratings of the APS, with respect to any
transactions by the Fund in futures contracts, the Fund shall
include as liabilities (i) 30% of the aggregate settlement
value, as marked to market, of any outstanding futures
contracts based on the Municipal Index which are owned by the
Fund plus (ii) 25% of the aggregate settlement value, as
marked to market, of any outstanding futures contracts based
on Treasury Bonds which contracts are owned by the Fund. For
purposes of the APB Basic Maintenance Amount In connections
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.
(h) Section 15(ii) of Part I of the Certificate of Vote is
hereby amended to replace such section with the following:
"Mandatory Redemption Price" means $25,000 per share of APB
plus an amount equal to accumulated but unpaid dividends
thereon to the date fixed for redemption (whether or not
earned or declared).
(i) Section 15(yy) of Part I of the Certificate of Vote is
hereby amended to replace such section with the following:
"Optional Redemption Price" shall mean (i) $25,000 per share
of APB in the case of a 7 day or 26-day 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
B-45
case plus an amount equal to accumulated but unpaid dividends
thereon to the date of redemption (whether or not earned or
declared).
(j) Section 15(ppp) of Part I of the Certificate of Vote is
hereby amended to replace such section with the following:
"Specific Redemption Provisions" means, with respect to any
Special Dividend Period of 365 or more days, either, or any
combination of, (i) a 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 Cell
Period"), consisting of a number of whole years and determined
by the Board of Trustees, after consultation within 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 $25,000 plus
accumulated by unpaid dividends plus a premium expressed as a
percentage of $25,000 as determined but the Board of Trustees
after consultation with the Broker-Dealers; provided, that
during any Special Dividend Period of 365 or more days if, on
the date of determination of the Applicable Rate for such
series, such Applicable Rate equaled or exceeded the Treasury
Rate, the Fund may redeem APB without regard to any Non-Call
Period or Premium Call Period at the Mandatory Redemption
Price.
B-46
ARTICLES OF AMENDMENT TO
THE CERTIFICATE OF VOTE OF TRUSTEES
CHANGING THE TIME WHEN THE FUND MUST DELIVER A LETTER
FROM AN INDEPENDENT ACCOUNTANT TO RATING AGENCIES
Van Kampen Municipal Trust, a Massachusetts business trust (the
"Fund"), certifies to the Secretary of State of the Commonwealth of
Massachusetts as follows:
FIRST: On September 25, 2003, the Board of Trustees of the Fund,
pursuant to the provisions of Article VI of the Amended and Restated Declaration
of Trust (the "Declaration of Trust") of the Fund and Section 5 of Part I of the
Certificate of Vote of Trustees Establishing a Class of Preferred Shares (the
"Certificate of Vote") of the Fund, authorized an amendment to the Certificate
of Vote to change the timing of filing certain reports with rating agencies from
quarterly to annually and to make conforming changes to the Certificate of Vote.
SECOND: Pursuant to the provisions of Article VI of the Declaration of
Trust and Section 5 of Part I of the Certificate of Vote of the Fund, the
following amendments to the Certificate of Vote have been duly adopted and
approved by a majority of the Trustees of the Fund.
C. Section 5 (d) (ii) of Part I of the Certificate of Vote is
hereby amended to replace the term "Quarterly Valuation Date"
with the term "Annual Valuation Date."
D. The second and third sentences of Section 9(b) of Part I of
the Certificate of Vote are hereby amended to replace such
sentences with the following:
The Fund shall also 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 last Valuation
Date of each month on or before the third Business Day after
such day. The Fund shall also deliver to S&P (if S&P is then
rating the APS) and Moody's (if Moody's is then rating the
APS) an APS Basic Maintenance Report whenever (i) the Fund
shall have redeemed APS or Common Shares, (ii) the Fund shall
fail to have S&P Eligible Assets or Moody's Eligible Assets
with an aggregate Discounted Value at least equal to 105% of
the APS Basic Maintenance Amount, or (iii) whenever requested
by Moody's or S&P, in each case on or before the third
Business Day after such day.
E. Section 9 (c) of Part I of the Certificate of Vote is hereby
amended to replace such section with the following:
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 an Annual Valuation Date, the Fund
shall cause the Independent Accountant to confirm in writing
to S&P (if S&P is then rating the APS), Moody's (if Moody's is
then rating the APS) and the Auction Agent (if either S&P or
Moody's is then rating the APS) (i) the mathematical accuracy
of the calculations reflected in such Report and (ii) that, in
such Report, the Fund determined in accordance with this
Certificate of Vote whether the Fund had, at such Annual
Valuation Date, 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").
B-47
F. The final clause of Section 13 (a) (i) of Part I of the
Certificate of Vote, which read "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" is hereby amended to
replace such clause with the following:
there shall be an annual 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
G. E. Section 15 (h) of Part I of the Certificate of Vote is
hereby amended to replace such section with the following:
"APS Basic Maintenance Report" shall mean a report signed by
any of the President, Treasurer, any Senior Vice President or
any 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), the APS Basic Maintenance Amount, the net asset
value and market trading price per Common Share, and the total
return percentage for the relevant valuation period.
H. F. Section 15 (ddd) of Part I of the Certificate of Vote is
hereby amended to replace such section with the following:
"Annual Valuation Date" shall mean the last Business Day of
each fiscal year of the Fund.
IN WITNESS WHEREOF, the undersigned has caused this Certificate of Vote
to be executed as of March 8, 2004.
----------------------------
A. Thomas Smith III
Vice President and Secretary
State of New York )
) ss
County of New York )
Then personally appeared before me A. Thomas Smith III, who
acknowledged the foregoing instrument to be his free act and deed and the free
act and deed in his capacity as Vice President and Secretary of Van Kampen
Municipal Trust.
Before me,
----------------------------
Notary Public
B-48
APPENDIX C
ACQUIRING FUND ANNUAL REPORT DATED [ ]
[To be filed by amendment]
C-1
APPENDIX D
TARGET FUND ANNUAL REPORT DATED [ ]
[To be filed by amendment]
D-1
APPENDIX E
MORGAN STANLEY INVESTMENT MANAGEMENT
PROXY VOTING POLICY AND PROCEDURES
IV. POLICY STATEMENT
Introduction -- Morgan Stanley Investment Management's ("MSIM") policy
and procedures for voting proxies ("Proxy Voting Policy and Procedures") with
respect to securities held in the accounts of clients apply to those MSIM
entities that provide discretionary investment management services and for which
a MSIM entity has authority to vote proxies. The policies and procedures and
general guidelines in this section will be reviewed and updated, as necessary,
to address new or revised proxy voting issues. The MSIM entities covered by
these policies and procedures currently include the following: Morgan Stanley
Investment Advisors Inc., Morgan Stanley AIP GP LP, Morgan Stanley Investment
Management Inc., Morgan Stanley Investment Management Limited, Morgan Stanley
Investment Management Company, Morgan Stanley Asset & Investment Trust
Management Co., Limited, Morgan Stanley Investment Management Private Limited,
Morgan Stanley Hedge Fund Partners GP LP, Morgan Stanley Hedge Fund Partners LP,
Van Kampen Asset Management, and Van Kampen Advisors Inc. (each a "MSIM
Affiliate" and collectively referred to as the "MSIM Affiliates").
Each MSIM Affiliate will use its best efforts to vote proxies as part
of its authority to manage, acquire and dispose of account assets. With respect
to the MSIM registered management investment companies (Van Kampen,
Institutional and Advisor Funds) (collectively referred to as the "MSIM Funds"),
each MSIM Affiliate will vote proxies pursuant to authority granted under its
applicable investment advisory agreement or, in the absence of such authority,
as authorized by the Boards of Directors or Trustees of the MSIM Funds. A MSIM
Affiliate will not vote proxies if the "named fiduciary" for an ERISA account
has reserved the authority for itself, or in the case of an account not governed
by ERISA, the Investment Management or Investment Advisory Agreement does not
authorize the MSIM Affiliate to vote proxies. MSIM Affiliates will, in a prudent
and diligent manner, vote proxies in the best interests of clients, including
beneficiaries of and participants in a client's benefit plan(s) for which the
MSIM Affiliates manage assets, consistent with the objective of maximizing
long-term investment returns ("Client Proxy Standard"). In certain situations, a
client or its fiduciary may provide a MSIM Affiliate with a proxy voting policy.
In these situations, the MSIM Affiliate will comply with the client's policy
unless to do so would be inconsistent with applicable laws or regulations or the
MSIM Affiliate's fiduciary responsibility.
Proxy Research Services -- To assist the MSIM Affiliates in their
responsibility for voting proxies and the overall global proxy voting process,
Institutional Shareholder Services ("ISS") and the Investor Responsibility
Research Center ("IRRC") have been retained as experts in the proxy voting and
corporate governance area. ISS and IRRC are independent advisers that specialize
in providing a variety of fiduciary-level proxy-related services to
institutional investment managers, plan sponsors, custodians, consultants, and
other institutional investors. The services provided to MSIM Affiliates include
in-depth research, global issuer analysis, and voting recommendations. While the
MSIM Affiliates may review and utilize the ISS and IRRC recommendations in
making proxy voting decisions, they are in no way obligated to follow the ISS
and IRRC recommendations. In addition to research, ISS provides vote execution,
reporting, and recordkeeping. MSIM's Proxy Review Committee (see Section IV.A.
below) will carefully monitor and supervise the services provided by the proxy
research services.
E-1
Voting Proxies for Certain Non-US Companies -- While the proxy voting
process is well established in the United States and other developed markets
with a number of tools and services available to assist an investment manager,
voting proxies of non-US companies located in certain jurisdictions,
particularly emerging markets, may involve a number of problems that may
restrict or prevent a MSIM Affiliate's ability to vote such proxies. These
problems include, but are not limited to: (i) proxy statements and ballots being
written in a language other than English; (ii) untimely and/or inadequate notice
of shareholder meetings; (iii) restrictions on the ability of holders outside
the issuer's jurisdiction of organization to exercise votes; (iv) requirements
to vote proxies in person, (v) the imposition of restrictions on the sale of the
securities for a period of time in proximity to the shareholder meeting; and
(vi) requirements to provide local agents with power of attorney to facilitate
the MSIM Affiliate's voting instructions. As a result, clients' non-U.S. proxies
will be voted on a best efforts basis only, after weighing the costs and
benefits of voting such proxies, consistent with the Client Proxy Standard. ISS
has been retained to provide assistance to the MSIM Affiliates in connection
with voting their clients' non-US proxies.
III. GENERAL PROXY VOTING GUIDELINES
To ensure consistency in voting proxies on behalf of its clients, MSIM
Affiliates will follow (subject to any exception set forth herein) these Proxy
Voting Policies and Procedures, including the guidelines set forth below. These
guidelines address a broad range of issues, including board size and
composition, executive compensation, anti-takeover proposals, capital structure
proposals and social responsibility issues and are meant to be general voting
parameters on issues that arise most frequently. The MSIM Affiliates, however,
may, pursuant to the procedures set forth in Section IV. below, vote in a manner
that is not in accordance with the following general guidelines, provided the
vote is approved by the Proxy Review Committee and is consistent with the Client
Proxy Standard.
VI. GUIDELINES
A. MANAGEMENT PROPOSALS
1. When voting on routine ballot items, unless otherwise
determined by the Proxy Review Committee, the following
proposals will be voted in support of management.
o Selection or ratification of auditors.
o Approval of financial statements, director and auditor
reports.
o General updating/corrective amendments to the chatter.
o Approval of the payment of a dividend.
o Proposals to limit Directors' liability and/or broaden
indemnification of Directors.
o Proposals requiring that a certain percentage (up to
66%) of the company's Board members be independent
Directors.
o Proposals requiring that members of the company's
compensation, nominating and audit committees be
comprised of independent or unaffiliated Directors.
E-2
o Proposals recommending set retirement ages or requiring
specific levels of stock ownership by Directors.
o Proposals to eliminate cumulative voting.
o Proposals to eliminate preemptive rights.
o Proposals for confidential voting and independent
tabulation of voting results.
o Proposals related to the conduct of the annual meeting
except those proposals that relate to the "transaction
of such other business which may come before the
meeting."
2. Election of Directors. In situations where no conflict exists,
and where no specific governance deficiency has been noted,
unless otherwise determined by the Proxy Review Committee,
will be voted in support of nominees of management.
Unless otherwise determined by the Proxy Review
Committee, a withhold vote will be made where:
(i) A nominee has, or any time during the previous
three years had, a relationship with the issuer
(e.g., investment banker, counsel or other
professional service provider, or familial
relationship with a senior officer of the
issuer) that may impair his or her independence;
(ii) A direct conflict exists between the interests
of the nominee and the public shareholders; or
(iii) Where the nominees standing for election have
not taken action to implement generally accepted
governance practices for which there is a
"bright line" test. These would include
elimination of dead hand or slow hand poison
pills, requiring Audit, Compensation or
Nominating Committees to be composed of
independent directors and requiring a majority
independent board.
3. The following non-routine proposals, which potentially may
have a substantive financial or best interest impact on a
shareholder, unless otherwise determined by the Proxy Review
Committee, will be voted in support of management.
CAPITALIZATION CHANGES
o Proposals relating to capitalization changes that
eliminate other classes of stock and voting rights.
o Proposals to increase the authorization of existing
classes of common stock (or securities convertible into
common stock) if. (i) a clear and legitimate business
purpose is stated; (ii) the number of shares requested
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is reasonable in relation to the purpose for which
authorization is requested; and (iii) the authorization
does not exceed 100% of shares currently authorized and
at least 30% of the new authorization will be
outstanding.
o Proposals to create a new class of preferred stock or
for issuances of preferred stock up to 50% of issued
capital.
o Proposals for share repurchase plans.
o Proposals to reduce the number of authorized shares of
common or preferred stock, or to eliminate classes of
preferred stock.
o Proposals to effect stock splits.
o Proposals to effect reverse stock splits if management
proportionately reduces the authorized share amount set
forth in the corporate charter. Reverse stock splits
that do not adjust proportionately to the authorized
share amount will generally be approved if the resulting
increase in authorized shares coincides with the proxy
guidelines set forth above for common stock increases.
COMPENSATION
o Proposals relating to Director fees, provided the
amounts are not excessive relative to outer companies in
the country or industry.
o Proposals for employee stock purchase plans that permit
discounts up to 15%, but only for grants that are part
of a broad based employee plan, including all
non-executive employees.
o Proposals for the establishment of Employee Stock Option
Plans and other employee ownership plans.
ANTI-TAKEOVER MATTERS
o Proposals to modify or rescind existing supermajority
vote requirements to amend the charters or bylaws.
o Proposals relating to the adoption of anti-greenmail
provisions provided that the proposal: (i) defines
greenmail; (ii) prohibits buyback offers to large block
holders not made to all shareholders or not approved by
disinterested shareholders; and (iii) contains no
anti-takeover measures or other provisions restricting
the rights of shareholders.
4. The following non-routine proposals, which potentially may
have a substantive financial or best interest impact on the
shareholder, unless otherwise determined by the Proxy Review
Committee, will be voted against (notwithstanding management
support).
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o Proposals to establish cumulative voting rights in the
election of directors.
o Proposals relating to capitalization changes that add
classes of stock which substantially dilute the voting
interests of existing shareholders.
o Proposals to increase the authorized number of shares of
existing classes of stock that carry preemptive rights
or super-voting rights.
o Proposals to create "blank check" preferred stock.
o Proposals relating to changes in capitalization by 100%
or more.
o Compensation proposals that allow for discounted stock
options that have not been offered to employees in
general.
o Proposals to amend bylaws to require a supermajority
shareholder vote to pass or repeal certain provisions.
o Proposals to indemnify auditors.
5. The following types of non-routine proposals, which
potentially may have a substantive financial or best interest
impact on an issuer, will be voted as determined by the Proxy
Review Committee.
CORPORATE TRANSACTIONS
o Proposals relating to mergers, acquisitions and other
special corporate transactions (i.e., takeovers,
spin-offs, sales of assets, reorganizations,
restructurings and recapitalizations) will be examined
on a case-by-case basis. In all cases, ISS and IRRC
research and analysis will be used along with MSIM
Affiliates' research and analysis, including, among
other things, MSM internal company-specific knowledge.
o Proposals relating to change-in-control provisions in
non-salary compensation plans, employment contracts, and
severance agreements that benefit management and would
be costly to shareholders if triggered.
o Proposals relating to shareholders rights plans that
allow appropriate offers to shareholders to be blocked
by the board or trigger provisions that prevent
legitimate offers from proceeding.
o Proposals relating to Executive/ Director stock option
plans. Generally, stock option plans should meet the
following criteria:
(i) Whether the stock option plan is incentive
based;
(ii) For mature companies, should be no more than 5%
of the issued capital at the time of approval;
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(iii) For growth companies, should be no more than 10%
of the issued capital at the time of approval.
ANTI-TAKEOVER PROVISIONS
o Proposals requiring shareholder ratification of poison
pills.
o Proposals relating to anti-takeover and related
provisions that serve to prevent the majority of
shareholders from exercising their rights or effectively
deter the appropriate tender offers and other offers.
B. SHAREHOLDER PROPOSALS
1. The following shareholder proposals will be supported, unless
otherwise determined by the Proxy Review Committee:
o Proposals requiring auditors to attend the annual
meeting of shareholders.
o Proposals requiring non-U.S. companies to have a
separate Chairman and CEO.
o Proposals requiring that members of the company's
compensation, nominating and audit committees be
comprised of independent or unaffiliated Directors.
o Proposals requiring that a certain percentage of the
company's members be comprised of independent and
unaffiliated Directors.
o Proposals requiring confidential voting.
o Proposals to reduce or eliminate of supermajority voting
requirements.
o Proposals requiring shareholder approval for shareholder
rights plan or poison pill.
o Proposals to require the company to expense stock
options.
2. The following shareholder proposals will be voted as
determined by the Proxy Review Committee.
o Proposals that limit tenure of directors.
o Proposals to limit golden parachutes.
o Proposals requiring directors to own large amounts of
stock to be eligible for election.
o Proposals that request or require disclosure of
executive compensation in addition to the disclosure
required by the Securities and Exchange Commission
("SEC") regulations.
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o Proposals that limit retirement benefits or executive
compensation.
o Proposals requiring shareholder approval for bylaw or
charter amendments.
o Proposals requiring shareholder approval of executive
compensation.
o Proposals requiring shareholder approval of golden
parachutes.
o Proposals to eliminate certain anti-takeover related
provisions.
o Proposals to prohibit payment of greenmail.
3. The following shareholder proposals will not be supported,
unless otherwise determined by the Proxy Review Committee.
o Proposals to declassify the Board of Directors (if
management supports a classified board).
o Proposals requiring a U.S. company to have a separate
Chairman and CEO.
o Proposals requiring that the company prepare reports
that are costly to provide or that would require
duplicative efforts or expenditures that are of a
non-business nature or would provide no pertinent
information from the perspective of institutional
shareholders.
o Proposals to add restrictions related to social,
political or special interest issues that impact the
ability of the company to do business or be competitive
and that have a significant financial or best interest
impact to the shareholders.
o Proposals that require inappropriate endorsements or
corporate actions.
VII. ADMINISTRATION OF PROXY POLICIES AND PROCEDURES
A. PROXY REVIEW COMMITTEE
1. The MSIM Proxy Review Committee ("Committee") is responsible
for creating and implementing MSIM's Proxy Voting Policy and
Procedures and, in this regard, has expressly adopted them.
(a) The Committee, which is appointed by MSIM's Chief
Investment Officer ("CIO"), consists of senior
investment professionals who represent the different
investment disciplines and geographic locations of the
firm. The Committee is responsible for establishing
MSIM's proxy voting policy and guidelines and
determining how MSIM will vote proxies on an ongoing
basis.
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(b) The Committee will periodically review and have the
authority to amend, as necessary, these Proxy Voting
Policy and Procedures and establish and direct voting
positions consistent with the Client Proxy Standard.
(c) The Committee will meet at least monthly to (among other
matters): (1) address any outstanding issues relating to
MSIM's Proxy Voting Policy and Procedures; and (2)
review proposals at upcoming shareholder meetings of
MSIM portfolio companies in accordance with this Policy
including, as appropriate, the voting results of prior
shareholder meetings of the same issuer where a similar
proposal was presented to shareholders. The Committee,
or its designee, will timely communicate to ISS MSIM's
Proxy Voting Policy and Procedures (and any amendments
to them and/or any additional guidelines or procedures
it may adopt).
(d) The Committee will meet on an ad hoc basis to (among
other matters): (1) authorize "split voting" (i.e.,
allowing certain shares of the same issuer that are the
subject of the same proxy solicitation and held by one
or more MSIM portfolios to be voted differently than
other shares) and/or "override voting" (i.e., voting all
MSIM portfolio shares in a manner contrary to the Proxy
Voting Policy and Procedures); (2) review and approve
upcoming votes, as appropriate, for matters for which
specific direction has been provided in these Policy and
Procedures; and (3) determine how to vote matters for
which specific direction has not been provided in these
Policy and Procedures. Split votes will generally not be
approved within a single Global Investor Group team. The
Committee may take into account ISS and IRRC
recommendations and the research as well as any other
relevant information they may request or receive.
(e) In addition to the procedures discussed above, if the
Committee determines that an issue raises a potential
material conflict of interest, or gives rise to the
appearance of a potential material conflict of interest,
the Committee will request a special committee to
review, and recommend a course of action with respect
to, the conflict(s) in question ("Special Committee").
The Special Committee shall be comprised of the Chairman
of the Proxy Review Committee, the Compliance Director
for the area of the firm involved or his/her designee, a
senior portfolio manager (if practicable, one who is a
member of the Proxy Review Committee) designated by the
Proxy Review Committee and MSIM's Chief Investment
Officer or his/her designee. The Special Committee may
request the assistance of MSIM's General Counsel or
his/her designee and will have sole discretion to cast a
vote. In addition to the research provided by ISS and
IRRC, the Special Committee may request analysis from
MSIM Affiliate investment professionals and outside
sources to the extent it deems appropriate.
(f) The Committee and the Special Committee, or their
designee(s), will document in writing all of their
decisions and actions, which documentation will be
maintained by the Committee and the Special Committee,
or their designee(s), for a period of at least 6 years.
To the
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extent these decisions relate to a security held by a
MSIM U.S. registered investment company, the Committee
and Special Committee, or their designee(s), will report
their decisions to each applicable Board of Trustees/
Directors of those investment companies at each Board's
next regularly scheduled Board meeting. The report will
contain information concerning decisions made by the
Committee and Special Committee during the most recently
ended calendar quarter immediately preceding the Board
meeting.
(g) The Committee and Special Committee, or their
designee(s), will timely communicate to applicable
portfolio managers, the Compliance Departments and, as
necessary, ISS, decisions of the Committee and Special
Committee so that, among other things, ISS will vote
proxies consistent with their decisions.
B. IDENTIFICATION OF MATERIAL CONFLICTS OF INTEREST
1. If there is a possibility that a vote may involve a material
conflict of interest, the vote must be decided by the Special
Committee in consultation with MSIM's General Counsel or
his/her designee.
2. A material conflict of interest could exist in the following
situations, among others:
(a) The issuer soliciting the vote is a client of MSIM or an
affiliate of MSIM and the vote is on a material matter
affecting the issuer;
(b) The proxy relates to Morgan Stanley common stock or any
other security issued by Morgan Stanley or its
affiliates; or
(c) Morgan Stanley has a material pecuniary interest in the
matter submitted for a vote (e.g., acting as a financial
advisor to a merger or acquisition for which Morgan
Stanley will be paid a success fee if completed).
C. PROXY VOTING REPORTS
1. MSIM will promptly provide a copy of these Policy and
Procedures to any client requesting it. MSIM will also, upon
client request, promptly provide a report indicating how each
proxy was voted with respect to securities held in that
client's account.
2. MSIM's legal department is responsible for filing an annual
Form N-PX on behalf of each registered management investment
company for which such filing is required, indicating how all
proxies were voted with respect to such investment company's
holdings.
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PART C: OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Section 5.3 of the Registrant's Declaration of Trust, a copy of which is
filed as an exhibit hereto, provides for indemnification, as set forth below:
"Section 5.3 Mandatory Indemnification.
(a) Subject to the exceptions and limitations contained in paragraph
(b) below:
(i) every person who is or has been a Trustee or officer of the
Trust shall be indemnified by the Trust to the fullest extent
permitted by law against all liability and against all expenses
reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or
otherwise by virtue of his being or having been a Trustee or officer
and against amounts paid or incurred by him in the settlement thereof;
(ii) the words, "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal,
administrative or other, including appeals), actual or threatened; and
the words "liability" and "expenses" shall include, without
limitation, attorneys' fees, costs, judgments, amounts paid in
settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
(i) against any liability to the Trust or its Shareholders by
reason of a final adjudication by the court or other body before which
the proceeding was brought that he engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved
in the conduct of his office;
(ii) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the reasonable
belief that his action was in the best interest of the Trust;
(iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in paragraph (b)(i) or
(b)(ii) resulting in a payment by a Trustee or officer, unless there
has been either a determination that such Trustee or officer did not
engage in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office by the
court or other body approving the settlement or other disposition or a
reasonable determination, based upon a review of readily available
facts (as opposed to a full trial-type inquiry) that he did not engage
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in such conduct:
(A) by vote of a majority of the Disinterested Trustees
acting on the matter (provided that a majority of the
Disinterested Trustees then in office act on the matter); or
(B) by written opinion of independent legal counsel.
(C) The rights of indemnification herein provided by be
insured against by policies maintained by the Trust, shall be
severable, shall not effect any other rights to which any Trustee
or officer may now or hereafter be entitled, shall continue as to
a Person who has ceased to be such Trustee or officer and shall
inure to the benefit of the heirs, executors, administrators, and
assigns of such Person. Nothing contained herein shall affect any
rights to indemnification to which personnel of the Trust other
than Trustees and officers may be entitled by contract or
otherwise under law.
(D) Expenses of preparation and presentation of a defense to
any claim, action, suit, or proceeding of the character described
in paragraph (a) of this Section 5.3 shall be advanced by the
Trust prior to final disposition thereof upon receipt of an
undertaking by or on behalf of the recipient to repay such amount
if it is ultimately determined that he is not entitled to
indemnification under this Section 5.3, provided that either
(i) such undertaking is secured by a surety bond or
some other appropriate security or the Trust shall be
insured against losses arising out of any such advances; or
(ii) a majority of the Disinterested Trustees acting on
the matter (provided that a majority of the Disinterested
Trustees then in office act on the matter) or an independent
legal counsel in a written opinion shall determine, based
upon a review of readily available facts (as opposed to a
full trial-type inquiry), that there is reason to believe
that the recipient ultimately will be found entitled to
indemnification.
As used in this Section 5.3, a "Disinterested Trustee" is one (i) who is
not an "Interested Person" of the Trust (including anyone who has been exempted
from being an "Interested Person" by any rule, regulation or order of the
Commission), and (ii) against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or had been pending."
ITEM 16. EXHIBITS
1. (a) Declaration of Trust of the Registrant and amendments thereto ++
C-2
(b) Form of Certificate of Vote Establishing Preferred Shares+++
2. Bylaws of the Registrant++
3. Not applicable
4. Form of Agreement and Plan of Reorganization ++++
5. (a) Specimen share certificate for common shares of the
Registrant++
(b) Specimen share certificate for preferred shares of the
Registrant++
6. (a) Investment Advisory Agreement++
(b) Administration Agreement++
7. Not Applicable
8. Not Applicable
9. Custodian Contract
10. Not Applicable
11. (a) Consent of Skadden, Arps, Slate, Meagher & Flom
LLP, counsel for the Registrant+
(b) Opinion of Skadden, Arps, Slate, Meagher & Flom LLP++
12. Tax opinion of Skadden, Arps, Slate, Meagher & Flom LLP++
13. (a) Transfer Agency Agreement++
(b) Auction Agency Agreement++
(c) Form of Broker-Dealer Agreement++
(d) Form of Letter of Representations++
14. (a) Consent of independent registered public accounting firm for the
Registrant++
(b) Consent of independent registered public accounting firm for the
Target Fund++
15. Not Applicable
16. Power of Attorney+
17. (a) Code of Ethics of the Investment Advisor++
(b) Code of Ethics of the Funds++
(c) Proxy card for the Target Fund
+ Filed herewith.
++ To be filed by further amendment.
+++ Filed as Appendix B to the Statement of Additional Information and
incorporated herein by reference to Registrant's Registration Statement
on Form N-14 as filed via EDGAR on March 18, 2005
++++ Filed as Appendix A to the Statement of Additional Information and
incorporated herein by reference to Registrant's Registration Statement
on Form N-14 as filed via EDGAR on March 18, 2005.
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.
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(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, as
amended, each post-effective amendment shall be deemed to be a new registration
statement for the securities offered therein, and the offering of securities at
that time shall be deemed to be the initial bona fide offering of them.
(3) The undersigned Registrant agrees that, if the Reorganizations
discussed in the registration statement close, it shall file by post-effective
amendment either a copy of the Internal Revenue Service private letter ruling
applied for or an opinion supporting the tax matters discussed in the
registration statement.
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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 New York
and the Sate of New York, on March 18, 2005.
VAN KAMPEN MUNICIPAL TRUST
By: /s/ Lou Anne McInnis
------------------------------------
Lou Anne McInnis
Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
SIGNATURES TITLE
---------- -----
Principal Executive Officer:
/s/ Ronald E. Robison Executive Vice President
- ------------------------------------------- and Principal Executive Officer
Ronald E. Robison
Principal Financial Officer:
/s/ James W. Garrett
- ------------------------------------------- Chief Financial
James W. Garrett Officer and Treasurer
Trustees:
/s/ David C. Arch* Trustee
- -------------------------------------------
David C. Arch
/s/ Jerry D. Choate* Trustee
- -------------------------------------------
Jerry D. Choate
/s/ Rod Dammeyer* Trustee
- -------------------------------------------
Rod Dammeyer
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/s/ Linda Hutton Heagy* Trustee
- -------------------------------------------
Linda Hutton Heagy
/s/ R. Craig Kennedy* Trustee
- -------------------------------------------
R. Craig Kennedy
/s/ Howard J Kerr* Trustee
- -------------------------------------------
Howard J Kerr
/s/ Mitchell M. Merin* Trustee
- -------------------------------------------
Mitchell M. Merin
/s/ Jack E. Nelson* Trustee
- -------------------------------------------
Jack E. Nelson
/s/ Richard F. Powers, III* Trustee
- -------------------------------------------
Richard F. Powers, III
/s/ Hugo F. Sonnenschein* Trustee
- -------------------------------------------
Hugo F. Sonnenschein
/s/ Wayne W. Whalen* Trustee
- -------------------------------------------
Wayne W. Whalen
/s/ Suzanne H. Woolsey* Trustee
- -------------------------------------------
Suzanne H. Woolsey
* Signed by Lou Anne McInnis pursuant to a power of attorney filed herewith.
/s/ Lou Anne McInnis March 18, 2005
- -------------------------------------------
Lou Anne McInnis
Attorney-in-Fact
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SCHEDULE OF EXHIBITS TO FORM N-14
VAN KAMPEN MUNICIPAL TRUST
Exhibit
- -------
11(a) Consent of Skadden, Arps, Slate, Meagher & Flom LLP
16 Power of Attorney