As filed with the Securities and Exchange Commission on May 11, 2005
Securities Act File No. 333-
Investment Company Act File No. 811-08000
================================================================================
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 SELECT SECTOR 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 Offering: As soon as practicable after this
Registration Statement is declared effective.
==============================================================================================================================
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- ------------------------------------------------------------------------------------------------------------------------------
TITLE OF SECURITIES AMOUNT BEING PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
BEING REGISTERED REGISTERED OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION FEE
UNIT PRICE
- ------------------------------------------ ----------------- --------------------- ----------------------- -------------------
Common Shares ($0.01 par value) 1,000 $ 12.47 (1) $ 12,470 $ 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 May 9, 2005.
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
EXPLANATORY NOTE
This Registration Statement is organized as follows:
o Questions and Answers to Shareholders of Van Kampen Strategic Sector
Municipal Trust and Van Kampen Select Sector Municipal Trust
o Notice of Special Meeting of Shareholders of Van Kampen Strategic Sector
Municipal Trust and Van Kampen Select Sector Municipal Trust
o Joint Proxy Statement/Prospectus of Van Kampen Strategic Sector Municipal
Trust and Van Kampen Select Sector Municipal Trust
o Statement of Additional Information regarding the Reorganization of Van
Kampen Strategic Sector Municipal Trust into Van Kampen Select Sector
Municipal Trust
o Part C Information
o Exhibits
-- JUNE 2005 --
- --------------------------------------------------------------------------------
IMPORTANT NOTICE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TO SHAREHOLDERS OF VAN KAMPEN
STRATEGIC SECTOR MUNICIPAL TRUST
AND
VAN KAMPEN TRUST
SELECT SECTOR MUNICIPAL
- --------------------------------------------------------------------------------
QUESTIONS & ANSWERS
- ---------------------------------------
Although we recommend that you read the complete Joint Proxy Statement/
Prospectus, we have provided for your convenience a brief overview of the issues
to be voted on.
- ---------------------------------------
Q WHY IS A SHAREHOLDER
MEETING BEING HELD?
A Shareholders of
Van Kampen Strategic Sector Municipal Trust: You are being asked to vote on a
reorganization (the "Reorganization") of Van Kampen Strategic Sector Municipal
Trust (the "Target Fund") into Van Kampen Select Sector Municipal Trust (the
"Acquiring Fund"), a closed-end investment company that pursues the same primary
investment objective and has similar investment policies as the Target Fund.
Shareholders of Van Kampen Select Sector Municipal Trust: You are being asked to
vote on the issuance of common shares of beneficial interest by the Acquiring
Fund in connection with the Reorganization.
Q WHY IS THE
REORGANIZATION BEING RECOMMENDED?
A The Board of Trustees of
each Fund has determined that the Reorganization will benefit common
shareholders of the Target Fund and the Acquiring Fund. The Target Fund and the
Acquiring Fund are similar. Each Fund pursues the same primary investment
objective to seek to provide common shareholders with a high level of current
income exempt from federal income tax, consistent with preservation of capital.
The Acquiring Fund's secondary investment objective is to seek to enhance the
total return provided to common shareholders. Each Fund invests substantially
all of its assets in municipal securities rated investment grade at the time of
investment. Each Fund is managed by the same investment
advisory personnel. After the Reorganization, it is anticipated that common
shareholders of each Fund will experience a reduced 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 Funds; however, it is
anticipated that preferred shareholders will not be adversely effected by the
Reorganization, and none of the expenses of the Reorganization will be borne by
preferred shareholders.
Q HOW WILL THE
REORGANIZATION AFFECT ME?
A Assuming shareholders of
the Target Fund approve the Reorganization and shareholders of the Acquiring
Fund approve the issuance of common shares of beneficial interest by that Fund,
the assets and liabilities of the Target Fund will be combined with those of the
Acquiring Fund and the Target Fund will dissolve.
Shareholders of the Target Fund: You will become a shareholder of the Acquiring
Fund. If you are a holder of common shares of the Target Fund, you will receive
newly-issued common shares of the Acquiring Fund, and if you are a holder of
preferred shares of the Target Fund, you will receive newly-issued preferred
shares of the Acquiring Fund. The aggregate net asset value of the common shares
you receive in the Reorganization will equal the aggregate net asset value of
the common shares you own immediately prior to the Reorganization less the costs
of the Reorganization (though you may receive cash for fractional shares). The
aggregate liquidation preference of the preferred shares you receive in the
Reorganization will equal the aggregate liquidation preference of the preferred
shares you own immediately prior to the Reorganization. No certificates for
shares of the Acquiring Fund will be issued in connection with the
Reorganization, although such certificates will be available upon request.
Shareholders of the Acquiring Fund: You will remain a shareholder of the
Acquiring Fund.
Q WILL I HAVE TO PAY ANY
SALES LOAD, COMMISSION OR OTHER SIMILAR FEE IN CONNECTION WITH THE
REORGANIZATION?
A You will pay no sales loads
or commissions in connection with the Reorganization. However, if the
Reorganization is completed, the costs associated with the Reorganization,
including the costs associated with the shareholder meeting, will be borne by
the 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 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 WHY IS THE VOTE OF
COMMON SHAREHOLDERS OF THE ACQUIRING FUND BEING SOLICITED?
A Although the Acquiring
Fund will continue its legal existence and operations after the Reorganization,
the rules of the New York Stock Exchange and the Chicago Stock Exchange, on
which the Acquiring Fund's common shares are listed, require the common
shareholders of the Acquiring Fund to approve the issuance of additional common
shares of beneficial interest by the Acquiring Fund in connection with the
Reorganization. If the issuance of additional common shares of the Acquiring
Fund is not approved, the Reorganization will not occur.
Q HOW DOES THE BOARD OF
TRUSTEES OF MY FUND SUGGEST I VOTE?
A After careful consideration,
the Board of Trustees of each Fund recommends that you vote "FOR" each of the
items proposed.
Q HOW DO I VOTE MY PROXY?
A You may cast your vote by
mail, phone or internet. To vote by mail, please mark your vote on the enclosed
proxy card and sign, date and return the card in the postage-paid envelope
provided. If you choose to vote via phone or internet, please refer to the
instructions found on the proxy card accompanying this Joint Proxy
Statement/Prospectus. To vote by phone or internet, you will need the "control
number" that appears on the proxy card.
Q WHOM DO I CONTACT FOR
FURTHER INFORMATION?
A You can contact your
financial adviser for further information. You may also call Van Kampen's Client
Relations Department at (800) 341-2929 (Telecommunication Device for the Deaf
users may call (800) 421-2833) or visit our web site at www.vankampen.com where
you can send us an e-mail message by selecting "Contact Us."
ABOUT THE PROXY CARD
- --------------------------------------------------------------------------------
Please vote on each issue using blue or black ink to mark an X in one of the
boxes provided on the proxy card.
SHAREHOLDERS OF VAN KAMPEN STRATEGIC SECTOR MUNICIPAL TRUST: APPROVAL OF
REORGANIZATION - mark "For," "Against" or "Abstain."
COMMON SHAREHOLDERS OF VAN KAMPEN SELECT SECTOR MUNICIPAL TRUST: APPROVAL OF
ISSUANCE OF COMMON SHARES - mark "For," "Against" or "Abstain."
Sign, date and return the proxy card in the enclosed postage-paid envelope. All
registered owners of an account, as shown in the address, must sign the card.
When signing as attorney, trustee, executor, administrator, custodian, guardian
or corporate officer, please indicate your full title.
<Table>
[ ] PLEASE MARK
X VOTES AS IN
THIS EXAMPLE
</Table>
VAN KAMPEN XXXXX
JOINT SPECIAL MEETING OF SHAREHOLDERS
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
<Table>
<Caption>
FOR AGAINST ABSTAIN
1. The proposal to [ ] [ ] [ ] 2. The proposal to approve the issuance of
approve the Common Shares.
Reorganization.
</Table>
<Table>
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
----------------------------------
</Table>
Please be sure to sign and date this Proxy, Date
Shareholder sign here Co-owner sign here
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
SAMPLE
VAN KAMPEN STRATEGIC SECTOR MUNICIPAL TRUST
AND
VAN KAMPEN SELECT SECTOR MUNICIPAL TRUST
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(800) 341-2929
NOTICE OF JOINT SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 12, 2005
Notice is hereby given that a joint special meeting of shareholders (the
"Special Meeting") of Van Kampen Strategic Sector Municipal Trust (the "Target
Fund") and Van Kampen Select Sector Municipal (the "Acquiring Fund") will be
held at the offices of Van Kampen Investments Inc., 1 Parkview Plaza, Oakbrook
Terrace, Illinois 60181-5555, on August 12, 2005 at 10:00 a.m. for the following
purposes:
For shareholders of the Target Fund:
1. To approve an Agreement and Plan of Reorganization (the "Reorganization
Agreement") between the Target Fund and Acquiring Fund, the termination
of the Target Fund's registration under the Investment Company Act of
1940, as amended, and the dissolution of the Target Fund under applicable
state law;
For common shareholders of the Acquiring Fund:
2. To approve the issuance of additional common shares of the Acquiring Fund
in connection with the Reorganization Agreement; and
For shareholders of both funds:
3. To transact such other business as may properly be presented at the
Special Meeting or any adjournment thereof.
Shareholders of record as of the close of business on June 13, 2005 are
entitled to vote at the Special Meeting or any adjournment thereof.
THE BOARD OF TRUSTEES OF EACH FUND REQUESTS THAT YOU VOTE YOUR SHARES BY
INDICATING YOUR VOTING INSTRUCTIONS ON THE ENCLOSED PROXY CARD, DATING AND
SIGNING SUCH PROXY CARD AND RETURNING IT IN THE ENVELOPE PROVIDED, WHICH IS
ADDRESSED FOR YOUR CONVENIENCE AND NEEDS NO POSTAGE IF MAILED IN THE UNITED
STATES OR BY RECORDING YOUR VOTING INSTRUCTIONS BY TELEPHONE OR VIA THE
INTERNET.
THE BOARD OF TRUSTEES OF THE TARGET FUND RECOMMENDS THAT YOU CAST YOUR VOTE:
- FOR THE REORGANIZATION AGREEMENT AS DESCRIBED IN THE JOINT PROXY
STATEMENT/PROSPECTUS.
THE BOARD OF TRUSTEES OF THE ACQUIRING FUND RECOMMENDS THAT YOU CAST YOUR
VOTE:
- FOR THE ISSUANCE OF ADDITIONAL COMMON SHARES OF THE ACQUIRING FUND IN
CONNECTION WITH THE REORGANIZATION AGREEMENT AS DESCRIBED IN THE JOINT
PROXY STATEMENT/PROSPECTUS.
IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK THAT
YOU MAIL YOUR PROXY CARD PROMPTLY OR RECORD YOUR VOTING INSTRUCTIONS BY
TELEPHONE OR VIA THE INTERNET.
For the Board of Trustees,
Lou Anne McInnis
Assistant Secretary
Van Kampen Strategic Sector Municipal
Trust
Van Kampen Select Sector Municipal Trust
June , 2005
------------------
YOUR VOTE IS IMPORTANT.
PLEASE VOTE PROMPTLY BY SIGNING AND RETURNING THE
ENCLOSED PROXY CARD OR BY RECORDING YOUR VOTING INSTRUCTIONS BY TELEPHONE OR VIA
THE INTERNET NO MATTER HOW MANY SHARES YOU OWN.
THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE.
THIS PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE
THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 11, 2005
JOINT PROXY STATEMENT/PROSPECTUS
VAN KAMPEN STRATEGIC SECTOR MUNICIPAL TRUST
AND
VAN KAMPEN SELECT SECTOR MUNICIPAL TRUST
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(800) 341-2929
JOINT SPECIAL MEETING OF SHAREHOLDERS
AUGUST 12, 2005
This Joint Proxy Statement/Prospectus is furnished to you as a shareholder of
Van Kampen Strategic Sector Municipal Trust (the "Target Fund") or Van Kampen
Select Sector Municipal Trust (the "Acquiring Fund"). A joint special meeting of
shareholders of the Funds (the "Special Meeting") will be held at the offices of
Van Kampen Investments Inc., 1 Parkview Plaza, Oakbrook Terrace, Illinois
60181-5555 on August 12, 2005 at 10:00 a.m. to consider the items listed below
and discussed in greater detail elsewhere in this Joint Proxy
Statement/Prospectus. If you are unable to attend the Special Meeting or any
adjournment thereof, the Board of Trustees of each Fund requests that you vote
your shares by completing and returning the enclosed proxy card or by recording
your voting instructions by telephone or via the internet. The approximate
mailing date of this Joint Proxy Statement/Prospectus and accompanying form of
proxy is June , 2005.
The purposes of the Special Meeting are:
For shareholders of the Target Fund:
1. To approve an Agreement and Plan of Reorganization (the "Reorganization
Agreement") between the Target Fund and the Acquiring Fund, the
termination of the Target Fund's registration under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the dissolution of
the Target Fund under applicable state law;
For common shareholders of the Acquiring Fund:
2. To approve the issuance of additional common shares of the Acquiring Fund
in connection with the Reorganization Agreement; and
For shareholders of both funds:
3. To transact such other business as may properly be presented at the
Special Meeting or any adjournment thereof.
The Reorganization Agreement that you are being asked to consider involves a
transaction that will be referred to in this Joint Proxy Statement/Prospectus as
the "Reorganization." The Reorganization seeks to combine two similar funds to
achieve certain economies of scale and other operational efficiencies. Each Fund
pursues the same primary investment objective to seek to provide common
shareholders with a high level of current income exempt from federal income tax,
consistent with preservation of capital. The Acquiring Fund's secondary
investment objective is to seek to enhance the total return provided to common
shareholders. Each Fund seeks to achieve its investment objective(s) primarily
by investing in a portfolio of municipal securities selected by the investment
adviser from those sectors of the municipal securities market that, in the
opinion of the investment adviser, offer a significant opportunity for a high
level of current income exempt from federal income tax without undue risk to
income or principal. The Target Fund and the Acquiring Fund are sometimes
referred to herein each as a "Fund" and collectively as the "Funds."
In the Reorganization, the Acquiring Fund will acquire substantially all of
the assets and assume substantially all of the liabilities of the Target Fund in
exchange for an equal aggregate value of newly issued common shares of
beneficial interest, par value $0.01 per share ("Acquiring Fund Common Shares")
and newly-issued remarketed 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 RPS"). The Target Fund will distribute Acquiring Fund Common
Shares to holders of common shares of the Target Fund ("Target Fund Common
Shares") (Acquiring Fund Common Shares and Target Fund Common Shares are
sometimes referred to herein collectively as "Common Shares"); and Acquiring
Fund APS to holders of auction preferred shares of the Target Fund ("Target Fund
APS") (the Target Fund APS and the Acquiring Fund RPS are sometimes referred to
herein collectively as "Preferred Shares"), and will then terminate its
registration under the 1940 Act, and dissolve under applicable state law. The
aggregate net asset value of Acquiring Fund Common Shares received in the
Reorganization will equal the aggregate net asset value of Target Fund Common
Shares held immediately prior to the Reorganization less the costs of the
Reorganization (though common shareholders may receive cash for their fractional
shares), and the aggregate liquidation preference of the Acquiring Fund RPS
received in the Reorganization will equal the aggregate liquidation preference
of the Target Fund APS held immediately prior to the Reorganization. The
Acquiring Fund will continue to operate after the Reorganization as a registered
closed-end investment company with the investment objective and policies
described in this Joint Proxy Statement/Prospectus.
In connection with the Reorganization, common shareholders of the Acquiring
Fund are being asked to approve the issuance of additional Acquiring Fund Common
Shares.
2
The Board of Trustees of each Fund has determined that including both
proposals in one Joint Proxy Statement/Prospectus will reduce costs and is in
the best interests of each Funds' shareholders.
In the event that Target Fund shareholders do not approve the Reorganization
or Acquiring Fund common shareholders do not approve the issuance of Acquiring
Fund Common Shares, the Target Fund will continue to exist and the Board of
Trustees of the Target Fund will consider what additional action, if any, to
take.
This Joint Proxy Statement/Prospectus sets forth concisely the information
shareholders of the Funds should know before voting on the proposals and
constitutes an offering of Acquiring Fund Common Shares and Acquiring Fund RPS.
Please read it carefully and retain it for future reference. A Statement of
Additional Information, dated , 2005, relating to this Joint Proxy
Statement/Prospectus (the "Reorganization Statement of Additional Information")
has been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated herein by reference. If you wish to request the Reorganization
Statement of Additional Information, please ask for the "Reorganization
Statement of Additional Information." Copies of each Fund's most recent annual
report and semi-annual report can be obtained on a web site maintained by Van
Kampen Investments Inc. at www.vankampen.com. In addition, each Fund will
furnish, without charge, a copy of the Reorganization Statement of Additional
Information, its most recent annual report and any more recent semi-annual
report to any shareholder upon request. Any such request should be directed to
the Van Kampen Client Relations Department by calling (800) 341-2929 (TDD users
may call (800) 421-2833) or by writing to the respective Fund at 1 Parkview
Plaza, P.O. Box 5555, Oakbrook Terrace, Illinois 60181-5555. The address of the
principal executive offices of the Funds is 1221 Avenue of the Americas, New
York, New York 10020, and the telephone number is (800) 341-2929.
The Funds are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, file reports,
proxy statements, proxy material and other information with the SEC. Materials
filed with the SEC can be reviewed and copied at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549 or downloaded from the SEC's
web site at www.sec.gov. Information on the operation of the SEC's Public
Reference Room may be obtained by calling the SEC at (202) 942-8090. You can
also request copies of these materials, upon payment at the prescribed rates of
a duplicating fee, by electronic request to the SEC's e-mail address
(publicinfo@sec.gov) or by writing the Public Reference Branch, Office of
Consumer Affairs and Information Services, SEC, Washington, DC, 20549-0102.
The Acquiring Fund Common Shares are listed on the New York Stock Exchange
(the "NYSE") and the Chicago Stock Exchange (the "CHX") under the ticker symbol
"VKL" and will continue to be so listed subsequent to the
3
Reorganization. The Target Fund Common Shares are listed on the NYSE and the CHX
under the ticker symbol "VKS." Reports, proxy statements and other information
concerning the Funds may be inspected at the offices of the NYSE, 20 Broad
Street, New York, New York 10005.
This Joint Proxy Statement/Prospectus serves as a prospectus of the Acquiring
Fund in connection with the issuance of the Acquiring Fund Common Shares and the
Acquiring Fund RPS in the Reorganization. No person has been authorized to give
any information or make any representation not contained in this Joint Proxy
Statement/Prospectus and, if so given or made, such information or
representation must not be relied upon as having been authorized. This Joint
Proxy Statement/ Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities in any jurisdiction in which, or
to any person to whom, it is unlawful to make such offer or solicitation.
The Board of Trustees of each Fund knows of no business other than that
discussed above that will be presented for consideration at the Special Meeting.
If any other matter is properly presented, it is the intention of the persons
named in the enclosed proxy to vote in accordance with their best judgment.
---------------------
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus is , 2005.
4
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
SUMMARY..................................................... 7
PROPOSAL 1: REORGANIZATION OF THE TARGET FUND............... 14
RISK FACTORS AND SPECIAL CONSIDERATIONS..................... 15
Market Risk............................................... 15
Interest Rate Risk........................................ 15
Credit Risk............................................... 15
Income Risk............................................... 16
Nonpayment Risk........................................... 16
Call Risk................................................. 16
Municipal Securities Risk................................. 16
Risks of Using Strategic Transactions..................... 18
Manager Risk.............................................. 18
Market Discount Risk...................................... 18
Leverage Risk............................................. 19
Anti-Takeover Provisions.................................. 21
Special Risks Related to Preferred Shares................. 21
COMPARISON OF THE FUNDS..................................... 22
Investment Objective(s) and Policies...................... 22
Other Investment Practices and Policies................... 31
Investment Restrictions................................... 33
Management of the Funds................................... 35
Other Service Providers................................... 39
Capitalization............................................ 39
Additional Information about Common Shares of the Funds... 41
Additional Information about Preferred Shares of the
Funds................................................... 44
Governing Law............................................. 49
Certain Provisions of the Declaration of Trust............ 49
Conversion to Open-End Fund............................... 50
Voting Rights............................................. 51
Financial Highlights...................................... 53
INFORMATION ABOUT THE REORGANIZATION........................ 55
General................................................... 55
Terms of the Reorganization Agreement..................... 57
Expenses of the Reorganization............................ 58
</Table>
5
<Table>
<Caption>
PAGE
----
Material U.S. Federal Income Tax Consequences of the
Reorganization.......................................... 59
Shareholder Approval...................................... 61
PROPOSAL 2: ISSUANCE OF ADDITIONAL ACQUIRING FUND COMMON
SHARES.................................................... 62
Shareholder Approval...................................... 62
OTHER INFORMATION........................................... 63
Voting Information and Requirements....................... 63
Shareholder Information................................... 65
Section 16(a) Beneficial Ownership Reporting Compliance... 65
Shareholder Proposals..................................... 65
Solicitation of Proxies................................... 66
Legal Matters............................................. 66
Other Matters to Come Before the Meeting.................. 66
EXHIBIT 1: DESCRIPTION OF SECURITIES RATINGS................ I-1
</Table>
6
------------------------------------------------------------------------------
SUMMARY
------------------------------------------------------------------------------
The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement/Prospectus and is qualified in its entirety by reference
to the more complete information contained in this Joint Proxy
Statement/Prospectus and in the Reorganization Statement of Additional
Information. Shareholders should read the entire Joint Proxy
Statement/Prospectus carefully.
PROPOSAL 1: REORGANIZATION OF THE TARGET FUND
THE PROPOSED REORGANIZATION. The Board of Trustees of each Fund, including the
trustees who are not "interested persons," as defined in the 1940 Act, of each
Fund, has unanimously approved the Reorganization Agreement. If the shareholders
of the Target Fund approve the Reorganization Agreement and the shareholders of
the Acquiring Fund approve the issuance of Acquiring Fund Common Shares (see
"Proposal 2: Issuance of Additional Acquiring Fund Common Shares"). Acquiring
Fund Common Shares and Acquiring Fund RPS will be issued to holders of Target
Fund Common Shares and Target Fund APS, respectively, in exchange for
substantially all of the assets of the Target Fund and the assumption of
substantially all of the liabilities of the Target Fund. The Target Fund will
then terminate its registration under the 1940 Act and dissolve under applicable
state law. The aggregate net asset value of Acquiring Fund Common Shares
received in the Reorganization will equal the aggregate net asset value of
Target Fund Common Shares held immediately prior to the Reorganization, less the
costs of the Reorganization (though common shareholders may receive cash for
fractional shares). The aggregate liquidation preference of Acquiring Fund RPS
received in the Reorganization will equal the aggregate liquidation preference
of Target Fund APS held immediately prior to the Reorganization.
BACKGROUND AND REASONS FOR THE PROPOSED REORGANIZATION. The Reorganization
seeks to combine two similar Funds to achieve certain economies of scale and
other operational efficiencies. Each Fund is registered as a non-diversified,
closed-end management investment company under the 1940 Act. Each Fund invests
substantially all of its assets in municipal securities that are rated
investment grade at the time of investment. The primary investment objective of
each Fund is to seek to provide common shareholders with a high level of current
income exempt from federal income tax, consistent with preservation of capital.
The Acquiring Fund's secondary investment objective is to seek to enhance the
total return provided to common shareholders. Each Fund seeks to achieve its
investment objective(s) primarily by investing in a portfolio of municipal
securities selected by the Fund's investment adviser from those sectors of the
municipal securities market that, in the opinion of such investment adviser,
offer a significant opportunity for a high level of current income exempt from
federal income
7
tax without undue risk to income or principal. The Funds are managed by the same
portfolio management team.
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
relevant information, anticipates that the Reorganization will benefit holders
of Target Fund Common Shares. The Board of Trustees of the Acquiring Fund (the
"Acquiring Fund Board"), based upon its evaluation of all relevant information,
anticipates that the Reorganization will benefit holders of Acquiring Fund
Common Shares. The Board of Trustees of each Fund believes, based on data
presented by Van Kampen Asset Management, investment adviser to each of the
Funds (the "Adviser"), that holders of common shares of each Fund will
experience a reduced 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.
The table below illustrates the anticipated reduction in operating expenses
expected as a result of the Reorganization. The table sets forth (i) the fees,
expenses and distributions to preferred shareholders paid by the Target Fund for
the 12-month period ended October 31, 2004, (ii) the fees, expenses and
distributions to preferred shareholders paid by the Acquiring Fund for the
12-month period ended October 31, 2004 and (iii) the pro forma fees, expenses
and distributions to preferred shareholders for the Acquiring Fund for the
12-month period ended October 31, 2004, assuming that the Reorganization had
been completed at the beginning of such period. As shown below, the
Reorganization is expected to result in decreased total annual expenses for
shareholders of each Fund (although such savings will not be immediately
realized (see footnote (c) to the table).
8
FEE, EXPENSE AND DISTRIBUTIONS ON PREFERRED SHARES TABLE FOR
COMMON SHAREHOLDERS OF THE FUNDS AS OF OCTOBER 31, 2004
<Table>
<Caption>
ACTUAL PRO FORMA
---------------------------------- ---------------
VAN KAMPEN VAN KAMPEN VAN KAMPEN
STRATEGIC SECTOR SELECT SECTOR SELECT SECTOR
MUNICIPAL TRUST MUNICIPAL TRUST MUNICIPAL TRUST
---------------- --------------- ---------------
Common Shareholder Transaction
Expenses(a):
Maximum Sales Load (as a
percentage of offering
price)(b)(c)................ None None None
Dividend Reinvestment Plan
Fees........................ None None None
Annual Expenses (as a percentage
of net assets attributable to
Common Shares):
Investment Advisory Fees(d)... 0.88% 0.83% 0.84%
Interest Payments on Borrowed
Funds....................... 0.00% 0.00% 0.00%
Other Expenses................ 0.35% 0.47% 0.25%
Total Annual Expenses(d).... 1.23% 1.30% 1.09%
Distributions:
Distributions on Preferred
Shares(e)................... 0.69% 0.57% 0.66%
---- ---- ----
Total Annual Expenses and
Distributions on Preferred
Shares...................... 1.92% 1.87% 1.75%
---- ---- ----
</Table>
- ---------------
(a)No expense 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
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)In connection with the Reorganization, there are certain other transaction
expenses which include, but are not limited to: all costs related to the
preparation, printing and distributing of this Joint Proxy
Statement/Prospectus to shareholders; costs related to preparation and
distribution of materials distributed to each Fund's Board; all expenses
incurred in connection with the preparation of the Reorganization Agreement
and registration statement on
9
Form N-14; SEC and state securities commission filing fees; legal and audit
fees; portfolio transfer taxes (if any); and any similar expenses incurred in
connection with the Reorganization. In accordance with applicable SEC rules,
the Board of Trustees of each Fund reviewed the fees and expenses that will
be borne directly or indirectly by the Funds in connection with the
Reorganization. After considering various alternatives for allocating these
costs, the Board of Trustees of each Fund agreed that, in the event the
Reorganization is approved and completed, the expenses of the Reorganization
will be shared by the Target Fund and the Acquiring Fund in proportion to
their projected declines in total annual operating expenses as a result of
the Reorganization. The Board of Trustees of each Fund and management have
agreed to limit the allocation of Reorganization expenses to each Fund based
on a maximum payback period of two years. To the extent that the expenses of
the Reorganization exceed such amount, the additional expenses of the
Reorganization will be borne by the Adviser. The table below summarizes each
Fund's net assets (Common Shares only) at October 31, 2004, projected annual
savings to each Fund as a result of the Reorganization, allocation of
Reorganization expenses among the Funds and the Adviser in dollars and
percentages, an estimated pay-back period (in years) and the resulting effect
on each Fund's net asset value per Common Share at October 31, 2004. The
Target Fund will benefit more from projected annual expense savings of the
Reorganization than the Acquiring Fund. The projected annual expense savings
are generally not expected to be immediately realized. If a shareholder sells
his or her Common Shares prior to the estimated pay-back period, then that
shareholder may not realize any of the projected expense savings resulting
from the reduced expense ratio of the combined fund. The net asset value per
Common Share of each Fund will be reduced at the Closing Date (as defined
herein) of the respective Reorganization to reflect the allocation of
Reorganization expenses to each Fund. The reduction in net asset value per
Common Share resulting from the allocation of Reorganization expenses, when
compared to the relative net asset sizes of the Funds involved in the
Reorganization, will be greater in the Acquiring Fund than the Target Fund.
In the event the Reorganization is not completed, the Adviser will bear the
10
costs associated with the Reorganization. The numbers presented in the table
are estimates; actual results may differ.
<Table>
<Caption>
REORGANIZATION ESTIMATED REDUCTION TO NET
NET ASSETS PROJECTED EXPENSE PAYBACK ASSET VALUE
(COMMON ANNUAL ALLOCATION IN PERIOD (IN PER COMMON
FUND SHARES ONLY) SAVINGS DOLLARS/PERCENTAGE YEARS) SHARE
- ---- ------------ --------- ------------------ ---------- ----------------
Strategic Sector
Municipal Trust $157,783,042 $110,448 $ 156,600/54% 1.42 0.01
Select Sector
Municipal Trust $ 67,410,737 $ 94,375 $ 133,400/46% 1.41 0.03
Total Expenses $290,000/100%
</Table>
(d)Expense information has been restated to reflect permanent reductions made to
management fees effective as of November 1, 2004 for each of the Target Fund and
the Acquiring Fund.
(e)In seeking to enhance the income for its common shareholders, each of the
Funds uses Preferred Shares as financial leverage. Leverage created by
borrowing or other forms of indebtedness would create interest expenses which
would, if used by the Funds, be charged to common shareholders (shown above
as "Interest Payments on Borrowed Funds"). Leverage created by Preferred
Shares creates dividend payments and/or capital gains distributions to
preferred shareholders which are charged to common shareholders (shown above
as "Distributions on Preferred Shares"). The dividend rates are based on
periodic auctions or remarketings, as the case may be, as described herein
and thus will differ based on varying market conditions at the times of such
auctions or remarketings.
The following example is intended to help you compare the costs of investing
in the Acquiring Fund pro forma after the Reorganization with the costs of
investing in the Target Fund and the Acquiring Fund without the Reorganization.
An investor would pay the following expenses on a $1,000 investment, assuming
(1) the operating expense ratio for each Fund (as a percentage of net assets
attributable to Common Shares) set forth in the table above and (2) a 5% annual
return throughout the period:
<Table>
<Caption>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Van Kampen Strategic Sector Municipal
Trust................................ $13 $39 $68 $149
Van Kampen Select Sector Municipal
Trust................................ $13 $41 $71 $157
Pro Forma--Van Kampen Select Sector
Municipal Trust...................... $12 $37 $64 $141
</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.
11
FURTHER INFORMATION REGARDING THE REORGANIZATION. The Target Fund Board has
determined that the Reorganization is in the best interests of holders of Target
Fund Common Shares and that the interests of such shareholders will not be
diluted as a result of the Reorganization. Similarly, the Board of Trustees of
the Acquiring Fund has determined that the Reorganization is in the best
interests of holders of Acquiring Fund Common Shares and that the interests of
such shareholders will not be diluted as a result of the Reorganization. It is
not anticipated that the Reorganization will directly benefit the holders of
Preferred Shares of either Fund; however, the Reorganization will not adversely
affect the holders of Preferred Shares of either Fund and the expenses of the
Reorganization will not be borne by the holders of Preferred Shares of either
Fund. As a result of the Reorganization, however, a shareholder of either Fund
will hold a reduced percentage of ownership in the larger combined fund than he
or she did in either of the separate Funds.
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code" or "Code"). If the Reorganization so qualifies, in
general, a shareholder of the Target Fund will recognize no gain or loss upon
the receipt 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 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 August 12,
2005. Shareholder approval of the Reorganization requires the affirmative vote
of shareholders of the Target Fund representing more than 50% of the outstanding
Target Fund Common Shares and Target Fund Preferred Shares, each voting
separately as a class. Subject to the requisite approval of the shareholders of
each Fund with regard to the Reorganization, it is expected that the closing
date of the transaction (the "Closing Date") will be after the close of business
on or about August 26, 2005, but it may be at a different time as described
herein.
The Target Fund Board recommends that you vote "FOR" the proposed
Reorganization.
PROPOSAL 2: ISSUANCE OF ACQUIRING FUND COMMON SHARES
In connection with the proposed Reorganization, as described under "Proposal
1: Reorganization of the Target Fund," the Acquiring Fund will issue additional
Acquiring Fund Common Shares and list such shares on the NYSE and CHX. The
Acquiring Fund will acquire substantially all of the assets and assume
substantially all of the liabilities of the Target Fund in exchange for the
newly-issued Acquiring
12
Fund Common Shares and newly-issued Acquiring Fund RPS. The Reorganization will
result in no reduction of net asset value of the Acquiring Fund Common Shares,
other than the costs of the Reorganization. No gain or loss will be recognized
by the Acquiring Fund or its shareholders in connection with the Reorganization.
The Acquiring Fund Board, based upon its evaluation of all relevant information,
anticipates that the Reorganization will benefit holders of Acquiring Fund
Common Shares. In particular, the Acquiring Fund Board believes, based on data
presented by the Adviser, that the Acquiring Fund will experience a reduced
overall operating expense ratio as a result of the Reorganization.
The Acquiring Fund Board requests that shareholders of the Acquiring Fund
approve the issuance of additional Acquiring Fund Common Shares at the Special
Meeting to be held on August 12, 2005. Shareholder approval of the issuance of
additional Acquiring Fund Common Shares requires the affirmative vote of a
majority of the votes cast on the proposal, provided that the total votes cast
on the proposal represents more than 50% in interest of all securities entitled
to vote on the proposal. Subject to the requisite approval of the shareholders
of each Fund with regard to the Reorganization, it is expected that the Closing
Date will be after the close of business on or about August 26, 2005, but it may
be at a different time as described herein.
The Acquiring Fund Board recommends that you vote "FOR" the issuance of
additional Acquiring Fund Common Shares in connection with the Reorganization.
13
------------------------------------------------------------------------------
PROPOSAL 1: REORGANIZATION OF THE TARGET FUND
------------------------------------------------------------------------------
The Reorganization seeks to combine two similar funds to achieve certain
economies of scale and other operational efficiencies. Each Fund is registered
as a non-diversified, closed-end management investment company under the 1940
Act. Each Fund pursues the same primary investment objective to seek to provide
common shareholders with a high level of current income exempt from federal
income tax, consistent with preservation of capital. The Acquiring Fund's
secondary investment objective is to seek to enhance the total return provided
to common shareholders. Each Fund seeks to achieve its investment objective(s)
primarily by investing in a portfolio of municipal securities selected by the
Adviser from those sectors of the municipal securities market that, in the
opinion of the Adviser, offer a significant opportunity for a high level of
current income exempt from federal income tax without undue risk to income or
principal. The Funds are managed by the same portfolio management team.
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 Acquiring Fund Common Shares and
Acquiring Fund RPS. The Target Fund will distribute Acquiring Fund Common Shares
to holders of Target Fund Common Shares and Acquiring Fund RPS to holders of
Target Fund APS, and will then terminate its registration under the 1940 Act and
dissolve under applicable state law. The aggregate net asset value of Acquiring
Fund Common Shares received in the Reorganization will equal the aggregate net
asset value on the Target Fund Common Shares held immediately prior to the
Reorganization, less the costs of the Reorganization (though common shareholders
may receive cash for fractional shares). The aggregate liquidation preference of
Acquiring Fund RPS received in the Reorganization will equal the aggregate
liquidation preference Target Fund APS held immediately prior to the
Reorganization. The Acquiring Fund will continue to operate as a registered
closed-end investment company with the investment objectives and policies
described in this Joint Proxy Statement/Prospectus.
The Target Fund Board, based upon its evaluation of all relevant information,
anticipates that the common shareholders of the Target Fund will benefit from
the Reorganization. In particular, the Target Fund Board believes, based on data
presented by the Adviser, that common shareholders of the Target Fund will
experience a reduced annual operating expense ratio as a result of the
Reorganization. The combined fund resulting from the Reorganizations will have a
larger asset base than either Fund has currently; certain fixed administrative
costs, such as costs of printing shareholder reports and proxy statements, legal
expenses, audit fees, mailing costs and other expenses, will be spread across
this larger asset base, thereby lowering the expense ratio for common
shareholders of the combined fund.
14
RISK FACTORS AND SPECIAL CONSIDERATIONS
Because each Fund, under normal market conditions, invests substantially all
of its assets in municipal securities rated investment grade at the time of
investment, any risks inherent in such investments are equally applicable to
both Funds and will apply to the combined fund after the Reorganization. The
Reorganization itself is not expected to adversely affect the rights of holders
of Common Shares or Preferred Shares of either Fund or to create additional
risks.
MARKET RISK
Market risk is the possibility that the market values of securities owned by
each Fund will decline. The prices of debt securities tend to fall as interest
rates rise, and such declines tend to be greater among debt securities with
longer maturities. Market risk is often greater among certain types of debt
securities, such as zero coupon bonds which do not make regular interest
payments but are instead bought at a discount to their face values and paid in
full upon maturity. As interest rates change, these securities often fluctuate
more in price than securities that make regular interest payments and therefore
subject the Funds to greater market risk than a fund that does not own these
types of securities. When-issued and delayed delivery transactions are subject
to changes in market conditions from the time of the commitment until
settlement. This may adversely affect the prices or yields of the securities
being purchased. The greater the Funds' outstanding commitments for these
securities, the greater the Funds' exposure to market price fluctuations.
INTEREST RATE RISK
Interest rate risk is the risk that prices of municipal securities generally
increase when interest rates decline and decrease when interest rates increase.
Prices of longer-term securities generally change more in response to interest
rate changes than prices of shorter-term securities.
CREDIT RISK
Credit risk refers to an issuer's ability to make timely payments of interest
and principal. The degree of credit risk depends on both the financial condition
of the issuer and the terms of the obligation. Each Fund invests substantially
all of its total assets in municipal securities rated investment grade at the
time of investment. However, to the extent that a Fund may hold securities rated
below investment grade, it may be subject to a higher level of credit risk than
a fund that holds solely investment grade securities. Securities rated BBB by
Standard & Poor's ("S&P") or Baa by Moody's Investors Service, Inc. ("Moody's")
are in the lowest of the four investment grades and are considered by the rating
agencies to be medium-grade obligations which possess speculative
characteristics so that changes in economic conditions or other circumstances
are more likely to lead to a weakened capacity of
15
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 its
interests in such securities. The credit risks and market prices of lower-grade
securities generally are more sensitive to negative issuer developments, such as
reduced revenues or increased expenditures, or adverse economic conditions, such
as a recession, than are higher-grade securities.
INCOME RISK
The income shareholders receive from a Fund is based primarily on interest
rates, which can vary widely over the short- and long-term. If interest rates
drop, your income from such Fund may drop as well.
NONPAYMENT RISK
Although substantially all of the municipal securities in which the Funds
invest 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 a 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 Funds' income and distributions to
shareholders.
MUNICIPAL SECURITIES RISK
Since each Fund, under normal market conditions, invests substantially all of
its assets in investment grade municipal securities, each Fund is more exposed
to risks affecting issuers of municipal securities than is a municipal bond fund
that invests more widely. Many different social, environmental and economic
factors may affect the financial condition of a municipality and its political
subdivisions. The yields of municipal securities may move differently and
adversely compared to the yields of
16
overall debt securities markets. Although the interest received from municipal
securities generally is exempt from regular federal income tax, each Fund may
invest an unlimited portion of its total assets in municipal securities that pay
interest that is subject to the federal alternative minimum tax. In addition,
there could be changes in applicable tax laws or tax treatments that reduce or
eliminate the current federal income tax exemption generally applicable to
interest received on municipal securities or otherwise adversely affect the
current federal or state tax status of municipal securities.
SECTOR INVESTING RISKS
Each Fund may invest more than 25% of its total assets in broad sectors of the
municipal securities market, such as obligations of hospitals and other health
care facilities, housing agency obligations, transportation related obligations,
utilities related obligations, industrial development bonds or in issuers
located in the same state. Investment in a limited number of sectors in the
municipal securities market and active management of portfolio allocation
involve certain risks. If a Fund so invests more than 25% of its assets in any
such sector or in the same state, that Fund will be more susceptible than a more
widely diversified investment company to economic, business, political,
regulatory and other developments generally affecting issuers in such sector of
the municipal securities market or in such state. The Adviser may from time to
time adjust the proportion of a Fund's assets allocated among the various
sectors of the municipal securities market. Active management of portfolio
allocation may increase a Fund's portfolio turnover rate and may make that Fund
more dependent on the Adviser's investment analysis than if that Fund had a
policy of maintaining investments in a broader range of sectors in the municipal
securities market.
LOWER RATED SECURITIES RISK
Each Fund may invest up to 20% of its total assets in municipal securities
rated BB or B by S&P or Ba or B by Moody's (or comparably rated by another
nationally recognized statistical rating organization). The values of lower
rated municipal securities generally fluctuate more than those of municipal
securities in the higher rated categories. In addition, investing in lower rated
municipal securities involves a greater possibility that adverse changes in the
business or financial condition of the issuer, in the economic viability of the
underlying facility or revenue source, or in general economic conditions may
impair the ability of the issuer to make timely payment of interest and
repayment of principal and increase the possibility of default. Negative
publicity or investor perceptions may also affect adversely the values of lower
rated municipal securities.
17
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.
TAXATION RISK
Neither Fund has established any limit on the percentage of its portfolio that
may be invested in municipal securities that pay interest that is 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 alternative minimum
tax. The Funds may not be a suitable investment for investors who are already
subject to the federal alternative minimum tax or who would become subject to
the federal alternative minimum tax as a result of an investment in the Funds.
In addition, income earned or deemed to be earned with respect to the each
Fund's hedging transactions, if any, will be taxable.
NON-DIVERSIFIED RISK
Each Fund has registered as a "non-diversified" investment company so that it
will be able to invest a relatively high percentage of its assets in obligations
of a limited number of issuers. To the extent each Fund so invests, each Fund
will be more susceptible than a more widely diversified investment company to
any single economic, political or regulatory occurrence.
MANAGER RISK
As with any managed fund, the investment adviser to each Fund may not be
successful in selecting the best-performing securities or investment techniques,
and a Fund's performance may lag behind that of similar funds.
MARKET DISCOUNT RISK
Whether investors will realize gains or losses upon the sale of shares of a
Fund will depend upon the market price of the shares at the time of original
purchase and subsequent sale, which may be less or more than such Fund's net
asset value per share. Since the market price of the shares will be affected by
such factors as the
18
relative demand for and supply of the shares in the market, general market and
economic conditions and other factors beyond the control of the Funds, the Funds
cannot predict whether shares of the Funds will trade at, below or above net
asset value. Shares of closed-end funds often trade at a discount to their net
asset values, and the Funds' shares may trade at such a discount.
In order to reduce or eliminate a market value discount from net asset value,
the Board of Trustees of a Fund may, subject to the terms of its preferred
shares, authorize such Fund from time to time to repurchase its common shares in
the open market or to tender for its common shares at net asset value. The Board
of Trustees of a Fund, in consultation with the Adviser, reviews on a quarterly
basis the possibility of open-market repurchases and/or tender offers for such
Fund's common shares. Subject to its borrowing restrictions, a Fund may incur
debt to finance such repurchases, which entails risks. The ability of a Fund to
enter into tender offers and the common share repurchases may be limited by the
1940 Act asset coverage requirements and any additional asset coverage
requirements which may be imposed by a rating agency in connection with any
rating of the preferred shares. No assurance can be given that the Board of
Trustees of a Fund will, in fact, authorize such Fund to undertake such
repurchases and/or tender offers or that, if undertaken, such actions would
result in such Fund's common shares trading at a price which is equal or close
to net asset value.
LEVERAGE RISK
Use of leverage, through the issuance of Preferred Shares, involves certain
risks to common shareholders. 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 a Fund. In certain
circumstances, when a Fund is required to allocate taxable income to holders of
its Preferred Shares, a Fund may be required to make an additional distribution
to such holders in an amount approximately equal to the tax liability resulting
from the allocation (an "Additional Dividend"). Leverage will allow holders of
each Fund's Common Shares to realize a higher current rate of return than if a
Fund were not leveraged as long as such Fund, while accounting for its costs and
operating expenses, is able to realize a higher net return on its investment
portfolio than the then-current dividend rate (and any Additional Dividend) paid
on its Preferred Shares. Similarly, since a pro rata portion of each Fund's net
realized capital gains is generally payable to holders of a Fund's Common
Shares, the use of leverage will increase the amount of such gains distributed
to holders of a Fund's Common Shares. However, short-term, medium-term and
long-term interest rates change from time to time as do their relationships to
each other (i.e., the slope of the yield curve) depending upon such
19
factors as supply and demand forces, monetary and tax policies and investor
expectations. Changes in any or all of such factors could cause the relationship
between short-term, medium-term and long-term rates to change (i.e., to flatten
or to invert the slope of the yield curve) so that short-term and medium-term
rates may substantially increase relative to the long-term obligations in which
each Fund may be invested. To the extent that the current dividend rate (and any
Additional Dividend) on a Fund's Preferred Shares approaches the net return on
such Fund's investment portfolio, the benefit of leverage to holders of Common
Shares of such Fund will be decreased. If the current dividend rate (and any
Additional Dividend) on the Preferred Shares of a Fund were to exceed the net
return on such Fund's portfolio, holders of Common Shares of such Fund would
receive a lower rate of return than if the Fund were not leveraged. Similarly,
since both the costs of issuing Preferred Shares and any decline in the value of
a Fund's investments (including investments purchased with the proceeds from any
Preferred Shares offering) will be borne entirely by holders of such Fund's
Common Shares, the effect of leverage in a declining market would result in a
greater decrease in net asset value to holders of Common Shares than if a Fund
were not leveraged. If a Fund is liquidated, holders of that Fund's Preferred
Shares will be entitled to receive liquidating distributions before any
distribution is made to holders of Common Shares of such Fund.
In an extreme case, a decline in net asset value could affect a Fund's ability
to pay dividends on its Common Shares. Failure to make such dividend payments
could adversely affect a Fund's qualification as a regulated investment company
under the federal tax laws. However, each Fund intends to take all measures
necessary to make required Common Share dividend payments. If a Fund's current
investment income is ever insufficient to meet dividend payments on either its
Common Shares or its Preferred Shares, such Fund may have to liquidate certain
of its investments. In addition, each Fund has the authority to redeem its
Preferred Shares for any reason and may be required to redeem all or part of its
Preferred Shares in the following circumstances:
- if the asset coverage for the Preferred Shares declines below 200%, either
as a result of a decline in the value of a Fund's portfolio investments or
as a result of the repurchase of Common Shares in tender offers or
otherwise, or
- in order to maintain the asset coverage guidelines established by Moody's
and S&P in rating the Preferred Shares.
Redemption of the Preferred Shares or insufficient investment income to make
dividend payments, may reduce the net asset value of a Fund's Common Shares and
require a Fund to liquidate a portion of its investments at a time when it may
be disadvantageous to do so.
20
ANTI-TAKEOVER PROVISIONS
The Declaration of Trust of each Fund (in each case, the "Declaration of
Trust") includes provisions that could limit the ability of other entities or
persons to acquire control of that Fund or to change the composition of its
Board of Trustees. Such provisions could limit the ability of common
shareholders to sell their 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
REMARKETING/AUCTION RISK. The dividend rate for the Preferred Shares of the
Acquiring Fund normally is set through a remarketing process. There can be no
assurance that the remarketing agent will be able to remarket all Acquiring Fund
RPS tendered in a remarketing. If any Acquiring Fund RPS tendered in a
remarketing are not remarketed, a holder of such Acquiring Fund RPS may be
required to hold some or all of its Acquiring Fund RPS at least until the end of
the next dividend period or to sell its Acquiring Fund RPS outside a
remarketing. In such case, the remarketing procedures may require an allocation
of Acquiring Fund RPS 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 Acquiring Fund RPS that is less than the
number of shares specified in such holder's tender order. Additionally, while a
holder or prospective purchaser may informally indicate to the remarketing agent
its dividend rate preferences, any such notice given to the remarketing agent to
tender or hold Acquiring Fund RPS 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
Acquiring Fund RPS.
The dividend rate for the Preferred Shares of the Target Fund normally is set
through an auction process. In the auction, holders of Target Fund APS 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 Target
Fund APS offered for sale than there are buyers, in which case holders of Target
Fund APS may not be able to sell their shares. Also, if holders of Target Fund
APS place bids to retain shares at an auction only at a specified dividend rate
and that rate exceeds the rate set at the auction, they will not retain their
shares. Additionally, if holders of Target Fund APS buy shares or elect to
retain shares without specifying a dividend rate below which they would not wish
to buy or continue to hold those shares, they could receive a lower rate of
return on their shares than the market rate. Finally, the dividend period for
the Target Fund APS may be changed by the Target Fund, subject to certain
conditions, including notice to holders of Target
21
Fund APS, which could also affect the liquidity of an investment in Target Fund
APS.
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
holders of Preferred Shares with a liquid trading market. It may not be possible
to sell Preferred 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. Target Fund APS may only be transferred outside of auctions to
or through broker-dealers or other persons as the Target 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 a
remarketing, as applicable, or in the secondary market. If a Fund fails to
satisfy its asset coverage ratios, it will be required to redeem a sufficient
number of Preferred Shares in order to return to compliance with the asset
coverage ratios. A Fund may voluntarily redeem Preferred Shares under certain
circumstances in order to meet asset coverage tests.
COMPARISON OF THE FUNDS
INVESTMENT OBJECTIVE(S) AND POLICIES
Each Fund's primary investment objective is to seek to provide common
shareholders with a high level of current income exempt from federal income tax,
consistent with preservation of capital. The Acquiring Fund's secondary
investment objective is to seek to enhance the total return provided to common
shareholders. Each Fund seeks to achieve its investment objective primarily by
investing in a portfolio of municipal securities selected by the Adviser from
those sectors of the municipal securities market that, in the opinion of the
Adviser, offer a significant opportunity for a high level of current income
exempt from federal income tax without undue risk to income or principal. Under
current market conditions, the Adviser to each of the Funds allocates each
Fund's investments in municipal securities primarily among the transportation,
housing and health care sectors of the municipal securities market. In addition,
the Acquiring Fund allocates municipal securities investments to the utilities
sector, while the Target Fund's Adviser allocates the Target Fund's investments
in municipal securities to the education
22
sector. The Adviser may from time to time adjust the proportion of each Fund's
assets allocated among these and other sectors of the municipal securities
market based upon its assessment of a variety of factors, including market
conditions, general economic conditions and political considerations.
Under current market conditions, each Fund will invest substantially all of
its total assets in municipal securities rated investment grade at the time of
investment. Investment grade securities are rated BBB or higher by S&P or Baa or
higher by Moody's in the case of long-term obligations, and have equivalent
ratings in the case of short-term obligations. Securities rated BBB by S&P are
regarded by S&P as having an adequate capacity to pay interest and repay
principal; whereas such securities normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely, in the opinion of S&P, to lead to a weakened capacity to pay interest
and repay principal for debt in this category than in higher rated categories.
Securities rated Baa by Moody's are considered by Moody's as medium grade
obligations; they are neither highly protected nor poorly secured; interest
payments and principal security appear to Moody's to be adequate for the present
but certain protective elements may be lacking or may be characteristically
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. Each Fund may invest up to 20% of its total assets in
municipal securities rated BB or B by S&P or Ba or B by Moody's (or comparably
rated by another nationally recognized statistical rating organization) at the
time of investment in the case of long-term obligations. While offering
opportunities for higher yields, lower rated securities are considered below
investment grade and involve higher risk. Securities rated BB or B are regarded
by S&P, on balance, as predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligation. Although such securities likely have some quality and protective
characteristics, in S&P's view these are outweighed by large uncertainties or
major risk exposures to adverse conditions. Securities rated B by Moody's
generally lack, in Moody's view, characteristics of the desirable investment;
assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may in Moody's opinion be small. The
Acquiring Fund will not invest in unrated securities. Each Fund may invest an
unlimited portion of its assets in municipal securities that pay interest that
is subject to the federal alternative minimum tax.
The foregoing policies with respect to credit quality of portfolio investments
will apply only at the time of the purchase of a security, and the Funds will
not be required to dispose of securities in the event that S&P or Moody's
downgrades its assessment of the credit characteristics of a particular issuer
or, in the case of unrated securities, in the event the Adviser reassesses its
view with respect to the credit quality of the issuer thereof.
23
MUNICIPAL SECURITIES. Municipal securities are obligations issued by or on
behalf of states, certain territories and possessions of the United States and
the District of Columbia and their political subdivisions, agencies and
instrumentalities, the interest on which, in the opinion of bond counsel or
other counsel to the issuer of such securities is, at the time of issuance, not
includable in gross income for regular federal income tax purposes. Under normal
market conditions, at least 80% of each Fund's net assets will be invested in
municipal securities. The policy stated in the foregoing sentence is a
fundamental policy of each Fund and cannot be changed without shareholder
approval. Neither Fund has established any limit on the percentage of its
portfolio that may be invested in municipal securities that pay interest that is
subject to the alternative minimum tax provisions of federal tax law, and a
substantial portion of the income produced by each Fund may be taxable under the
alternative minimum tax. The Funds may not be suitable investments for investors
who are already subject to the federal alternative minimum tax or who would
become subject to the federal alternative minimum tax as a result of an
investment in the Funds. Subject to the limitations set forth herein, the Target
Fund may engage in certain strategic transactions (as hereinafter defined). Such
transactions will not be treated as investments in municipal securities for the
purpose of the 80% test.
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. Under 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 primarily to invest 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 and as a reserve for expenses, share repurchases, dividends and
other distributions to shareholders.
The two principal classifications of municipal securities are "general
obligation" and "revenue" or "special obligation" securities, which include
"industrial revenue bonds." General obligation securities 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 securities are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special tax or other specific revenue source such as from
the user of the facility being financed; accordingly the timely payment of
interest and the repayment of principal in accordance with the terms of the
revenue or special obligation bond is a function of the economic viability of
such facility or such revenue source. Although the ratings of Moody's or S&P of
the municipal securities in each Fund's portfolio are relative and subjective,
and are not absolute
24
standards of quality, such ratings reflect the assessment of Moody's or S&P, as
the case may be, of the issuer's ability, or the economic viability of the
special revenue source, with respect to the timely payment of interest and the
repayment of principal in accordance with the terms of the obligation.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of municipal authorities
or entities. Although lease obligations do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. Typically in "non-appropriation" lease obligations, the lease
terminates as of the end of the last fiscal year for which an appropriation is
made. Although "non-appropriation" lease obligations are often secured by an
assignment of the lessor's interest in the underlying property, disposition of
the property in the event of foreclosure might prove difficult. There is no
limitation on the percentage of each Fund's assets that may be invested in "non-
appropriation" lease obligations. In evaluating such unrated lease obligations,
the Adviser will consider such factors as it deems appropriate, including (a)
whether the lease can be cancelled, (b) the ability of the lease obligee to
direct the sale of the underlying assets, (c) the general creditworthiness of
the lease obligor, (d) the likelihood that the municipality will discontinue
appropriating funding for the leased property in the event such property is no
longer considered essential by the municipality, (e) the legal recourse of the
lease obligee in the event of such a failure to appropriate funding and (f) any
limitations which are imposed on the lease obligor's ability to utilize
substitute property or services than those covered by the lease obligation.
Each Fund may invest in participation certificates. Participation certificates
are participations in lease obligations of state and local governments or
authorities to finance the acquisition of equipment and facilities. They may
represent participations in a lease, an installment purchase contract, or a
conditional sales contract. Some municipal leases and participation certificates
may not be readily marketable.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantee
of such payment obligations, of the municipal securities.
Municipal securities may have fixed or variable interest rates. Each Fund may
purchase floating and variable rate demand notes, which are municipal securities
25
normally having a stated maturity in excess of one year, but which permit the
holder to tender the notes for purchase at the principal amount thereof. The
interest rate on a floating rate demand note is based on a known lending rate,
such as a bank's prime rate, and is adjusted each time such rate is adjusted.
The interest rate on a variable rate demand note is adjusted at specified
intervals. There generally is no secondary market for these notes, although they
may be tendered for redemption at face value. The Acquiring Fund may also invest
up to 15% of its total assets in variable rate municipal securities whose rates
vary inversely with changes in market rates of interest. Such variable rate
municipal securities may also pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of municipal securities whose rates vary inversely with changes in market
rates of interest generally will be larger than comparable changes in the value
of an equal principal amount of a fixed rate municipal security having similar
credit quality, redemption provisions and maturity.
Each Fund may also acquire custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain municipal securities. The underwriter of
these certificates or receipts typically purchases municipal securities and
deposits the securities in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the obligations. Although under the terms of a custodial receipt, a
Fund typically would be authorized to assert its rights directly against the
issuer of the underlying obligation, a Fund could be required to assert through
the custodian bank those rights as may exist against the underlying issuer.
Thus, in the event the underlying issuer fails to pay principal and/or interest
when due, a Fund may be subject to delays, expenses and risks that are greater
than those that would have been involved if such Fund had purchased a direct
obligation of the issuer. In addition, in the event that the trust or custodial
account in which the underlying security has been deposited is determined to be
an association taxable as a corporation, instead of a non-taxable entity, the
yield on the underlying security would be reduced in recognition of any taxes
paid.
The Target Fund may also invest in municipal securities, the interest rate on
which has been divided into two or more different components. Typically, one
component (the "Auction Component") pays an interest rate that is reset
periodically through an auction process or by reference to an interest rate
index and is essentially a variable or floating rate obligation. A second
component (the "Residual Component") pays a residual interest rate based on the
difference between the total interest paid by the issuer on the municipal
securities and the rate paid on the Auction Component. Residual Components may
also pay a rate of interest determined by subtracting a multiple of a variable
or floating rate from the total amount paid by the issuer of the municipal
security. The Target Fund may
26
purchase Auction Components without limitation and, with respect to up to 10% of
the Target Fund's total assets, may purchase Residual Components. Because the
interest rate paid to holders of Residual Components is generally determined by
subtracting a variable or floating rate from a predetermined amount, the
interest rate paid to Residual Component holders will decrease as such variable
or floating rate increases and increase as such variable or floating rate
decreases. Moreover, the extent of the increases and decreases in the value of a
Residual Component generally will be larger than comparable changes in the value
of an equal principal amount of a fixed rate municipal security having similar
credit quality, redemption provisions and maturity.
The Adviser will select securities for each Fund's portfolio which the Adviser
believes entail reasonable credit risk considered in relation to the particular
investment policies of each Fund. As a result, each Fund will not necessarily
invest in the highest-yielding municipal securities permitted by its investment
policies if the Adviser determines that market risks or credit risks associated
with such investments would subject each Fund's portfolio to excessive risk.
There is no limitation as to the maturity of municipal securities in which
either Fund may invest. The Adviser may adjust the average maturity of a Fund's
portfolio from time to time, depending on its assessment of the relative yields
available on securities of different maturities and its expectations of future
changes in interest rates.
Neither Fund generally will invest more than 25% of its total assets in any
one industry. Governmental issuers of municipal securities are not considered
part of any "industry." However, municipal securities backed only by the assets
and revenues of non-governmental users may for this purpose be deemed to be
issued by such non-governmental users, and the 25% limitation would apply to
such obligations. It is nonetheless possible that a Fund may invest more than
25% of its total assets in one or more broad sectors of the municipal securities
market, such as obligations of hospitals and other health care facilities,
housing agency obligations, transportation obligations or utilities related
obligations, if the Adviser determines that the yields available from
obligations in one or more particular sectors of the market justify the
additional risks associated with a large investment in such sectors. Although
such obligations could be supported by the credit of governmental users, or by
the credit of non-governmental 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 a particular market sector. Each Fund reserves the
right to invest more than 25% of its assets in industrial development bonds or
in issuers located in the same state. If a Fund were to invest more than 25% of
its total assets in issuers located in the same state, it would be more
susceptible to adverse economic, business or regulatory conditions in that
state.
27
TEMPORARY DEFENSIVE STRATEGIES. At times the Adviser may judge that conditions
in the markets for municipal securities make pursuing each Fund's basic
investment strategy inconsistent with the best interests of its shareholders. At
such times the Adviser may use alternative strategies, primarily designed to
reduce fluctuations in the value of each Fund's assets. In implementing these
"defensive" strategies, the Funds may invest to a substantial degree in
high-quality, short-term municipal securities. If these high-quality, short-term
municipal securities are not available or, in the Adviser's judgment, do not
afford sufficient protection against adverse market conditions, the Funds may
temporarily invest in taxable securities. Such taxable securities may include:
obligations of the U.S. Government, its agencies or instrumentalities: other
debt securities rated within the four highest grades by either S&P or Moody's;
commercial paper rated in the highest grade by either rating service;
certificates of deposit and bankers' acceptances; repurchase agreements with
respect to any of the foregoing investments; or any other fixed-income
securities that the Adviser considers consistent with such strategies. To the
extent that the use of certain of these strategies produces taxable income, this
taxable income will be distributed on a pro rata basis among the Preferred
Shares and the Common Shares. It is impossible to predict whether, or for how
long, a Fund will use any such defensive strategies. Further, the yields on such
securities may approach or be less than the then current dividend rate payable
to holders of Preferred Shares. In such event, the benefit of leverage to the
common shareholders will diminish and a Fund's leveraged capital structure may
work to the disadvantage of the common shareholders. To the extent that a Fund
invests in taxable securities for temporary defensive purposes, that Fund will
not be invested in a manner primarily designed to achieve its primary investment
objective of seeking to provide common shareholders with a high level of current
income exempt from federal income tax, consistent with preservation of capital.
Each Fund seeks to achieve its investment objective(s) primarily by investing
in a portfolio of municipal securities selected by the Adviser from those
sectors of the municipal securities market that, in the opinion of the Adviser,
offer a significant opportunity for a high level of current income exempt from
federal income tax without undue risk to income or principal. The Adviser's
investment approach with respect to each Fund is to identify those sectors of
the municipal securities market that the Adviser believes are undervalued and,
within those sectors, to select individual municipal securities that are
consistent with each Fund's investment objective(s). The Adviser believes that
securities in undervalued sectors of the municipal securities market generally
offer a higher yield than comparable municipal securities in more fully valued
sectors of the municipal securities market. Investment in undervalued sectors of
the municipal securities market also presents the opportunity for capital gains
as the sector becomes more fully valued. Certain sectors of the municipal
securities market may from time to time be undervalued due to such factors as:
excess supply occasioned by concurrent, large scale capital
28
intensive projects, refinancings and fiscal or tax driven offering schedules;
political, regulatory, and economic developments; and investor perception. The
Adviser seeks to take advantage of such opportunities by allocating a
significant portion of each Fund's assets to such sectors and by seeking to
minimize risk to income and principal through extensive credit research and by
investing substantially all of its total assets in investment grade rated
securities.
Under current market conditions, the Adviser expects to allocate the Acquiring
Fund's investments in municipal securities primarily among the transportation,
housing, health care and utilities sectors of the municipal securities market
and the Target Fund's investments in municipal securities primarily among the
transportation, housing, health care and education sectors of the municipal
securities market. The Adviser may from time to time adjust the proportion of a
Fund's assets allocated among these and other sectors of the municipal
securities market. Subject to each Fund's policies with respect to investment in
any single industry, investment in securities rated below investment grade and
guidelines which may be imposed by any nationally recognized statistical rating
organization issuing a rating of the Preferred Shares, there is no limit on the
percentage of the Fund's total assets that may be invested in municipal
securities relating to any particular sector of the municipal securities market.
TRANSPORTATION. The transportation sector of the municipal securities market
includes airports, highway, bridge and toll road facilities and public
transportation and port authorities. Many airport and toll road facility
securities are backed exclusively by the revenues of particular projects whereas
public highway, bridge and public transportation and port authority securities
often are backed at least in part by more diverse revenue sources, such as
gasoline taxes and vehicle registration fees, sales taxes and revenues and
special taxes from nontransportation related activities.
HOUSING. The housing sector of the municipal securities market includes both
single and multi-family housing bonds issued by state housing agencies or local
issuers. Also included may be rehabilitation or construction related bonds and
bonds secured by second or third lien mortgages. State housing agencies often
have permanent staffs, supervisory boards and defined operating policies to
implement state housing policies. Local issuers generally are conduit agencies
empowered only to issue a specific bond financing. Many of these mortgages,
including most single family mortgages, backing these municipal securities have
some type of primary mortgage insurance. A high proportion of single family
mortgages issued in connection with state housing agency bond financings relate
to lower priced, entry level homes.
HEALTH CARE. The health care sector of the municipal securities market
includes hospitals, nursing homes, mental health care facilities, rehabilitation
centers and other public, non-profit, or similar entities principally engaged in
providing services for the treatment or prevention of diseases, disorders or
other medical conditions.
29
UTILITIES. The utilities sector of the municipal securities market, in which
the Acquiring Fund invests a portion of its municipal securities investments,
includes electric utilities, water and sewage utilities, gas utilities and other
entities engaged in the provision of other utility or utility related goods or
services. Securities in the utilities sector of the municipal securities market
may be issued by state and local government-owned entities, utility districts,
rural cooperatives and joint-action agencies and other governmental
subdivisions, agencies and instrumentalities and certain non-governmental,
investor-owned entities.
EDUCATION. The education sector of the municipal securities market, in which
the Target Fund allocates a portion of its municipal securities investments,
includes educational institutions, such as colleges and universities, and
student loan securities. Student loan securities are backed by the interest and
principal payments on student loans. Educational institution securities may be
backed by the revenues of particular facilities or activities, tuition and fees
or the general obligation of the institution. Student loan securities are backed
by the interest and principal payments on student loans.
OTHER SECTORS. As discussed above, in pursuing each Fund's investment
objective(s) the Adviser may from time to time adjust the proportion of each
Fund's assets allocated among the foregoing and other sectors of the municipal
securities market based upon the investment adviser's assessment of a variety of
factors. Such other sectors, as determined by the Adviser, will not necessarily
correspond to traditional industry categories and may include, among other
sectors, the education, insured and credit enhanced, general obligation, special
district, lower rated and various geographic (such as particular regions or
individual states) sectors of the municipal securities market. Neither Fund
will, however, invest more than 20% of its total assets at the time of
investment in securities rated below investment grade.
The insured and credit enhanced sector of the municipal securities market
includes municipal securities backed by original issue insurance or secondary
market insurance or by some other form of credit support, such as a letter of
credit or a mandatory purchase facility. Such insurance generally insures the
timely payment of scheduled interest and principal payments. Other types of
credit enhancement may provide only for the ultimate payment of interest or
principal, or may simply provide a liquidity facility for the disposition of
securities. The Acquiring Fund does not intend to purchase secondary market
insurance. The general obligation sector of the municipal securities market
includes securities issued by states, counties, cities, towns and school
districts secured by the municipal issuer's general taxing powers. In general, a
general obligation security is secured by the issuer's unlimited taxing power.
For smaller governmental jurisdictions such as cities, school districts and
towns, the only available unlimited taxing power is on property. For larger
municipal issuers such as states, counties and larger cities, the available tax
revenues are more diverse and may include sales and income taxes
30
along with property taxes. Not all general obligation securities are secured by
an unlimited taxing power. Some issuers, generally smaller municipal
governments, pledge taxes that are limited as to revenue sources and the maximum
property tax millage amounts. These securities are usually referred to as
limited-tax general obligation securities. The special district sector of the
municipal securities market includes special purpose municipal entities issuing
securities payable from the revenues generated from a particular activity, fee
or assessment or payable from a limited taxing authority.
OTHER INVESTMENT PRACTICES AND POLICIES
In connection with the investment objective(s) and policies described above,
each Fund may, but is not required to, use various 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, which may hereinafter be
referred to as "Strategic Transactions," may further the Funds' respective
investment objectives, no assurance can be given that these investment practices
will achieve this result.
STRATEGIC TRANSACTIONS. Each Fund may engage in certain Strategic Transactions
to attempt to protect against possible changes in the market value of securities
held in or to be purchased for its portfolio resulting from securities markets
fluctuations, to protect unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes,
to manage the effective maturity or duration of its portfolio, or to establish a
position in the derivatives markets as a temporary substitute for purchasing or
selling particular securities. The Funds may use Strategic Transactions to
enhance potential gain, although no more than 5% of such Fund's assets may be
committed to Strategic Transactions for non-hedging purposes (although the use
of Strategic Transactions by the Target Fund for these purposes may not include
financial futures and options thereon). Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables, including market conditions.
The ability of a Fund to utilize these Strategic Transactions successfully
depends on the Adviser's ability to predict pertinent market movements, which
cannot be assured. Each Fund complies with applicable regulatory requirements
when implementing these strategies, techniques and instruments.
Strategic Transactions have risks associated with them, including possible
default by the other party to the transaction, liquidity and, to the extent the
Adviser's view as to certain market movements is incorrect, the risk that the
use of such Strategic Transactions could result in losses greater than if they
had not been used. Use of put
31
and call options may result in losses to a Fund, force the sale of portfolio
securities at inopportune times or for prices other than at current market
values, limit the amount of appreciation a Fund can realize on its investments
or cause a Fund to hold a security it might otherwise sell. The use of options
and futures transactions entails certain other risks. In particular, the
variable degree of correlation between price movements of futures contracts and
price movements in the related portfolio position of a Fund creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of the Fund's position. In addition, futures and options markets may
not be liquid in all circumstances and certain over-the-counter options may have
no markets. As a result, in certain markets, a Fund might not be able to close
out a transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts and the sale of options thereon would create,
a greater ongoing potential financial risk than would purchases of options,
where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. Income earned or gains realized or deemed to
be earned or realized, if any, by a Fund from engaging in Strategic Transactions
generally will be taxable income of the Fund. Such income will be allocated to
both the Common Shares and the Preferred Shares of each Fund on a pro rata
basis.
"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. Each Fund may also purchase
and sell municipal securities on a "when-issued" and "delayed delivery" basis.
No income accrues to a Fund on municipal securities in connection with such
transactions prior to the date 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 than yields on the municipal securities obtained pursuant
to such transactions. Because a Fund engaging in such transactions relies on the
buyer or seller, as the case may be, to consummate the transaction, failure by
the other party to complete the transaction may result in that 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
32
engages in "when-issued" and "delayed delivery" transactions, it will do so for
the purpose of acquiring securities for a Fund's portfolio consistent with that
Fund's investment objective and policies and not for the purpose of investment
leverage. No specific limitation exists as to the percentage of a Fund's assets
which may be used to acquire securities on a "when-issued" or "delayed delivery"
basis.
INVESTMENT RESTRICTIONS
Each Fund's investment objective(s), each Fund's investment policy with
respect to investing at least 80% of its net assets in municipal securities and
the following investment restrictions are fundamental and cannot be changed
without the approval of the holders of a majority of a Fund's outstanding voting
securities (defined in the 1940 Act as the lesser of (i) more than 50% of a
Fund's outstanding Common Shares and of the Preferred Shares, including any
outstanding Preferred Shares, voting by class, or (ii) 67% of a Fund's
outstanding Common Shares and of the Preferred Shares, including any outstanding
Preferred Shares, voting by class, present at a meeting at which the holders of
more than 50% of the outstanding shares of each such class are present in person
or by proxy). All other investment policies or practices are considered by the
Funds not to be fundamental and accordingly may be changed without shareholder
approval. If a percentage restriction on investment or use of assets set forth
below is adhered to at the time a transaction is effected, later changes in
percentage resulting from changing market values will not be considered a
deviation from policy. With respect to the limitation on borrowings, the
percentage applies at the time of purchase and on an ongoing basis. The Funds
may not:
1. Invest more than 25% of its total assets in a single industry; however, as
described above, a Fund may from time to time invest more than 25% of its
total assets in a particular segment of the municipal securities market.
2. Issue senior securities, as defined in the 1940 Act, other than preferred
shares of beneficial interest, except to the extent such issuance might be
involved with borrowings described under subparagraph (3) below or with
respect to Strategic Transactions, as described herein.
3. Borrow money, except for temporary or emergency purposes from banks or for
repurchase of a Fund's shares, and then only in an amount not exceeding
one-third of a Fund's total assets, including the amount borrowed. The
Funds will not mortgage, pledge or hypothecate any assets except in
connection with a borrowing or a Strategic Transaction. The Funds will not
purchase portfolio securities during any period that such borrowings
exceed 5% of the total asset value of each Fund. Notwithstanding this
investment restriction, the Funds may enter into "when issued" and
"delayed delivery" transactions.
33
4. Make loans of money or property to any person, except to the extent the
securities in which the Funds may invest are considered to be loans and
except that the Funds may lend money or property in connection with
maintenance of the value of or a Fund's interest with respect to the
municipal securities owned by each Fund.
5. Buy any securities "on margin." Neither the deposit of initial or
variation margin in connection with Strategic 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 in connection with Strategic Transactions.
7. Act as an underwriter of securities, except to the extent the Funds may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.
8. Make investments for the purpose of exercising control or participation in
management, except to the extent that exercise by a Fund of its rights
under agreements related to municipal securities would be deemed to
constitute such control or participation and except that the Funds 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 SEC under the 1940 Act, as amended from
time to time or, (iii) an exemption or other relief from the provisions of
the 1940 Act.
9. Invest in securities by issued by other investment companies except as
part of a merger, reorganization or other acquisition and except to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time or, (iii) an exemption or other relief from the
provisions of the 1940 Act.
10. Invest in equity interests in oil, gas or other mineral exploration or
development programs except pursuant to the exercise by a Fund of its
rights under agreements relating to municipal securities.
11. Purchase or sell real estate, commodities or commodity contracts, except
to the extent the municipal securities the Funds may invest in are
considered to be interests in real estate, commodities or commodity
contracts or to the extent a Fund exercises its rights under agreements
relating to such municipal securities (in which case the Funds may
liquidate real estate acquired as a result of a default on a mortgage),
and except to the extent that Strategic
34
Transactions the Funds may invest in are considered to be commodities or
commodities contracts.
In addition, to comply with federal tax requirements for qualifications as a
"regulated investment company," each Fund's investments will be limited in a
manner such that at the close of each quarter of each fiscal year, (a) no more
than 25% of such Fund's total assets are invested in the securities of a single
issuer, and (b) with regard to at least 50% of such Fund's total assets, no more
than 5% of its total assets are invested in the securities of a single issuer.
These tax-related limitations may be changed by the trustees to the extent
necessary to comply with changes to applicable tax requirements.
The Funds generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as it
deems advisable in view of prevailing or anticipated market conditions to
accomplish such Fund's investment objective(s). For example, a Fund may sell
portfolio securities in anticipation of a movement in interest rates. Other than
for tax purposes, frequency of portfolio turnover will not be a limiting factor
if a Fund considers it advantageous to purchase or sell securities. Neither Fund
anticipates that its annual portfolio turnover rate will in exceed 200%. A high
rate of portfolio turnover involves correspondingly greater brokerage commission
and transaction expenses than a lower rate, which expenses must be borne by a
Fund and its holders of Common Shares. High portfolio turnover may also result
in the realization of substantial net short-term capital gains, and any
distributions resulting from such gains will be taxable at ordinary income rates
for federal income tax purposes.
As a matter of operating policy, each Fund will not invest 25% or more of its
assets in a single industry; however, each Fund may from time to time invest 25%
or more of its assets in a particular segment of the municipal securities
market.
MANAGEMENT OF THE FUNDS
THE BOARDS. The Board of Trustees of each Fund is responsible for the overall
supervision of the operations of its respective Fund and performs the various
duties imposed on trustees of investment companies by the 1940 Act and under
applicable state law.
THE ADVISER. The investment adviser for each Fund is Van Kampen Asset
Management. The Adviser is a wholly owned subsidiary of Van Kampen Investments
Inc. ("Van Kampen Investments"). Van Kampen Investments is a diversified asset
management company that administers more than three million retail investor
accounts, has extensive capabilities for managing institutional portfolios and
has more than $97 billion under management or supervision as of April 30, 2005.
Van Kampen Investments is an indirect wholly owned subsidiary of Morgan Stanley,
a preeminent global financial services firm that maintains leading market
35
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 a combined investment advisory and administration agreement
between each Fund and the Adviser, each Fund pays the Adviser an annual fee
payable monthly of 0.55% of such Fund's average daily net assets, including
assets attributable to Preferred Shares. Effective June 1, 2004 and November 1,
2004, the investment advisory fee paid by each Fund was reduced from 0.65% to
0.60% and 0.60% to 0.55%, respectively. Subsequent to the Reorganization, the
Adviser will continue to receive compensation at the rate of 0.55% of the
average daily net assets, including assets attributable to Preferred Shares, of
the combined fund. Because the fees paid to the Adviser are calculated on net
assets, including assets attributable to Preferred Shares, the fees earned by
the Adviser will be higher when preferred shares are outstanding.
Under a separate accounting services and legal services agreement, the Adviser
(or its affiliates) provides accounting and legal services to each Fund. The
Adviser (or its affiliates) allocates the cost of such services to each Fund.
PORTFOLIO MANAGEMENT. Each Fund's portfolio is managed by the Adviser's
Municipal Fixed Income team. The team is made up of established investment
professionals. Current members of the team managing both funds include Robert
Wimmel, a Vice President of the Adviser, and John Reynoldson, an Executive
Director of the Adviser. In addition, Dennis Pietrzak, an Executive Director of
the Adviser, is a current member of the team managing the Acquiring Fund and
Timothy D. Haney, a Vice President of the Adviser, is a current member of the
team managing the Target Fund.
Mr. Wimmel has worked for the Adviser since 1996 and joined the team managing
the Funds in . Mr. Reynoldson has worked for the Adviser since 1987
and joining the team managing the Funds in . Mr. Pietrzak has worked
for the Adviser since and joined the team managing the Acquiring Fund
in . Mr. Haney has worked for the Adviser since
and joined the team managing the Target Fund in .
Mr. Pietrzak is the lead portfolio manager of Acquiring Fund. Mr. Haney is the
lead portfolio manager for the Target Fund. Messrs. Wimmel and Reynoldson are
co-portfolio managers of each Fund. Members of the team collaborate to manage
the assets of each Fund. All team members are responsible for the day-to-day
management of the Funds and for the execution of the overall strategy of the
Funds.
36
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 Funds.
PORTFOLIO TRANSACTIONS WITH AFFILIATES. The Adviser may place portfolio
transactions, to the extent permitted by law, with brokerage firms affiliated
with the Funds and the Adviser if it reasonably believes that the quality of
execution and the commission are comparable to that available from other
qualified firms.
LEGAL PROCEEDINGS INVOLVING THE ADVISER. The Adviser, certain affiliates of
the Adviser, and certain investment companies advised by the Adviser or its
affiliates were named as defendants in a number of similar class action
complaints which 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' motion to
dismiss this action is pending. After defendants moved to dismiss, the
plaintiffs filed a motion for leave to amend the complaint, which is also
pending. The proposed amendment drops all claims against the named investment
companies, which are listed only as nominal defendants. The proposed amendment
raises similar claims against the Adviser and its affiliates with respect to the
investment companies advised by the Adviser or its affiliates, and, in addition,
alleges that affiliates of the Adviser received undisclosed compensation for
steering investors into thirteen non-affiliated fund families. The defendants
intend to continue to defend this action vigorously. While the defendants
believe that they have meritorious defenses, the ultimate outcome of this matter
is not presently determinable at this early stage of litigation.
The Adviser and certain affiliates of the Adviser are also named as defendants
in a derivative suit which additionally names as defendants individual trustees
of certain Van Kampen funds; the named investment companies are listed as
nominal defendants. The complaint alleges that defendants caused the Van Kampen
funds to pay economic incentives to a proprietary sales force to promote the
sale of Van Kampen funds. The complaint also alleges that the Van Kampen funds
paid excessive commissions to Morgan Stanley and its affiliates in connection
with the sales of the funds. The complaint seeks, among other things, the
removal of the current trustees
37
of the funds, rescission of the management contracts for the funds, disgorgement
of profits by Morgan Stanley and its affiliates and monetary damages. This
complaint has been coordinated with the action described in the preceding
paragraph. The defendants have moved to dismiss this action and otherwise intend
to defend it vigorously. This action is currently stayed until the later of (i)
a ruling on the motion to dismiss the action described in the preceding
paragraph or (ii) a ruling on a motion to dismiss the action described in the
next paragraph. While the defendants believe that they have meritorious
defenses, the ultimate outcome of this matter is not presently determinable at
this early stage of litigation.
The plaintiff in the action described in the preceding paragraph recently
filed a separate derivative action against the Adviser, certain affiliates of
the Adviser, the individual trustees of certain Van Kampen funds, and certain
unaffiliated entities. The named investment companies are listed as nominal
defendants. The complaint alleges that certain unaffiliated entities engaged in
or facilitated market timing and late trading in the Van Kampen funds, and that
the Adviser, certain affiliates of the Adviser, and the trustees failed to
prevent and/or detect such market timing and late trading. The complaint seeks,
among other things, the removal of the current trustees of the funds, rescission
of the management contracts and distribution plans for the funds, disgorgement
of fees and profits from the Adviser and its affiliates, and monetary damages.
The defendants' motion to dismiss this action is pending. While the defendants
believe that they have meritorious defenses, the ultimate outcome of this matter
is not presently determinable at this early stage of litigation.
The Adviser and 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 profit that diluted the 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 recently reversed the federal
district court's order remanding this case to state court and directed entry of
judgment in favor of defendants.
The Adviser and the individual trustees of certain Van Kampen funds are named
as defendants in a recently filed class action complaint that alleges the
defendants breached various fiduciary and statutory duties to investors by
failing to ensure that the funds participated in securities class action
settlements involving securities held in the funds' portfolios. The complaint
seeks, among other things, compensatory and punitive damages. None of the funds
are named as defendants, and no claims
38
are asserted against them. The defendants expect to move to dismiss the
complaint and believe that they have meritorious defenses.
The Adviser, one of the investment companies advised by the Adviser, and
certain officers and directors of the investment company are defendants in a
class action filed in 2001 alleging that the defendants issued a series of
prospectuses and registration statements that were materially false and
misleading. Among other things, the complaint alleges that the prospectuses and
registration statements contained misleading descriptions of the method
defendants used to value senior loan interests in the fund's portfolio, and that
defendants materially overstated the net asset value of the fund. The parties
recently mediated the dispute through a court-supervised settlement conference
and reached an agreement to settle the case. The parties presented a settlement
agreement for preliminary court approval in April 2005.
OTHER SERVICE PROVIDERS
CUSTODIAN, TRANSFER AGENT AUCTION AGENT AND DIVIDEND PAYING AGENT. State
Street Bank and Trust Company is the custodian for each Fund. Its principal
business address is P.O. Box 43071, Providence, Rhode Island, 02940-3071.
EquiServe Trust Company, N.A., 250 Royall Street, Canton, Massachusetts, 02021,
is the transfer agent, dividend disbursing agent and registrar for the Common
Shares of each Fund. Deutsche Bank Trust Company Americas ("Deutsche Bank"), 280
Park Avenue, New York, New York 10017, is the auction agent and dividend paying
agent for the Target Fund APS. Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), World Financial Center, North Tower, New York,
New York 10281, is the remarketing agent for the Acquiring Fund RPS.
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. The following table below sets forth the
capitalization of the Target Fund
39
and the Acquiring Fund as of October 31, 2004, and the pro forma capitalization
of the combined fund as if the Reorganization had occurred on that date.
CAPITALIZATION AS OF OCTOBER 31, 2004 (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<Table>
<Caption>
ACTUAL PRO FORMA
---------------------- ---------
STRATEGIC SELECT SELECT
SECTOR SECTOR SECTOR
MUNICIPAL MUNICIPAL MUNICIPAL
TRUST TRUST TRUST
--------- --------- ---------
NET ASSETS CONSIST OF:
Common Shares ($.01 par value)*...... $ 108 $ 47 $ 157
Paid in surplus...................... 146,198 61,644 207,550
Net unrealized appreciation.......... 10,915 6,641 17,556
Accumulated undistributed net
investment income.................. 1,760 843 2,603
Accumulated net realized gain
(loss)............................. (1,198) (1,764) (2,962)
NET ASSETS APPLICABLE TO
COMMON SHARES...................... $157,783 $ 67,411 $224,904
PREFERRED SHARES ($.01 par value,
with
liquidation preference of $25,000
and
$25,000 for Acquiring Fund and
Target Fund, respectively)*........ $ 95,000 $ 34,000 $129,000
NET ASSETS INCLUDING PREFERRED
SHARES............................. $252,783 $101,411 $353,904
</Table>
- ---------------
* Based on the number of outstanding shares listed in "Outstanding Securities
of the Funds" table below.
** Reflects a non-recurring cost associated with these Reorganizations of
approximately $290,000, with $133,400 to be borne by the Acquiring Fund and
$156,600 to be borne by the Target Fund, assuming the Reorganizations is
approved and completed.
40
OUTSTANDING SECURITIES OF THE FUNDS AS OF OCTOBER 31, 2004
<Table>
<Caption>
AMOUNT OUTSTANDING
AMOUNT HELD EXCLUSIVE OF AMOUNT
AMOUNT BY FUND FOR ITS SHOWN IN
TITLE OF CLASS AUTHORIZED OWN ACCOUNT PREVIOUS COLUMN
-------------- ---------- --------------- -------------------
Strategic Sector Municipal
Trust
Common Shares............. Unlimited 0 10,806,700
Preferred Shares.......... 100,000,000 0 3,800
Select Sector Municipal
Trust
Common Shares............. Unlimited 0 4,682,128
Preferred Shares.......... 100,000,000 0 1,360
</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
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.
41
COMMON SHARE PRICE DATA. The following table sets forth the high and low sales
prices for Common Shares of each Fund on the NYSE for each full quarterly period
within each Fund's two most recent fiscal years and for the first fiscal quarter
of the current fiscal year of each Fund, along with the net asset value and
discount or premium to net asset value for each quotation.
<Table>
<Caption>
TARGET FUND
-----------------------------------
NET ASSET PREMIUM NET ASSET PREMIUM
QUARTERLY PERIOD ENDING HIGH PRICE VALUE (DISCOUNT) LOW PRICE VALUE (DISCOUNT)
- ----------------------- ---------- ----- ---------- --------- --------- ----------
April 30, 2005........ $13.19 $15.09 -12.59% $12.29 $14.41 -14.71%
January 31, 2005...... $13.15 $14.56 -9.68% $12.50 $14.35 -12.89%
October 31, 2004...... $13.25 $14.60 -9.25% $12.72 $14.27 -10.86%
July 31, 2004......... $13.66 $13.87 -1.51% $12.13 $14.01 -13.42%
April 30, 2004........ $14.77 $15.00 -1.53% $12.58 $14.19 -11.35%
January 31, 2004...... $14.43 $14.87 -2.96% $13.83 $14.74 -6.17%
October 31, 2003...... $14.10 $14.49 -2.69% $13.26 $14.04 -5.56%
July 31, 2003......... $14.79 $15.12 -2.18% $13.53 $13.99 -3.29%
April 30, 2003........ $14.05 $14.64 -4.03% $13.52 $14.26 -5.19%
</Table>
<Table>
<Caption>
ACQUIRING FUND
----------------------
NET ASSET PREMIUM NET ASSET PREMIUM
QUARTERLY PERIOD ENDING HIGH PRICE VALUE (DISCOUNT) LOW PRICE VALUE (DISCOUNT)
- ----------------------- ---------- --------- ---------- --------- --------- ----------
April 30, 2005........ $12.81 $14.83 -13.62% $112.05 $14.15 -14.84%
January 31, 2005...... $12.86 $14.38 -10.57% $12.30 $14.26 -13.74%
October 31, 2004...... $12.87 $14.39 -10.56% $12.25 $13.97 -12.31%
July 31, 2004......... $12.20 $13.89 -12.17% $11.51 $13.68 -15.86%
April 30, 2004........ $13.77 $14.82 -7.09% $11.94 $13.89 -14.04%
January 31, 2004...... $13.44 $14.50 -7.31% $12.70 $14.24 -10.81%
October 31, 2003...... $12.88 $14.21 -9.36% $12.33 $13.61 -9.40%
July 31, 2003......... $13.90 $14.70 -5.44% $12.46 $13.62 -8.52%
April 30, 2003........ $13.07 $14.17 -7.76% $12.74 $13.81 -7.75%
</Table>
As of May 9, 2005, (i) the net asset value per share for Target Fund Common
Shares was $14.67 and the market price per share was $12.70, representing a
discount to net asset value of 13.43%, and (ii) the net asset value per share
for Acquiring Fund Common Shares was $14.41 and the market price per share was
$12.47, representing a discount to net asset value of 13.46%.
Common Shares of the Funds have historically traded at a discount to net asset
value. 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
42
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 the Fund to undertake such
repurchases and/or tender offers or that, if undertaken, such actions would
result in the common shares trading at a price which is equal or close to net
asset value.
DIVIDENDS AND DISTRIBUTIONS. The Funds' current policies with respect to
dividends and distributions relating to their respective Common Shares are
similar. It is each Fund's present policy, which may be changed by its Board of
Trustees, to make monthly distributions to holders of its Common Shares of
substantially all, in the case of the Target Fund, and all or a portion, in the
case of the Acquiring Fund, of that Fund's net investment income remaining after
the payment of dividends on any outstanding Preferred Shares. The Acquiring Fund
may at times pay out less than the entire amount of net investment income earned
in any particular period and may at times pay out such accumulated undistributed
income in addition to net investment income earned in other periods in order to
permit the Acquiring Fund to maintain a more stable level of distributions to
holders of Common Shares. As a result, the distributions paid by the Acquiring
Fund for any particular period may be more or less than the amount of net
investment income earned by the Acquiring Fund during such period. For federal
income tax purposes, the Acquiring Fund will be required to distribute
substantially all of its net investment income for each calendar year. Net
income of each Fund consists of all interest income accrued on portfolio assets
less all expenses of the Fund. The Funds are required to allocate net capital
gains and other taxable income, if any, received by a Fund among that Fund's
Common Shares and the Preferred Shares on a pro rata basis in the year for which
such capital gains and other income is realized.
Expenses of each Fund are accrued each day. Net realized capital gains, if
any, are expected to be distributed to shareholders at least once a year. While
there are any Preferred Shares of a Fund outstanding, such Fund may declare any
cash dividend or other distribution on its Common Shares, unless at the time of
such declaration, (1) all accrued Preferred Shares dividends have been paid and
(2) the value of the Fund's total assets (determined after deducting the amount
of such dividend or other distribution), less all liabilities and indebtedness
of 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, each Fund may be
required to comply with other asset coverage requirements as a condition of a
Fund obtaining a rating of its
43
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 the Fund to maintain its
qualification for taxation as a regulated investment company. Each Fund intends,
however, to the extent possible, to purchase or redeem 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," and collectively the "Plans") pursuant to which distributions of
dividends and all capital gains on Common Shares are automatically reinvested in
Common Shares pursuant to such Plan. The Plans for the Target Fund and the
Acquiring Fund are similar, except that, unlike the Target Fund's Plan, the
Acquiring Fund's Plan requires holders of Common Shares to elect to participate
in its Plan. Thus, under the Acquiring Fund's Plan, unless holders of Common
Shares 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.
After the Reorganization, a holder of Common Shares of a Fund who currently
receives dividends in cash will continue to receive dividends in cash; all
holders who elect to participate in the Plan of a Fund will have their dividends
automatically reinvested in shares of the combined fund. All correspondence
concerning the Plan should be directed to the Plan Agent at P.O. Box 8200,
Boston, Massachusetts 02266. Telephone calls concerning the Plan may be directed
to the Plan Agent at (800) 341-2929.
ADDITIONAL INFORMATION ABOUT PREFERRED SHARES OF THE FUNDS
GENERAL. The Preferred Shares of the Acquiring Fund are labeled "remarketed
preferred shares" ("RPS"). The Preferred Shares of the Target Fund are labeled
"auction preferred shares" ("APS"). Both Target Fund APS and Acquiring Fund RPS
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 Preferred Shares of each Fund have a
liquidation preference of $25,000 per share. Neither Target Fund nor Acquiring
Fund Preferred
44
Shares are traded on a stock exchange or over-the-counter. Holders of each
Fund's Preferred Shares do not have preemptive rights to purchase any shares of
the same series 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. While the Acquiring
Fund RPS and the Target Fund APS are similar in many respects, there are
differences that shareholders should consider.
SERIES. Under the 1940 Act, each Fund is permitted to have outstanding more
than one series of Preferred Shares so long as no single series has priority
over another to the distribution of assets of that Fund or the payment of
dividends. Both Funds currently have two series of Preferred Shares outstanding:
a Series A and a Series B. If the Reorganization is approved and completed, the
combined fund will have four series. The existing two series of Series A and
Series B, and the Acquiring Fund will issue Series C RPS in exchange for Series
A APS of the Target Fund and Series D RPS in exchange for Series B APS of the
Target Fund. Except with regard to the length of the regular dividend period
applicable to each series and as otherwise described in the prospectus offering
each Fund's Preferred Shares, the terms of each series of the Acquiring Fund RPS
are the same and the terms of each series of Target Fund APS are the same.
PURCHASE AND SALE. Acquiring Fund RPS and Target Fund APS are purchased and
sold using different procedures.
Target Fund APS generally are purchased and sold through auctions generally
conducted every 28 days by Deutsche Bank, as the auction agent for the Target
Fund's APS (the "Auction Agent") unless the Target Fund elects to declare a
special dividend period. Unless otherwise permitted by the Target Fund, existing
and potential holders of Target Fund APS only may participate in auctions
through their broker-dealers. Broker-dealers submit the orders of their
respective customers who are existing and potential holders of APS to the
Auction Agent. On or prior to each auction date for the APS (the business day
next preceding the first day of each dividend period), each holder may submit
orders to buy, sell or hold APS to its broker-dealer. Outside of these auctions,
shares of APS may be purchased or sold through broker-dealers for the APS in a
secondary trading market maintained by the broker-dealers. However, there can be
no assurance that a secondary market will develop or if it does develop, that it
will provide holders with a liquid trading market for the Acquiring Fund APS.
Acquiring Fund RPS generally are purchased and sold through remarketings
conducted every seven days in the case of Series A, and every 28 days in the
case of Series B, by Merrill Lynch, unless the Acquiring Fund elects to declare
a special dividend period. Acquiring Fund RPS are purchased and sold through
remarketing procedures. On each tender date (the business day preceding the
related dividend reset date) for shares of Acquiring Fund RPS, the remarketing
agent will, after
45
canvassing the market and considering prevailing market conditions, provide to
holders of shares of Acquiring Fund RPS non-binding indications of the
applicable dividend rate for the next succeeding 7-day or 28-day, as the case
may be, 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 Acquiring Fund RPS or a new purchaser is
required to agree to purchase shares of Acquiring Fund RPS. Each holder of
shares of Acquiring Fund RPS then must notify the remarketing agent of its
desire (on a share-by-share basis) either to tender such share at a price of
$25,000 per share or to continue to hold such share for a 7-day or 28-day, as
the case may be, 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 (subject to limit
exceptions) 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 Acquiring Fund RPS
tendered to it on such tender date at a price of $25,000 per share. Such
determination will be made in the sole discretion of the remarketing agent and
will be conclusive and binding on the Acquiring Fund and on the holders of
Acquiring Fund RPS. The remarketing agent intends to make a secondary market in
the Acquiring Fund RPS outside of remarketings. The remarketing agent, however,
has no obligation to make a secondary market in the Acquiring Fund RPS outside
of remarketings, and there can be no assurance that a secondary market for
Acquiring Fund RPS 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 Series A APS
would receive Acquiring Fund Series C RPS and a holder of Target Fund Series B
APS would receive Acquiring Fund Series D RPS. Accordingly, Acquiring Fund RPS
received in connection with the Reorganization would have the same regular
dividend period of twenty-eight days as their Target Fund APS.
DIVIDENDS AND DISTRIBUTIONS. The holders of Preferred Shares of each Fund are
entitled to receive, when, as and if declared by the Board of Trustees of such
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 that Fund's Common Shares.
Dividends on Preferred Shares of each Fund, to the extent payable from tax-
exempt income earned on such Fund's investments, will be exempt from federal
46
income tax in the hands of holders of Preferred Shares of each Fund. Each Fund
is required to allocate net capital gains and other taxable income, if any,
proportionately between its common shares and Preferred Shares. The amount of
taxable income allocated to the Preferred Shares depends upon the amount of such
income realized by the Fund, but is generally not expected to be significant.
Prior to each dividend payment date, the relevant Fund is required to deposit
with its Auction Agent sufficient funds for the payment of such declared
dividends. Neither Fund intends to establish any reserves for the payment of
dividends, and no interest will be payable in respect of any dividend payment or
payment on a Fund's Preferred Shares which may be in arrears.
In normal circumstances, whenever the Target Fund intends to include any net
capital gains or other taxable income in any dividend on Target Fund APS, the
Target 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 the Target 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 Target Fund
retroactively allocates any net capital gains or other taxable income to the
Target Fund APS without having given notice to the Auction Agent the Target Fund
will pay an additional dividend to offset substantially the tax effect thereof.
These provisions are not applicable to Acquiring Fund RPS.
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 Acquiring Fund RPS and Target Fund APS as of a recent auction or
remarketing date.
<Table>
<Caption>
AUCTION/REMARKETING
DIVIDEND DATE FUND RATE
------------------- ---- ----
May 9, 2005 Acquiring Fund Series 2.695%
A RPS
April 25, 2005 Acquiring Fund Series 2.530%
B RPS
May 5, 2005 Target Series A Fund 2.800%
APS
May 6, 2005 Target Fund Series B 2.600%
APS
</Table>
47
The dividend rates in effect at the closing of the Reorganization will be the
rates determined in the auction most recently proceeding such closing.
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 $25,000 per share plus
accumulated but unpaid dividends (whether or not earned or declared) to the date
of redemption plus, in certain circumstances, a redemption premium. 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.
LIQUIDATION RIGHTS. Upon any liquidation, dissolution or winding up of a Fund,
whether voluntary or involuntary, the holders of each Fund's Preferred Shares
will be entitled to receive, out of the assets of the applicable Fund available
for distribution to shareholders, before any distribution or payment is made
upon any of a Fund's Common Shares or any other capital shares of a Fund ranking
junior in right of payment upon liquidation to Preferred Shares of $25,000 per
share together with the amount of any dividends accumulated but unpaid (whether
or not earned or declared) thereon to the date of distribution, and after such
payment the holders of Preferred Shares will be entitled to no other payments
except for any additional dividends (as described above). If such assets of a
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 a 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 such Fund except
for any additional dividends (which are more fully described below). A
consolidation, merger or share exchange of a Fund with or into any other entity
or entities or a sale, whether for cash, shares of stock, securities or
properties, of all or substantially all or any part of the assets of a Fund
shall not be deemed or construed to be a liquidation, dissolution or winding up
of such Fund for this purpose.
ADDITIONAL INFORMATION. For additional information regarding Acquiring Fund
RPS, Target Fund shareholders should consult the Reorganization Statement of
Additional Information, which contains a more complete summary of the terms of
the Acquiring Fund RPS, and the Certificate of Vote of Trustees Establishing
Preferred Shares attached as Appendix B to the Reorganization Statement of
48
Additional Information. Acquiring Fund APS issued in connection with the
Reorganization will be governed by the Certificate of Vote of the Acquiring
Fund, which, upon completion of the Reorganization, will be amended to reflect
the creation of new series and the issuance of additional Acquiring Fund APS.
GOVERNING LAW
Each Fund is organized as a business trust under the laws of The Commonwealth
of Massachusetts. The Target Fund was organized on November 12, 1993 and
commenced operations on January 22, 1993; the Acquiring Fund was organized on
September 9, 1993 and commenced operations on November 19, 1993.
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 the Fund and provides for
indemnification and reimbursement of expenses out of the Fund's property for any
shareholder held personally liable for the obligations of that Fund. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund itself would be unable
to meet its obligations. Given the nature of each Fund's assets and operations,
the possibility of a Fund being unable to meet its obligations is remote and, in
the opinion of counsel to the Funds, the risk to the Funds' respective
shareholders is remote.
Each Fund is also subject to federal securities laws, including the 1940 Act
and the rules and regulations promulgated by SEC thereunder, and applicable
state securities laws. Each Fund is registered as a non-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, 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.
49
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
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 or officer 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
50
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 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, AMEX, CHX,
NASDAQ National Market System or other national securities exchange or national
market system. Shareholders of an open-end investment company may require the
company to redeem their shares at any time (except in certain circumstances as
authorized by or under the 1940 Act) at their net asset value, less such
redemption charge, if any, as might be in effect at the time of a redemption. If
a Fund were converted to an open-end fund, it is likely that new Common Shares
would be sold at net asset value plus a sales load. Following any such
conversion, it is also possible that certain of a Fund's investment policies and
strategies would have to be modified to assure sufficient portfolio liquidity.
In particular a 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 a 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 a Fund to meet its investment objective(s).
VOTING RIGHTS
Voting rights are identical for the holders of each Fund's Common Shares.
Holders of each Fund's Common Shares are entitled to one vote for each share
held. Except as set forth below or as set forth above under "Additional
Information About Preferred Shares of the Funds--Voting Rights," "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 of Fund, 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
51
elect a majority of that Fund's trustees until all dividends have been paid or
declared and set apart for payment.
The affirmative vote of a majority of the holders of Acquiring Fund RPS,
voting as a class, is required to amend, alter or repeal any of the preferences,
rights or powers of holders of Acquiring Fund RPS 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.
52
FINANCIAL HIGHLIGHTS
TARGET FUND. The following schedule presents financial highlights for one
Target Fund Common Share outstanding throughout the periods indicated.
<Table>
<Caption>
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------------------------------------
2004 2003 2002(A) 2001 2000 1999 1998 1997 1996 1995
---- ---- ------- ---- ---- ---- ---- ---- ---- ----
NET ASSET VALUE, BEGINNING
OF THE PERIOD............ $ 14.49 $ 14.44 $ 14.75 $ 13.70 $ 13.14 $ 14.82 $ 14.35 $ 13.67 $ 13.72 $ 12.28
------- ------- ------- ------- ------- ------- -------- -------- -------- --------
Net Investment Income.... .93 1.03 1.09 1.10 1.07 1.07 1.09 1.10 1.12 1.15
Net Realized and
Unrealized Gain/Loss.... .19 .10 (.33) .94 .61 (1.69) .47 .67 (.07) 1.51
Common Share Equivalent
of Distributions Paid to
Preferred Shareholders:
Net Investment Income... (.10) (.09) (.12) (.28) (.36) (.28) (.31) (.31) (.31) (.34)
------- ------- ------- ------- ------- ------- -------- -------- -------- --------
Total from Investment
Operations............... 1.02 1.04 .64 1.76 1.32 (.90) 1.25 1.46 .74 2.32
Distributions Paid to
Common Shareholders:
Net Investment Income... (.91) (.99) (.95) (.71) (.76) (.78) (.78) (.78) (.79) (.88)
------- ------- ------- ------- ------- ------- -------- -------- -------- --------
NET ASSET VALUE, END OF
THE PERIOD............... $ 14.60 $ 14.49 $ 14.44 $ 14.75 $ 13.70 $ 13.14 $ 14.82 $ 14.35 $ 13.67 $ 13.72
======= ======= ======= ======= ======= ======= ======== ======== ======== ========
Common Share Market Price
at End of the Period..... $ 13.14 $ 14.10 $ 13.66 $ 13.28 $11.250 $11.625 $14.5625 $ 12.750 $ 11.750 $ 11.875
Total Return(b)........... -0.36% 10.82% 10.14% 24.99% 3.37% -15.30% 20.97% 15.55% 5.69% 18.79%
Net Assets Applicable to
Common Shares at End of
the Period (In
millions)................ $ 157.8 $ 156.6 $ 156.0 $ 159.4 $ 148.0 $ 142.0 $ 160.2 $ 155.1 $ 147.7 $ 148.3
Ratio of Expenses to
Average Net Assets
Applicable to Common
Shares(c)................ 1.46% 1.56% 1.54% 1.55% 1.66% 1.64% 1.62% 1.65% 1.67% 1.77%
Ratio of Net Investment
Income to Average Net
Assets Applicable to
Common Shares(c)......... 6.46% 7.09% 7.51% 7.77% 8.07% 7.47% 7.47% 7.89% 8.23% 8.74%
Portfolio Turnover........ 40% 33% 33% 44% 22% 39% 18% 23% 24% 75%
SUPPLEMENTAL RATIOS:
Ratio of Expenses to
Average Net Assets
Including Preferred
Shares(c)................ .91% .97% .95% .96% 1.00% 1.01% 1.01% 1.01% 1.01% 1.06%
Ratio of Net Investment
Income to Average Net
Assets Applicable to
Common Shares(d)......... 5.76% 6.44% 6.65% 5.79% 5.38% 5.50% 5.35% 5.67% 5.91% 6.14%
SENIOR SECURITIES:
Total Preferred Shares
Outstanding.............. 3,800 3,800 3,800 3,800 3,800 3,800 1,900 1,900 1,900 1,900
Asset Coverage Per
Preferred Share(e)....... $66,532 $66,202 $66,065 $66,948 $63,958 $62,357 $134,297 $131,631 $127,743 $128,047
Involuntary Liquidating
Preference Per Preferred
Share.................... $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
Average Market Value Per
Preferred Share.......... $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
</Table>
(a) As required, effective November 1, 2001, the Target Fund has adopted the
provisions of the AICPA Audit and Accounting Guide for Investment companies
and began accreting market discount on fixed income securities. The effect
of this change for the year ended October 31, 2002 was to increase net
investment income per share by $.03, decrease net realized and unrealized
gains and losses per share by and supplemental data for periods prior to
October 31, 2002 have not been restated to reflect this change in
presentation.
(b) Total return assumes an investment at the common share market price at the
beginning of the period indicated, reinvestment of all distributions for the
period in accordance with the Target Fund's dividend reinvestment plan, and
sale of all shares at the closing common share market price at the end of
the period indicated.
(c) Ratios do not reflect the effect of dividend payments to preferred
shareholders.
(d) Ratios reflect the effect of dividend payments to preferred shareholders.
(e) Calculated by subtracting the Target Fund's total liabilities (not including
the preferred shares) from the Target Fund's total assets and dividing this
by the number of preferred shares outstanding.
53
ACQUIRING FUND. The following schedule presents financial highlights for one
Acquiring Fund common share outstanding throughout the periods indicated.
<Table>
<Caption>
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------------------------------
2004 2003 2002(A) 2001 2000 1999 1998 1997 1996 1995
---- ---- ------- ---- ---- ---- ---- ---- ---- ----
NET ASSET VALUE, BEGINNING
OF THE PERIOD............. $ 14.10 $ 13.82 $ 13.80 $ 12.95 $ 12.49 $ 14.14 $ 13.61 $ 12.92 $ 12.83 $ 11.51
------- ------- ------- ------- ------- -------- -------- -------- ------- -------
Net Investment Income..... .89 .94 .99 .99 .98 .98 .99 .98 .98 .99
Net Realized and
Unrealized Gain/Loss.... .31 .30 .01 .84 .50 (1.67) .52 .66 .07 1.39
Common Share Equivalent of
Distributions Paid to
Preferred Shareholders:
Net Investment Income... (.08) (.08) (.10) (.24) (.30) (.24) (.26) (.26) (.26) (.29)
------- ------- ------- ------- ------- -------- -------- -------- ------- -------
Total from Investment
Operations................ 1.12 1.16 .90 1.59 1.18 (.93) 1.25 1.38 .79 2.09
Distributions Paid to
Common Shareholders:
Net Investment Income... (.82) (.88) (.88) (.74) (.72) (.72) (.72) (.69) (.70) (.77)
------- ------- ------- ------- ------- -------- -------- -------- ------- -------
NET ASSET VALUE, END OF THE
PERIOD.................... $ 14.40 $ 14.10 $ 13.82 $ 13.80 $ 12.95 $ 12.49 $ 14.14 $ 13.61 $ 12.92 $ 12.83
======= ======= ======= ======= ======= ======== ======== ======== ======= =======
Common Share Market Price
at End of the Period...... $ 12.87 $ 12.78 $ 12.80 $ 12.40 $ 10.75 $10.6875 $13.3125 $ 11.75 $10.625 $ 10.75
Total Return(b)............ 7.37% 6.87% 10.43% 22.63% 7.56% -14.88% 19.91% 17.46% 5.35% 19.87%
Net Assets Applicable to
Common Shares at End of
the Period (In
millions)................. $ 67.4 $ 66.0 $ 64.7 $ 64.6 $ 60.7 $ 58.5 $ 66.2 $ 63.7 $ 60.5 $ 60.1
Ratio of Expenses to
Average Net Assets
Applicable to Common
Shares(c)................. 1.42% 1.42% 1.39% 1.39% 1.50% 1.46% 1.47% 1.53% 1.55% 1.68%
Ratio of Net Investment
Income to Average Net
Assets Applicable to
Common Shares(c).......... 6.27% 6.67% 7.24% 7.37% 7.83% 7.21% 7.11% 7.50% 7.67% 8.13%
Portfolio Turnover......... 41% 50% 47% 33% 41% 59% 44% 39% 47% 84%
SUPPLEMENTAL RATIOS:
Ratio of Expenses to
Average Net Assets
Including Preferred
Shares(c)................. .94% .94% .91% .90% .95% .95% .97% .99% .99% 1.05%
Ratio of Net Investment
Income to Average Net
Assets Applicable to
Common Shares(d).......... 5.70% 6.14% 6.49% 5.58% 5.46% 5.42% 5.22% 5.50% 5.62% 5.77%
SENIOR SECURITIES:
Total Preferred Shares
Outstanding............... 1,360 1,360 1,360 1,360 1,360 1,360 1,360 1,360 1,360 1,360
Asset Coverage Per
Preferred Share(e)........ $74,580 $73,540 $72,583 $72,503 $69,597 $ 67,984 $ 73,695 $ 71,839 $69,489 $69,164
Involuntary Liquidating
Preference Per Preferred
Share..................... $25,000 $25,000 $25,000 $25,000 $25,000 $ 25,000 $ 25,000 $ 25,000 $25,000 $25,000
Average Market Value Per
Preferred Share........... $25,000 $25,000 $25,000 $25,000 $25,000 $ 25,000 $ 25,000 $ 25,000 $25,000 $25,000
</Table>
(a) As required, effective November 1, 2001, the Target Fund has adopted the
provisions of the AICPA Audit and Accounting Guide for Investment Companies
and began accreting market discount on fixed income securities. The effect
of this change for the year ended October 31, 2002, was to increase net
investment income per share by $.02, decrease net realized and unrealized
gains and losses per share by $.02 and increase the ratio of net investment
income to average net assets applicable to common shares by 0.15%. Per
share, ratios and supplemental data for periods prior to October 31, 2002
have not been restated to reflect this change in presentation.
(b) Total return assumes an investment at the common share market price at the
beginning of the period indicated, reinvestment of all distributions for the
period in accordance with the Target Fund's dividend reinvestment plan, and
sale of all shares at the closing common share market price at the end of
the period indicated.
(c) Ratios do not reflect the effect of dividend payments to preferred
shareholders.
(d) Ratios reflect the effect of dividend payments to preferred shareholders.
(e) Calculated by subtracting the Target Fund's total liabilities (not including
the preferred shares) from the Target Fund's total assets and dividing this
by the number of preferred shares outstanding.
54
INFORMATION ABOUT THE REORGANIZATION
GENERAL
Under the Reorganization Agreement (a form of which is attached as Appendix A
to the Reorganization Statement of Additional Information), the Acquiring Fund
will acquire substantially all of the assets, and will assume substantially all
of the liabilities, of the Target Fund, in exchange for Acquiring Fund Common
Shares and Acquiring Fund RPS to be issued by the Acquiring Fund. The Acquiring
Fund will issue and cause to be listed on the NYSE and the CHX additional
Acquiring Fund Common Shares. The Acquiring Fund Common Shares issued to the
Target Fund will have an aggregate net asset value equal to the aggregate net
asset value of the Target Fund Common Shares less the costs of the
Reorganization (though cash may be paid in lieu of any fractional shares). The
Acquiring Fund RPS issued to the Target Fund will have an aggregate liquidation
preference equal to the aggregate liquidation preference of the Target Fund APS.
Upon receipt by the Target Fund of such shares, the Target Fund will (i)
distribute the Acquiring Fund Common Shares to the holders of Target Fund Common
Shares and (ii) distribute the Acquiring Fund RPS to the holders of Target Fund
APS. As soon as practicable after the Closing Date for the Reorganization, the
Target Fund will deregister as an investment company under the 1940 Act and
dissolve under applicable state law.
The Target Fund will distribute the Acquiring Fund Common Shares and the
Acquiring Fund RPS received by it pro rata to its holders of record of Target
Fund Common Shares and Target Fund APS, as applicable, in exchange for such
shareholders' shares in the Target Fund. Such distribution will be accomplished
by opening new accounts on the books of the Acquiring Fund in the names of the
common and preferred shareholders of the Target Fund and transferring to those
shareholder accounts the Acquiring Fund Common Shares and the Acquiring Fund RPS
previously credited on those books to the accounts of the Target Fund. Each
newly-opened account on the books of the Acquiring Fund for the former common
shareholders of the Target Fund will represent the respective pro rata number of
Acquiring Fund Common Shares (rounded down, in the case of fractional shares
held in an account other than a Dividend Reinvestment Plan account, to the next
largest number of whole shares) due such shareholder. No fractional Acquiring
Fund Common Shares will be issued (except for shares held in a Dividend
Reinvestment Plan account). In the event of fractional shares held in an account
other than a Dividend Reinvestment Plan account, the Acquiring Fund's transfer
agent will aggregate all such fractional Acquiring Fund Common Shares and sell
the resulting whole shares on the NYSE for the account of all holders of such
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
55
former preferred shareholders of Target Fund APS would represent the respective
pro rata number of Acquiring Fund RPS due such shareholder. See "Terms of the
Reorganization Agreement--Surrender and Exchange of Share Certificates" below
for a description of the procedures to be followed by Target Fund shareholders
to obtain their Acquiring Fund Common Shares or Acquiring Fund RPS (and cash in
lieu of fractional shares, if any).
As a result of the Reorganization, every holder of Target Fund Common Shares
would own Acquiring Fund Common Shares that (except for cash payments received
in lieu of fractional shares) will have an aggregate net asset value immediately
after the Closing Date equal to the aggregate net asset value of that
shareholder's Target Fund Common Shares immediately prior to the Closing Date
less the costs of the Reorganization. Since the Acquiring Fund Common Shares
will be issued at net asset value in exchange for the net assets of the Target
Fund having a value equal to the aggregate net asset value of those Acquiring
Fund Common Shares, the net asset value per share of Acquiring Fund Common
Shares should remain virtually unchanged by the Reorganization except for its
share of the reorganization costs. Similarly, the aggregate liquidation
preference of the Acquiring Fund RPS to be issued to the Target Fund will equal
the aggregate liquidation preference of the Target Fund APS. Each holder of
Target Fund APS would receive Acquiring Fund RPS that would have an aggregate
liquidation preference immediately after the Closing Date equal to the aggregate
liquidation preference of that shareholder's Target Fund APS immediately prior
to the Closing Date. The liquidation preference per share of the Acquiring Fund
RPS 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 RPS or Target Fund APS. However, as a result of the
Reorganization, a shareholder of either Fund will hold a reduced percentage of
ownership in the larger combined entity than he or she did in either of the
separate Funds.
No sales charge or fee of any kind will be charged to shareholders of the
Target Fund in connection with their receipt of Acquiring Fund Common Shares or
Acquiring Fund RPS in the Reorganization. Holders of Target Fund APS will find
that the remarketing or auction dates and dividend payment dates for the
Acquiring Fund RPS received in the Reorganization are ordinarily (i.e., except
in the case of a special dividend period) on a 7-day schedule for Series A and a
28-day schedule for Series B. Any change in the standard dividend period should
not materially affect the value of the Preferred Shares held by holders of
Target Fund APS. The remarketing or auction procedures for the Acquiring Fund
RPS and the Target Fund APS are similar. As a result of the Reorganization, the
last dividend period for the Target Fund APS prior to the Closing Date and the
initial dividend period for the Acquiring Fund RPS issued in connection with the
Reorganization after the
56
Closing Date may be shorter than the ordinary dividend period for such shares.
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, a form of which is attached as Appendix A to the
Reorganization Statement of Additional Information.
VALUATION OF ASSETS AND LIABILITIES. The respective assets of each of the
Funds will be valued after the close of business on the NYSE (generally, 4:00
p.m., Eastern time) on the Closing Date. For the purpose of determining the net
asset value of a Common Share of each Fund, the value of the securities held by
the Fund plus any cash or other assets (including interest accrued but not yet
received) minus all liabilities (including accrued expenses) and the aggregate
liquidation value of the outstanding Preferred Shares of the Fund is divided by
the total number of Common Shares of the Fund outstanding at such time. Daily
expenses, including the fees payable to the Adviser, will accrue on the Closing
Date.
AMENDMENTS AND CONDITIONS. The Reorganization Agreement may be amended at any
time prior to the Closing Date with respect to any of the terms therein. The
obligations of each Fund pursuant to the Reorganization Agreement are subject to
various conditions, including a registration statement on Form N-14 being
declared effective by the SEC, approval by the shareholders of the Target Fund,
approval of the issuance of additional Acquiring Fund Common Shares by holders
of Common Shares of the Acquiring Fund, receipt of an opinion of counsel as to
tax matters, receipt of an opinion of counsel as to corporate and securities
matters and the continuing accuracy of various representations and warranties of
the Funds being confirmed by the respective parties.
POSTPONEMENT; TERMINATION. Under the Reorganization Agreement, the Board of
Trustees of either Fund may cause the Reorganization to be postponed or
abandoned in certain circumstances should such Board determine that it is in the
best interests of the shareholders of its respective Fund to do so.
The Reorganization Agreement may be terminated, and the Reorganization
abandoned at any time (whether before or after adoption thereof by the
shareholders of either of the Funds) prior to the Closing Date, or the Closing
Date may be postponed: (i) by mutual consent of the Boards of Trustees of the
Funds and (ii) by the Board of Trustees of either Fund if any condition to that
Fund's obligations set forth in the Reorganization Agreement has not been
fulfilled or waived by such Board.
SURRENDER AND EXCHANGE OF SHARE CERTIFICATES. After the Closing Date, each
holder of an outstanding certificate or certificates formerly representing
Target Fund Common Shares will be entitled to receive, upon surrender of his or
her
57
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 held in an account other than a Dividend
Reinvestment Plan account. Promptly after the Closing Date, the transfer agent
for the Acquiring Fund Common Shares will mail to each holder of certificates
formerly representing Target Fund Common Shares a letter of transmittal for use
in surrendering his or her certificates for certificates representing Acquiring
Fund Common Shares and cash in lieu of any fractional shares held in an account
other than a Dividend Reinvestment Plan account.
Please do not send in any share certificates at this time. Upon consummation
of the Reorganization, holders of Target Fund Common Shares will be furnished
with instructions for exchanging their share certificates for Acquiring Fund
share certificates and, if applicable, cash in lieu of fractional shares.
From and after the Closing Date, certificates formerly representing Target
Fund Common Shares will be deemed for all purposes to evidence ownership of the
number of full Acquiring Fund Common Shares distributable with respect to the
Target Fund Common Shares held before the Reorganization as described above and
as shown in the table above, provided that, until such share certificates have
been so surrendered, no dividends payable to the holders of record of Target
Fund Common Shares as of any date subsequent to the Closing Date will be
reinvested pursuant to the Acquiring Fund's Dividend Reinvestment Plan, but will
instead be paid in cash. Once such Target Fund share certificates have been
surrendered, participants in the Target Fund's Dividend Reinvestment Plan will
automatically be enrolled in the Dividend Reinvestment Plan of the Acquiring
Fund.
From and after the Closing Date, there will be no transfers on the share
transfer books of the Target Fund. If, after the Closing Date, certificates
representing Target Fund Common Shares are presented to the Acquiring Fund, they
will be cancelled and exchanged for certificates representing Acquiring Fund
Common Shares, as applicable, and cash in lieu of fractional shares, if any,
distributable with respect to such Target Fund Common Shares in the
Reorganization.
Preferred Shares are held in "street name" by the Depository Trust Company and
all transfers will be accomplished by book entry.
EXPENSES OF THE REORGANIZATION. In the event the Reorganization is approved
and completed, the expenses of the Reorganization will be shared by the Target
Fund and the Acquiring Fund in proportion to their projected declines in total
operating expenses as a result of the Reorganization. In the event the
Reorganization is not completed, the Adviser will bear the costs associated with
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
58
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 Joint 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 U.S. federal income tax purposes (generally, assets held for
investment). This summary does not address all of the U.S. federal income tax
consequences that may be relevant to a particular shareholder or to shareholders
who may be subject to special treatment under U.S. federal income tax laws. No
ruling has been or will be obtained from the IRS regarding any matter relating
to the Reorganization. No assurance can be given that the IRS would not assert,
or that a court would not sustain, a position contrary to any of the tax aspects
described below. Prospective investors must consult their own tax advisers as to
the U.S. federal income tax consequences of the Reorganization, as well as the
effects of state, local and non-U.S. tax laws.
It is a condition to closing the Reorganization that each of the Target Fund
and the Acquiring Fund receives an opinion from Skadden, Arps, Slate, Meagher &
Flom LLP ("Skadden Arps"), dated as of the Closing Date, regarding the
characterization of the Reorganization as a "reorganization" within the meaning
of Section 368(a) of the Internal Revenue Code. As such a reorganization, the
U.S. federal income tax consequences of the Reorganization can be summarized as
follows:
- No gain or loss will be recognized by the Target Fund or the Acquiring
Fund upon the transfer to the Acquiring Fund of substantially all of the
assets of the Target Fund in exchange for Acquiring Fund Common Shares and
Acquiring Fund RPS and the assumption by the Acquiring Fund of
59
substantially all of the liabilities of the Target Fund and the subsequent
liquidation of the Target Fund.
- No gain or loss will be recognized by a shareholder of the Target Fund who
exchanges, as the case may be, all of his, her or its Target Fund Common
Shares for Acquiring Fund Common Shares pursuant to the Reorganization
(except with respect to cash received in lieu of a fractional share of the
Acquiring Fund, as discussed below) or all of his, her or its Target Fund
APS solely for Acquiring Fund RPS pursuant to the Reorganization.
- The aggregate tax basis of the Acquiring Fund Common Shares or Acquiring
Fund RPS, 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 shall for which cash
is received).
- The holding period of the Acquiring Fund Common Shares or Acquiring Fund
RPS, as the case may be, received by a shareholder of the Target Fund
pursuant to the Reorganization will include the holding period of the
shares of the Target Fund surrendered in exchange therefor.
- A shareholder of the Target Fund that receives cash in lieu of a
fractional 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 is more than one year as of the date of the exchange.
- The Acquiring Fund's tax basis in the Target Fund's assets received by the
Acquiring Fund pursuant to the Reorganization will equal the tax basis of
such assets in the hands of the Target Fund immediately prior to the
Reorganization, and the Acquiring Fund's holding period of such assets
will include the period during which the assets were held by the Target
Fund.
The Acquiring Fund intends to continue to be taxed under the rules applicable
to regulated investment companies as defined in Section 851 of the Internal
Revenue Code, which are the same rules currently applicable to the Target Fund
and its shareholders.
The opinion of Skadden Arps will be based on 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
60
accordance with the Reorganization Agreement and as described herein. An opinion
of counsel is not binding on the IRS or any court.
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.
SHAREHOLDER APPROVAL
Under the Declaration of Trust of the Target Fund (as amended to date and
including the Certificate of Vote of Trustees Establishing Preferred Shares of
the Target Fund), relevant Massachusetts law and the rules of the NYSE and CHX,
shareholder approval of the Reorganization Agreement requires the affirmative
vote of shareholders of the Target Fund representing more than 50% of the
outstanding Target Fund Common Shares and Target Fund APS, each voting
separately as a class.
61
------------------------------------------------------------------------------
PROPOSAL 2: ISSUANCE OF ADDITIONAL ACQUIRING FUND COMMON SHARES
------------------------------------------------------------------------------
Pursuant to the Reorganization Agreement, which is described more fully under
"Proposal 1: Reorganization of the Target Fund" herein, the Acquiring Fund will
acquire substantially all of the assets and assume substantially all of the
liabilities of the Target Fund in exchange for an equal aggregate value of
Acquiring Fund Common Shares and Acquiring Fund RPS. The Target Fund will
distribute Acquiring Fund Common Shares to holders of Target Fund Common Shares
and Acquiring Fund RPS to holders of Target Fund APS, and will then terminate
its registration under the 1940 Act and dissolve under applicable state law. The
Acquiring Fund Board, based upon its evaluation of all relevant information,
anticipates that the Reorganization will benefit holders of Acquiring Fund
Common Shares.
The aggregate net asset value of Acquiring Fund Common Shares received in the
Reorganization will equal the aggregate net asset value on the Target Fund
Common Shares held immediately prior to the Reorganization, less the costs of
the Reorganization (though you may receive cash for fractional shares). The
aggregate liquidation preference of Acquiring Fund RPS received in the
Reorganization will equal the aggregate liquidation preference Target Fund APS
held immediately prior to the Reorganization. The Reorganization will result in
no dilution of net asset value of the Acquiring Fund Common Shares, other than
to reflect the costs of the Reorganization. No gain or loss will be recognized
by the Acquiring Fund or its shareholders in connection with the Reorganization.
The Acquiring Fund will continue to operate as a registered closed-end
investment company with the investment objective and policies described in this
Joint Proxy Statement/Prospectus.
In connection with the Reorganization and as contemplated by the
Reorganization Agreement, the Acquiring Fund will issue additional Acquiring
Fund Common Shares and list such shares on the NYSE and the CHX. While
applicable state and federal law does not require the shareholders of the
Acquiring Fund to approve the Reorganization, applicable NYSE and CHX rules
require the common shareholders of the Acquiring Fund to approve the issuance of
additional Acquiring Fund Common Shares to be issued in connection with the
Reorganization.
SHAREHOLDER APPROVAL
Shareholder approval of the issuance of additional Acquiring Fund Common
Shares requires the affirmative vote of a majority of the votes cast on the
proposal, provided that the total votes cast on the proposal represents more
than 50% in interest of all securities entitled to vote on the proposal. For
more information regarding voting requirements, see the section entitled "Other
Information--Voting Information and Requirements" below.
62
- ------------------------------------------------------------------------------
OTHER INFORMATION
- ------------------------------------------------------------------------------
VOTING INFORMATION AND REQUIREMENTS
GENERAL. A list of shareholders of the Target Fund entitled to be present and
vote at the Special Meeting will be available at the offices of the Target Fund,
1 Parkview Plaza, Oakbrook Terrace, Illinois 60181-5555, for inspection by any
shareholder during regular business hours for ten days prior to the date of the
Special Meeting.
RECORD DATE. The Board of Trustees of each Fund has fixed the close of
business on June 13, 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 10,806,700
Target Fund Common Shares and 3,800 Target Fund APS and the Acquiring Fund had
outstanding 4,682,127 Acquiring Fund Common Shares and 1,360 Acquiring Fund RPS.
PROXIES. Shareholders may vote by appearing in person at the Special Meeting,
by returning the enclosed proxy card or by casting their vote via telephone or
the internet using the instructions provided on the enclosed proxy card and more
fully described below. Shareholders of each Fund have the opportunity to submit
their voting instructions via the internet by utilizing a program provided by a
third-party vendor hired by the Funds, or by "touch-tone" telephone voting. The
giving of such a proxy will not affect your right to vote in person should you
decide to attend the Special Meeting. To use the internet, please access the
internet address found on your proxy card. To record your voting instructions by
automated telephone, please call the toll-free number listed on your proxy card.
The internet and automated telephone voting instructions are designed to
authenticate shareholder identities, to allow shareholders to give their voting
instructions, and to confirm that shareholders' instructions have been recorded
properly. Shareholders submitting their voting instructions via the internet
should understand that there may be costs associated with internet access, such
as usage charges from internet access providers and telephone companies, that
must be borne by the shareholders. Any person giving a proxy may revoke it at
any time prior to its exercise by giving written notice of the revocation to the
Secretary of the Fund at the address indicated above, by delivering a duly
executed proxy bearing a later date, by recording later-dated voting
instructions via the internet or automated telephone or by attending the Special
Meeting and voting in person. The giving of a proxy will not affect your right
to vote in person if you attend the Special Meeting and wish to do so.
All properly executed proxies received prior to the Special Meeting will be
voted in accordance with the instructions marked thereon or otherwise as
provided
63
therein. Unless instructions to the contrary are marked, proxies will be voted
"FOR" the approval of each proposal. Abstentions and broker non-votes (i.e.,
where a nominee such as a broker, holding shares for beneficial owners,
indicates that instructions have not been received from the beneficial owners,
and the nominee does not exercise discretionary authority) are not treated as
votes "FOR" a proposal.
With respect to Proposal 1, abstentions and broker non-votes have the same
effect as votes "AGAINST" the proposals since their approvals are based on the
affirmative vote of a majority of the total Target Fund Common Shares
outstanding and a majority of the total Target Fund APS outstanding, each voting
separately as a class. With respect to Proposal 2, abstentions will not be
treated as votes "FOR" the proposal but will be counted as votes cast on the
proposal and will therefore have the same effect as votes "AGAINST" the
proposal. Broker non-votes will not be treated as vote "FOR" the proposal and
will not be counted as votes cast on the proposal and will therefore have the
effect of reducing the aggregate number of shares voting on the proposal and
reducing the number of votes "FOR" required to approve the proposal.
With respect to each proposal, a majority of the outstanding shares entitled
to vote on the proposal must be present in person or by proxy to have a quorum
to conduct business at the Special Meeting. Abstentions and broker non-votes
will be deemed present for quorum purposes.
CERTAIN VOTING INFORMATION REGARDING TARGET FUND APS. Pursuant to the rules of
the NYSE, Target Fund APS held in "street name" may be voted under certain
conditions by broker-dealer firms and counted for purposes of establishing a
quorum of that Fund if no instructions are received one business day before the
Special Meeting or, if adjourned, one business day before the day to which the
Special Meeting is adjourned. These conditions include, among others, that (i)
at least 30% of the Target Fund's preferred shares outstanding have voted on the
Reorganization and (ii) less than 10% of the Target Fund's preferred shares
outstanding have voted against the Reorganization. In such instance, the
broker-dealer firm will vote such uninstructed Target Fund APS on the
Reorganization in the same proportion as the votes cast by all holders of Target
Fund APS who voted on the Reorganization. The 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.
64
SHAREHOLDER INFORMATION
As of June 13, 2005, to the knowledge of the Funds, no shareholder owned
beneficially more than 5% of the outstanding Common Shares of either Fund.
The table below indicates the number of Common Shares of the Funds owned
beneficially by each trustee that owns shares of the Funds, as of June 13, 2005,
and the percentage of such trustee's Common Shares to the total Common Shares
outstanding for such Fund.
<Table>
<Caption>
TARGET FUND ACQUIRING FUND
---------------------------------- ----------------------------------
COMMON SHARES OWNED COMMON SHARES OWNED
AS A PERCENTAGE OF AS A PERCENTAGE OF
COMMON COMMON SHARES COMMON COMMON SHARES
SHARES OWNED OUTSTANDING SHARES OWNED OUTSTANDING
------------ ------------------- ------------ -------------------
Arch.................... 500 < 1% 511 < 1%
Dammeyer................ 0 0% 11,000 < 1%
Heagy................... 0 0% 100 < 1%
Kennedy................. 0 0% 100 < 1%
Sonnenschein............ 0 0% 350 < 1%
Whalen.................. 0 0% 500 < 1%
</Table>
To the knowledge of the Funds, no executive officers owned, directly or
beneficially, Common Shares of the Funds as of June 13, 2005 and no trustees or
executive officers owned Preferred Shares of the Funds as of that date.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 30(f) of the 1940 Act and Section 16(a) of the Securities Exchange Act
of 1934, as amended, require the Funds' trustees, officers, investment adviser,
affiliated persons of the investment adviser and persons who own more than 10%
of a registered class of 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.
65
SOLICITATION OF PROXIES
Solicitation of proxies on behalf of the Funds is being made primarily by the
mailing of this Notice and Joint Proxy Statement/Prospectus with its enclosures
on or about June , 2005. Shareholders whose shares are held by nominees such
as brokers can vote their proxies by contacting their respective nominee. In
addition to the solicitation of proxies by mail, employees of the Adviser and
its affiliates as well as dealers or their representatives may, without
additional compensation, solicit proxies in person or by mail, telephone,
telegraph, facsimile or oral communication. The Funds have retained
Computershare Fund Services ("CFS") to make telephone calls to shareholders of
the Funds to remind them to vote. CFS will be paid a project management fee as
well as fees charged on a per call basis and certain other expenses. Management
estimates that the solicitation by CFS will cost approximately $ for the
Target Fund and $ for the Acquiring Fund. Proxy solicitation expenses are
an expense of the Reorganization which will be borne by the Target Fund and the
Acquiring Fund in proportion to their projected declines in total operating
expenses as a result of the Reorganization.
LEGAL MATTERS
Certain legal matters concerning the federal income tax consequences of the
Reorganizations and the issuance of Acquiring Fund Common Shares and Acquiring
Fund RPS will be passed upon by Skadden Arps, which serves as counsel to the
Target Fund and the Acquiring Fund. Wayne W. Whalen, a partner of Skadden Arps,
is a trustee of both the Target Fund and the Acquiring Fund.
OTHER MATTERS TO COME BEFORE THE MEETING
The Board of Trustees of each Fund knows of no business other than that
described in this Joint Proxy Statement/Prospectus which will be presented for
consideration at the Special Meeting. If any other matters are properly
presented, it is the intention of the persons named on the enclosed proxy card
to vote proxies in accordance with their best judgment.
Representatives of D&T will attend the Special Meeting, will have the
opportunity to make a statement if they desire to do so and will be available to
answer appropriate questions.
In the event that a quorum is present at the Special Meeting but sufficient
votes to approve any of the proposals are not received, proxies (including
abstentions and broker non-votes) will be voted in favor of one or more
adjournments of the Special Meeting to permit further solicitation of proxies on
the such proposals, provided that the Board of Trustees of each Fund determines
that such an adjournment and additional solicitation is reasonable and in the
interest of shareholders based on a consideration of all relevant factors,
including the percentage of votes then cast, the
66
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 Strategic Sector
Municipal Trust
Van Kampen Select Sector
Municipal Trust
June , 2005
67
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.
I-1
(Such differentiation applies when an entity has both senior and subordinated
obligations, secured and unsecured obligations, or operating company and holding
company obligations.) Accordingly, in the case of junior debt, the rating may
not conform exactly with the category definition.
AAA: An obligation rated "AAA" has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated "AA" differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher-
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
SPECULATIVE GRADE
BB, B, CCC, CC, C: Obligations rated "BB", "B", "CCC", "CC" and "C" are
regarded as having significant speculative characteristics. "BB" indicates the
least degree of speculation and "C" the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC: An obligation rated "CCC" is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse
I-2
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC: An obligation rated "CC" is currently highly vulnerable to nonpayment.
C: A subordinated debt or preferred stock obligation rated "C" is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The "C" rating may be used to cover a situation
where a bankruptcy petition has been filed or similar action taken, but payments
on this obligation are being continued. A "C" also will be assigned to a
preferred stock issue in arrears on dividends or sinking fund payments, but that
is currently paying.
D: An obligation rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating.
N.R.: This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular obligation as a matter of policy.
SHORT-TERM ISSUE CREDIT RATINGS
A 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
I-3
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.
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+").
I-4
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.
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.
I-5
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.
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.
I-6
P-3
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability
to repay short-term obligations.
NP
Issuers (or supporting institutions) rated Not Prime do not fall within any of
the Prime rating categories.
NOTE: Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced
by the senior-most long-term rating of the issuer, its guarantor or
support-provider.
I-7
[VAN KAMPEN INVESTMENTS LOGO]
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 11, 2005
STATEMENT OF ADDITIONAL INFORMATION
RELATING TO THE ACQUISITION OF THE ASSETS AND LIABILITIES OF
VAN KAMPEN STRATEGIC SECTOR MUNICIPAL TRUST
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN SELECT SECTOR MUNICIPAL TRUST
DATED , 2005
This Reorganization Statement of Additional Information is available to the
shareholders of Van Kampen Strategic Sector Municipal Trust (the "Target Fund")
in connection with a proposed transaction (the "Reorganization") whereby Van
Kampen Select Sector 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 remarketed preferred shares
with a par value of $0.01 per share and a liquidation preference of $25,000 per
share ("Acquiring Fund RPS"). The Target Fund will distribute Acquiring Fund
Common Shares to holders of common shares of the Target Fund ("Target Fund
Common Shares") and Acquiring Fund APS to holders of auction preferred shares of
the Target Fund ("Target Fund APS"), and will then terminate its registration
under the Investment Company Act of 1940, as amended (the "1940 Act"), and
dissolve under applicable state law. A copy of a form of the Agreement and Plan
of Reorganization between the Target Fund and the Acquiring Fund is attached
hereto as Appendix A. Unless otherwise defined herein, capitalized terms have
the meanings given to them in the Proxy Statement/Prospectus.
This Reorganization Statement of Additional Information is not a prospectus
and should be read in conjunction with the Proxy Statement/Prospectus dated June
, 2005 relating to the proposed Reorganization of the Target Fund into the
Acquiring Fund. A copy of the Proxy Statement/Prospectus may be obtained,
without charge, by writing to the Van Kampen Client Relations Department at 1
Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, Illinois 60181-5555 or by
calling (800) 341-2929 (TDD users may call (800) 421-2833).
The Acquiring Fund will provide, without charge, upon the written or oral
request of any person to whom this Reorganization 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
Reorganization Statement of Additional Information is a part.
This Reorganization 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-13
Management of the Target Fund and the Acquiring Fund........ S-15
Portfolio Transactions and Brokerage Allocation............. S-18
Additional Information Relating to Remarketed Preferred
Shares of the Acquiring Fund.............................. S-20
Financial Statements........................................ S-34
Appendix A Form of Agreement and Plan of Reorganization..... A-1
Appendix B Certificate of Vote of Trustees.................. B-1
Appendix C Acquiring Fund Annual Report Dated October 31,
2004...................................................... C-1
Appendix D Target Fund Annual Report Dated October 31,
2004...................................................... D-1
Appendix E Proxy Voting Procedures.......................... E-1
</Table>
TRUSTEES AND OFFICERS
GENERAL
The business and affairs of each Fund are managed under the direction of
each Fund's Board of Trustees and each Fund's officers appointed by each Fund's
Board of Trustees. The Acquiring Fund and the Target Fund share the same Board
of Trustees and executive officers. The tables below list the trustees and
executive officers of each Fund and their principal occupations during the last
five years, other directorships held by trustees and their affiliations, if any,
with Van Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Asset
Management (the "Adviser"), Van Kampen Funds Inc. (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
Reorganization 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 82 Trustee/Director/
Blistex Inc. since 1993 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, 80 Trustee/Director/
33971 Selva Road since 2003 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 82 Trustee/Director/
CAC, L.L.C. since 1993 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. Prior to
Investment (EGI), a company January 2005,
that makes private investments Director of the
in other companies. University of Chicago
Hospitals and Health
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 & 80 Trustee/Director/
Heidrick & Struggles since 2003 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 80 Trustee/Director/
1744 R Street, NW since 2003 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 82 Trustee/Director/
736 North Western Avenue since 1993 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 80 Trustee/Director/
423 Country Club Drive since 2003 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 82 Trustee/Director/
1126 E. 59th Street since 1994 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 80 Trustee/Director/
815 Cumberstone Road since 2003 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 80 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 82 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 82 Trustee/Director/
333 West Wacker Drive since 1993 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 each Fund and earn a rate of return
S-7
determined by reference to the return on the common shares of each Fund or other
funds in the Fund Complex as selected by the respective Non-Affiliated Trustee.
To the extent permitted by the 1940 Act, each 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 each 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 each 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 each 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
Estimated
Aggregate Maximum
Pension or Annual Total
Aggregate Aggregate Retirement Benefits from Compensation
Compensation Compensation Benefits the Fund before
from the from the Accrued as Complex Deferral from
Target Acquiring Part of Upon Fund
Name(1) Fund(2) Fund(2) Expenses(3) Retirement(4) Complex(5)
------- ------------ ------------ ----------- ------------- -------------
INDEPENDENT TRUSTEES
David C. Arch $2,770 $1,836 $ 35,277 $147,500 $192,530
Jerry D. Choate 3,681 2,316 82,527 126,000 200,002
Rod Dammeyer 2,776 1,842 63,782 147,500 208,000
Linda Hutton Heagy 3,480 2,115 24,465 142,500 184,784
R. Craig Kennedy 3,681 2,316 16,911 142,500 200,002
Howard J Kerr 2,976 2,042 140,743 146,250 208,000
Jack E. Nelson 3,681 2,316 97,294 109,500 200,002
Hugo F. Sonnenschein 2,976 2,042 64,476 147,500 208,000
Suzanne H. Woolsey 3,681 2,316 58,450 142,500 200,002
INTERESTED TRUSTEE
Wayne W. Whalen(1) 2,976 2,042 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 each Fund and certain other funds in the Fund
Complex. J. Miles Branagan retired as a member of the Board of Trustees of
each Fund and other funds in the Fund Complex on December 31, 2004. Theodore
A. Myers retired as a
S-8
member of the Board of Trustees of each Fund and other funds in the Fund Complex
on December 31, 2003.
(2) The amounts shown in this column represent the aggregate compensation before
deferral with respect to each Fund's fiscal year ended October 31, 2004. The
following Trustees deferred compensation from the Acquiring Fund during the
fiscal year ended October 31, 2004: Mr. Choate, $2,316; Mr. Dammeyer,
$1,842; Ms. Heagy, $2,115; Mr. Nelson, $2,316; Mr. Sonnenschein, $2,042; and
Mr. Whalen, $2,042. The cumulative deferred compensation (including
interest) accrued with respect to each trustee, including former trustees,
from the Acquiring Fund as of October 31, 2004 is as follows: Mr. Choate,
$3,079; Mr. Dammeyer, $39,314; Ms. Heagy, $2,919; Mr. Nelson, $3,053; Mr.
Sonnenschein, $34,496; and Mr. Whalen, $33,545. The following trustees
deferred compensation from the Target Fund during the fiscal year ended
October 31, 2004: Mr. Choate, $3,681; Mr. Dammeyer, $2,776; Ms. Heagy,
$3,480; Mr. Nelson, $3,681; Mr. Sonnenschein, $2,976; and Mr. Whalen,
$2,976. The cumulative deferred compensation (including interest) accrued
with respect to each trustee, including former trustees, from the Target
Fund as of October 31, 2004 is as follows: Mr. Choate, $4,855; Mr. Dammeyer,
$47,547; Ms. Heagy, $4,718; Mr. Nelson, $4,813; Mr. Sonnenschein, $41,562;
and Mr. Whalen, $41,264. 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 of each Fund 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 each Fund
as defined by the 1940 Act and (2) are "independent" of each Fund as defined by
the New York Stock Exchange, American Stock Exchange and Chicago Stock Exchange
listing standards.
Each 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 each
Fund's independent registered public accounting firm, reviews
S-9
with such independent registered public accounting firm the scope and results of
each 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. Each 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 each Fund with management as well as with
the independent registered public accounting firm of each 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 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 each Fund that each Fund's
audited financial statements be included in each Fund's annual report to
shareholders for the most recent fiscal year for filing with the SEC.
Each 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.
Each 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 each Fund, monitors
corporate governance matters and makes recommendations to each 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 each Fund select and nominate any other nominee Independent Trustees for the
Fund. While the Independent Trustees of each 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 each Board. Nominations from shareholders should be in
writing and sent to the Independent Trustees as described below.
During each Fund's last fiscal year, each Board of Trustees held 16
meetings. During each Fund's last fiscal year, the audit committee of each Board
held 5 meetings, the brokerage and services committee of each Board held 4
meetings and the governance committee held 5 meetings.
SHARE OWNERSHIP
Excluding any deferred compensation balances as described in the
Compensation Table, as of December 31, 2004, the most recently completed
calendar year prior to the date of this Statement of Additional Information,
each trustee of each Fund beneficially
S-10
owned equity securities of each Fund and of all of the funds in the Fund Complex
overseen by the trustee in the dollar range amounts specified below.
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 Acquiring Fund............... $10,001- none $10,001- $1- $1- none none $1- none
$50,000 $50,000 $10,000 $10,000 $10,000
Dollar range of equity securities
in the Target Fund............... $1- none none none none none none none none
$10,000
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- $50,001
$100,000 $10,000 $100,000 $50,000 $100,000 $10,000 $10,000 $50,000 $100,000
</Table>
INTERESTED TRUSTEES
<Table>
<Caption>
TRUSTEE
----------------------------
MERIN POWERS WHALEN
-------- -------- --------
Dollar range of equity securities in the Acquiring Fund..... none none none
Dollar range of equity securities in the Target Fund........ none none none
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>
S-11
Including deferred compensation balances (which are amounts deferred and
thus retained by each 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 each Fund had in
the aggregate, combining beneficially owned equity securities and deferred
compensation of each Fund and of all of the funds in the Fund Complex overseen
by the trustee, the dollar range of amounts specified below.
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 Acquiring
Fund........................... $1- none $10,001- $1- $1- none none $1- none
$10,000 $50,000 $10,000 $10,000 $10,000
Dollar range of equity
securities and deferred
compensation in the Target
Fund........................... $1- none none none none none none none none
$10,000
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 over
$100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000
</Table>
INTERESTED TRUSTEES
<Table>
<Caption>
TRUSTEE
------------------------------
MERIN POWERS WHALEN
-------- -------- --------
Dollar range of equity
securities and deferred
compensation in the Acquiring
Fund........................... none none $1-
$10,000
Dollar range of equity
securities and deferred
compensation in the Target
Fund........................... none none none
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 June 13, 2005, the trustees and officers of the Target Fund as a
group owned less than 1% of the shares of the Target Fund. As of June 13, 2005,
the trustees and officers of the Acquiring Fund as a group owned less than 1% of
the shares of the Acquiring Fund.
CODE OF ETHICS
Each 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 each 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 each Fund or other Van Kampen funds, or that such employees take
unfair advantage of their relationship with each 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
S-12
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 each 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
Each Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, each Fund retains the
Adviser to manage the investment of each 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 each Fund's investment objective(s). The Adviser also
furnishes offices, necessary facilities and equipment, provides administrative
services to each Fund, renders periodic reports to each Fund's Board of Trustees
and permits its officers and employees to serve without compensation as trustees
or officers of each Fund if elected to such positions. Each Fund, however, bears
the costs of its day-to-day operations, including auction agent or remarketing
agent fees, fees for broker-dealers participating in auctions of such Fund's
preferred shares, 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 a Fund for any actions or omissions in the absence of willful
misfeasance, bad faith, negligence or reckless disregard of its obligations and
duties under the Advisory Agreement.
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 each Fund's benefit and to advise
the trustees of each 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 of Van Kampen Investments to receive in connection
with each Fund's portfolio transactions or other arrangements which may benefit
each Fund.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by each Fund's Board of Trustees of each Fund
or (ii) by a vote of a majority of each 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
S-13
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 of each Fund,
including the non-interested trustees, considered the nature, quality and scope
of the services provided by the Adviser, the performance, fees and expenses of
each 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 of each Fund 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 each Fund. The Board of Trustees of each Fund
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 each Fund's advisory fee schedule. The Board of
Trustees of each Fund considered comparative advisory fees of each Fund and
other investment companies at different asset levels, and considered the trends
in the industry versus historical and projected sales and redemptions of each
Fund. The Board of Trustees of each Fund 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 of each Fund discussed the
financial strength of the Adviser and its affiliated companies and the
capability of the personnel of the Adviser. The Board of Trustees of each Fund
reviewed the statutory and regulatory requirements for approval of advisory
agreements. The Board of Trustees of each Fund, including the non-interested
trustees, evaluated all of the foregoing and determined, in the exercise of its
business judgment, that approval of each Advisory Agreement was in the best
interests of each Fund and its shareholders.
ADVISORY FEES
The Adviser received the following approximate advisory fees from each
Fund:
<Table>
<Caption>
FISCAL YEAR ENDED OCTOBER 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------
Acquiring Fund.................................... $ 631,900 $ 648,000 $ 639,000
Target Fund....................................... $1,583,200 $1,636,700 $1,631,800
</Table>
ACCOUNTING SERVICES AGREEMENT
Each Fund has entered into an accounting services agreement pursuant to
which the Adviser provides accounting services to the Fund supplementary to
those provided by the custodian. Such services are expected to enable the Fund
to more closely monitor and maintain its accounts and records. Each Fund pays
all costs and expenses related to such services, including all salary and
related benefits of accounting personnel, as well as the overhead and expenses
of office space and the equipment necessary to render such services. Each Fund
shares together with the other Van Kampen funds in the cost of providing such
services with 25% of such costs shared proportionately based on the respective
number of classes of securities issued per fund and the remaining 75% of such
costs based proportionately on the respective net assets per fund.
S-14
ACCOUNTING SERVICES FEES
The Adviser received the following approximate accounting services fees
from each Fund:
<Table>
<Caption>
FISCAL YEAR ENDED OCTOBER 31,
------------------------------
2004 2003 2002
-------- -------- --------
Acquiring Fund........................................... $13,000 $13,400 $14,800
Target Fund.............................................. $18,300 $19,800 $21,600
</Table>
LEGAL SERVICES AGREEMENT
Each Fund and certain other Van Kampen funds have entered into legal
services agreements pursuant to which Van Kampen Investments provides legal
services, including without limitation, accurate maintenance of each fund's
minute books and records, preparation and oversight of each fund's regulatory
reports and other information provided to shareholders, as well as responding to
day-to-day legal issues on behalf of the funds. Payment by the funds for such
services is made on a cost basis for the salary and salary-related benefits,
including but not limited to bonuses, group insurance and other regular wages
for the employment of personnel. Of the total costs for legal services provided
to the funds, one half of such costs are allocated equally to each fund and the
remaining one half of such costs are allocated to specific funds based on
monthly time records.
LEGAL SERVICES FEES
Van Kampen Investments received the following approximate legal services
fees from each Fund:
<Table>
<Caption>
FISCAL YEAR ENDED OCTOBER 31,
------------------------------
2004 2003 2002
-------- -------- --------
Acquiring Fund........................................... $12,900 $13,200 $10,400
Target Fund.............................................. $13,400 $14,600 $11,700
</Table>
MANAGEMENT OF THE TARGET FUND AND THE ACQUIRING FUND
OTHER ACCOUNTS MANAGED BY THE ACQUIRING FUND PORTFOLIO MANAGERS
As of October 31, 2004, Dennis Pietrzak 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.
OTHER ACCOUNTS MANAGED BY THE TARGET FUND PORTFOLIO MANAGERS
As of October 31, 2004, Timothy D. Haney 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.
S-15
OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS OF BOTH THE TARGET FUND AND THE
ACQUIRING FUND
As of October 31, 2004, Robert Wimmel managed 39 registered investment
companies with a total of $11.35 billion in assets; 0 pooled investment vehicles
other than registered investment companies; and 0 other accounts.
As of October 31, 2004, John Reynoldson managed 36 registered investment
companies with a total of $8.25 billion in assets; 0 pooled investment vehicles
other than registered investment companies; and 295 other accounts with a total
of $239 million 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
Portfolio managers receive a combination of base compensation and
discretionary compensation, comprised of a cash bonus and several deferred
compensation programs described below. The methodology used to determine
portfolio manager compensation is applied across all accounts managed by the
portfolio manager.
BASE 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 designated funds advised by the
Adviser or its affiliates. The award is subject to vesting and other
conditions. Portfolio managers must notionally invest a minimum of 25% to
a maximum of 50% of the IMDCP deferral into a combination of the
designated funds they manage or directly support that are included in the
IMDCP fund menu.
- Select Employees' Capital Accumulation Program (SECAP) awards--a
voluntary program that permits employees to elect to defer a portion of
their discretionary
S-16
compensation and notionally invest the deferred amount across a range of
designated investment funds, including funds advised by the Adviser or
its affiliates; and
- Voluntary Equity Incentive Compensation Program (VEICP) awards--a
voluntary program that permits employees to elect to defer a portion of
their discretionary compensation to invest in Morgan Stanley stock units.
Several factors determine discretionary compensation, which can vary by
portfolio management team and circumstances. In order of relative importance,
these factors include
- Investment performance. A portfolio manager's compensation is linked to
the pre-tax investment performance of the accounts managed by the
portfolio manager. Investment performance is calculated for one-, three
and five-year periods measured against a fund's benchmark (as set forth
in a fund's prospectus), indices and/or peer groups. Generally, the
greatest weight is placed on the three- and five-year periods.
- Revenues generated by the investment companies, pooled investment
vehicles and other accounts managed by the portfolio manager.
- Contribution to the business objectives of the Adviser.
- The dollar amount of assets managed by the portfolio manager.
- Market/compensation survey research by independent third parties.
- Other qualitative factors, such as contributions to client objectives.
- Performance of 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 October 31, 2004, the end of each Fund's most recently completed
fiscal year, the dollar range of securities beneficially owned by each portfolio
manager in each Fund is shown below:
<Table>
<Caption>
PIETRZAK HANEY REYNOLDSON WIMMEL
-------- ----- ---------- ------
Acquiring Fund................. N/A
Target Fund.................... N/A
</Table>
- ------------------------------------
(1) This amount includes amounts held directly or notionally in the Fund through
certain defined contribution and/or defined compensation programs.
S-17
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for
each 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 each Fund's
portfolio business, the policies and practices in this regard are subject to
review by each Fund's Board of Trustees.
As most transactions made by each Fund are principal transactions at net
prices, each Fund generally incurs little or no brokerage costs. The portfolio
securities in which each 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.
Each 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 each Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker-dealers and in negotiating prices and any brokerage commissions
on such transactions, the Adviser considers the firm's reliability, integrity
and financial condition and the firm's execution capability, the size and
breadth of the market for the security, the size of and difficulty in executing
the order, and the best net price. There are many instances when, in the
judgment of the Adviser, more than one firm can offer comparable execution
services. In selecting among such firms, consideration may be given to those
firms which supply research and other services in addition to execution
services. The Adviser is authorized to pay higher commissions to brokerage firms
that provide it with investment and research information than to firms which do
not provide such services if the Adviser determines that such commissions are
reasonable in relation to the overall services provided. No specific value can
be assigned to such research services which are furnished without cost to the
Adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser to each 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 each 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-18
The Adviser also may place portfolio transactions, to the extent permitted
by law, with brokerage firms affiliated with each 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 each 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 each Fund. In making such allocations among
each Fund and other advisory accounts, the main factors considered by the
Adviser are the respective sizes of each 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 each Fund may effect securities
transactions, are affiliated persons (as defined in the 1940 Act) of each Fund
or affiliated persons of such affiliates, including Morgan Stanley or its
subsidiaries. Each Fund's Board of Trustees has adopted certain policies
incorporating the standards of Rule 17e-1 issued by the SEC under the 1940 Act
which require that the commissions paid to affiliates of each Fund must be
reasonable and fair compared to the commissions, fees or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time.
The rule and procedures also contain review requirements and require the Adviser
to furnish reports to the trustees and to maintain records in connection with
such reviews. After consideration of all factors deemed relevant, the trustees
will consider from time to time whether the advisory fee for each Fund will be
reduced by all or a portion of the brokerage commission paid to affiliated
brokers.
S-19
Unless otherwise disclosed below, neither Fund paid any commissions to
affiliated brokers during the last three fiscal years. Each Fund paid the
following commissions to brokers during the fiscal years shown:
<Table>
<Caption>
AFFILIATED BROKERS
ALL BROKERS MORGAN STANLEY DW INC.
----------- ----------------------
ACQUIRING FUND:
Commissions paid:
Fiscal year ended October 31, 2004.....
Fiscal year ended October 31, 2003.....
Fiscal year ended October 31, 2002.....
FISCAL YEAR 2004 PERCENTAGES:
Commissions with affiliate to total commissions.....
Value of brokerage transactions with affiliate to
total transactions...............................
</Table>
<Table>
<Caption>
AFFILIATED BROKERS --
ALL BROKERS MORGAN STANLEY DW INC.
----------- ----------------------
TARGET FUND:
COMMISSIONS PAID:
Fiscal year ended December 31, 2004... $
Fiscal year ended December 31, 2003...
Fiscal year ended December 31, 2002...
FISCAL YEAR 2004 PERCENTAGES:
Commissions with affiliate to total
commissions........................
Value of brokerage transactions with
affiliate to total transactions....
</Table>
During the fiscal year ended October 31, 2004, neither Fund paid any
brokerage commissions to brokers selected primarily on the basis of research
services provided to the Adviser.
ADDITIONAL INFORMATION
RELATING TO REMARKETED PREFERRED SHARES OF THE ACQUIRING FUND
The following is a brief description of the terms of the Acquiring Fund RPS
(the "RPS"). This description does not purport to be complete and is subject to
and qualified in its entirety by reference to the Declaration of Trust,
including the Certificate of Vote establishing and fixing the rights and
preferences of the shares of RPS, attached hereto as Appendix B (the
"Certificate of Vote" and together with the Acquiring Fund's Declaration of
Trust, the "RPS Provisions"). For purposes of this section, capitalized terms
not otherwise defined herein have the meanings ascribed to them in the
Certificate of Vote.
S-20
GENERAL
The Declaration of Trust currently authorizes the issuance of an unlimited
number of Common Shares and 100,000,000 Preferred Shares (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 RPS Provisions,
the Fund will be authorized to issue up to 1,360 shares of RPS.
The Declaration of Trust provides that shareholders are not liable for any
liabilities of the Fund, requires inclusion of a clause to that effect in every
agreement entered into by the Fund and indemnifies shareholders against any such
liability. Although shareholders of an unincorporated business trust established
under Massachusetts law may, in certain limited circumstances, be held
personally liable for the obligations of the Trust as though they were general
partners, the provisions of the Declaration of Trust described in the foregoing
sentence make the likelihood of such personal liability remote.
DIVIDENDS
GENERAL. The RPS Provisions provide that holders of each series of RPS
will be entitled to receive, when, as and if declared by the Board of Trustees
of the Fund, out of funds legally available therefor, cumulative cash dividends,
at the respective rates per annum set forth on the cover page hereof for the
Initial Dividend Period for each such series and, in the case of any other
Dividend Period for a series, at the Applicable Dividend Rate for the applicable
Dividend Period, and no more (except as otherwise provided below under
"Additional Dividends"), payable on the respective dates set forth below and,
except as described below, set by the Remarketing Agent in accordance with the
remarketing procedures described under "Remarketing" herein and in the Statement
of Additional Information.
INITIAL DIVIDEND PAYMENT DATES AND DIVIDEND PERIODS. The Initial Dividend
Period for each series of RPS will commence on the Date of Original Issue and
will end on Monday, January 10, 1994 for Series A RPS and Monday, January 17,
1994 for Series B RPS. The Date of Original Issue means, for each series of RPS,
the date on which the Fund originally issues such series. Dividends for the
Initial Dividend Period for Series A RPS and Series B RPS will be payable, when,
as and if declared, on Tuesday, January 11, 1994 and Tuesday, January 18, 1994,
respectively. With respect to each series, dividends for each Dividend Period
thereafter will be payable, when, as and if declared, on each respective
Dividend Payment Date, subject to certain exceptions.
SUBSEQUENT DIVIDEND PERIODS. With respect to each series of RPS, after the
Initial Dividend Period for such series, a Dividend Period will commence on each
Dividend Payment Date (which, except during a Non-Payment Period, will be a
Settlement Date). Each subsequent Dividend Period for such series, with the
exception of 7-day Dividend Periods, will comprise, beginning with and including
the date on which it commences, seven consecutive days with respect to Series A
RPS and 28 consecutive days with respect to Series B RPS or, in the event the
Board of Trustees has designated such Dividend Period as a Special Dividend
Period, such number of consecutive days or whole years as shall be designated by
the Board of Trustees. Notwithstanding the foregoing, any adjustment of the
remarketing schedule by the Remarketing Agent which includes an
S-21
adjustment of a Settlement Date will lengthen or shorten Dividend Periods by
causing them always to end on and include the day before the Settlement Date as
so adjusted.
SPECIAL DIVIDEND PERIODS. The Board of Trustees may at any time designate
a subsequent Dividend Period with respect to any series of RPS on the
Remarketing Date next preceding the commencement of such Dividend Period as a
Special Dividend Period with such number of days or whole years (subject to
adjustment as described above) as the Board of Trustees shall specify, subject
to certain conditions. See "Description of RPS -- Dividends -- Special Dividend
Periods." in the Statement of Additional Information:
DIVIDEND PAYMENT DATES. Dividends on each series of RPS will accumulate
from its Date of Original Issue and will be payable, when, as and if declared by
the Board of Trustees, out of funds legally available therefor, on the
applicable Dividend Payment Dates to the Securities Depository (or such other
record holder) as of the Business Day preceding the applicable Dividend Payment
Date. The Dividend Payment Dates will be (a) with respect to a Special Dividend
Period of more than 28 days, the first Business Day of each calendar month after
the designation of such Special Dividend Period, provided that in any calendar
month in which a Remarketing Date is scheduled to occur, dividends shall be paid
on the Business Day next succeeding such Remarketing Date, and (b) with respect
to any other Dividend Period, the day after the last day thereof, provided that
if any such day is not a Business Day, the Dividend Payment Date will be the
first Business Day after such day.
DIVIDEND PAYMENTS. So long as there is a Securities Depository with
respect to the RPS, each dividend on such shares will be paid to the Securities
Depository or its nominee as the record holder of all shares. The Securities
Depository will credit the accounts of the Agent Members of the beneficial
owners of RPS in accordance with the Securities Depository's normal procedures.
Each Agent Member will be responsible for holding or disbursing such payments to
the holders of the RPS for which it is acting in accordance with the
instructions of such holders.
The amount of dividends per share payable on shares of any series of the
RPS on any date on which dividends shall be payable on such RPS shall be
computed by multiplying the respective Applicable Dividend 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 or Dividend
Periods are less than 1 year and 360 for all other Dividend Period or Dividend
Periods, and applying the rate obtained against $25,000. Any dividend payment
made on the RPS shall first be credited against the earliest accumulated but
unpaid dividends due with respect to such RPS.
RESTRICTIONS ON DIVIDENDS AND OTHER PAYMENTS. Under the 1940 Act, the Fund
may not declare dividends (other than dividends payable in Common Shares) or
make other distributions on Common Shares or purchase any such shares if, at the
time of the declaration, distribution or purchase, as applicable (and after
giving effect thereto), asset coverage (as defined in the 1940 Act) with respect
to the outstanding RPS would be less than 200% (or such other percentage as may
in the future be required by law). The Fund's RPS Provisions set forth certain
additional restrictions on the payment of dividends
S-22
or other distributions in respect of the Common Shares that apply for so long as
any RPS are outstanding. See "Description of RPS -- Dividends -- Restrictions on
Dividends and Other Payments" in the Statement of Additional Information.
Upon any failure to pay dividends on the RPS for two years or more, the
holders of RPS will acquire certain additional voting rights. See "Voting
Rights" below. Such rights shall be the exclusive remedy of the holders of the
RPS upon any failure to pay dividends on shares of the Fund.
ADDITIONAL DIVIDENDS. If the Fund allocates any net capital gains or other
income taxable for federal income tax purposes to RPS without having given
advance notice thereof to the Paying Agent and the Remarketing Agent as
described above under "Remarketing -- Remarketing Schedule" (such allocation is
referred to herein as a "Retroactive Taxable Allocation"), the Fund will make
certain payments to holders of the RPS to which such Retroactive Taxable
Allocation was made to offset the tax effect thereof. 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 Paying Agent, the Remarketing
Agent and to each holder of shares (initially Cede as nominee of DTC) during
such taxable year at such holder's address as the same appears or last appeared
on the stock books of the Fund. The Fund will, within 30 days after such notice
is given to the Paying Agent and the Remarketing Agent, pay to the Paying Agent
(who will then distribute to such holder of RPS), out of funds legally available
therefor, an amount equal to the aggregate Additional Dividends (as defined
below) with respect to all Retroactive Taxable Allocations made to such holders
during the taxable year in question. See "Taxation" herein and in the Statement
of Additional Information.
An "Additional Dividend" means payment to a holder of RPS of an amount
which, after taking into account the 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 defined
below) to be equal to the dollar amount of the dividends which would have been
received by such holder if the Retroactive Taxable Allocations had not been
made. Such Additional Dividend shall be calculated (a) without consideration
being given to the time value of money, (b) assuming no holder of RPS is subject
to the federal alternative minimum tax with respect to dividends received from
the Fund, (c) assuming the portion of the dividend to which each Retroactive
Taxable Allocation applies would be taxable in the hands of each holder of RPS
at (i) in the case of an allocation of capital gains, the greater of the maximum
marginal regular federal income tax rate on net capital gains applicable to
individuals or corporations in effect during the taxable year in question,
whichever is greater, or (ii) in the case of an allocation of ordinary income,
the greater of the maximum marginal regular federal income tax rate on ordinary
income applicable to individuals or corporations in effect during the taxable
year in question, whichever is greater, and (d) assuming the Additional Dividend
will not be subject to federal income tax.
ASSET MAINTENANCE
The Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the RPS Provisions. These requirements are
summarized below.
S-23
1940 ACT ASSET COVERAGE. The Fund will be required under the RPS
Provisions to maintain, with respect to the RPS, as of the last Business Day of
each month in which any RPS are outstanding, asset coverage of at least 200%
with respect to senior securities which are shares, including the RPS (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 shares of a
closed-end investment company as a condition of paying dividends on its common
shares) ("1940 Act Asset Coverage"). If the Fund fails to maintain 1940 Act
Asset Coverage and such failure is not cured as of the last Business Day of the
following calendar month (the "1940 Act Cure Date"), the Fund will be required
under certain circumstances to redeem certain of the RPS.
RPS BASIC MAINTENANCE AMOUNT. So long as RPS are outstanding, the Fund
will be required under the RPS Provisions to maintain as of each Valuation Date
assets having in the aggregate a Discounted Value at least equal to the RPS
Basic Maintenance Amount established by the rating agency or agencies then
rating the RPS. See "Description of RPS -- Asset Maintenance -- RPS Basic
Maintenance Amount" in the Statement of Additional Information. If the Fund
fails to meet such requirement on any Valuation Date and such failure is not
cured on or before the third Business Day after such Valuation Date (the "RPS
Basic Maintenance Cure Date"), the Fund will be required under certain
circumstances to redeem certain of the RPS.
MINIMUM LIQUIDITY LEVEL
Pursuant to S&P guidelines, so long as S&P is rating the RPS and such
shares remain Outstanding, the Fund will be required under the RPS Provisions to
have, as of each Valuation Date, Deposit Securities with maturity or tender
dates not later than the days preceding the first respective Dividend Payment
Dates (collectively, "Dividend Coverage Assets") for each RPS Outstanding of
each series that follow such Valuation Date and having a value not less than the
Dividend Coverage Amount (the "Minimum Liquidity Level"). So long as S&P is
rating the RPS, 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. The "Dividend
Coverage Amount," as of any Valuation Date, means (a) the aggregate amount of
dividends that will accumulate on each RPS Outstanding to (but not including)
the first Dividend Payment Date for such share that follows such Valuation Date
plus any liabilities of the Fund that are required to be paid on or prior to the
next Dividend Payment Date and less (b) the combined value of Deposit Securities
irrevocably deposited for the payment of dividends on RPS and Receivables for
Municipal Securities Sold which become due prior to the Dividend Payment Date,
interest with respect to municipal securities which is payable to the Fund prior
to or on such Dividend Payment Date. "Deposit Securities" generally means cash
and municipal securities rated at least A-1+ or SP-1+ by S&P, except that, for
purposes of the requirements regarding Optional Redemption and for certain other
purposes as set forth in the RPS Provisions, such municipal securities shall be
considered "Deposit Securities" only if they are also rated P-1, MIG-1 or VMIG-1
by Moody's. The definitions of "Deposit Securities," "Dividend Coverage Assets"
and "Dividend Coverage Amount" may be changed from time to time by the Fund
without shareholder approval, but only in the event the Fund receives
confirmation from S&P that any such change would not impair the ratings then
assigned by S&P to the RPS.
S-24
REDEMPTION
OPTIONAL REDEMPTION. After the Initial Dividend Period, the Fund at its
option may redeem RPS of any series, in whole or in part, on any scheduled
Dividend Payment Date applicable to the shares of such series called for
redemption, out of funds legally available therefor, at a redemption price of
$25,000 per share plus (in the case of a Special Dividend Period of 365 days or
more only) a premium, if any, resulting from the designation of a Premium Call
Period, plus an amount equal to dividends thereon accumulated but unpaid to the
date fixed for redemption (whether or not earned or declared), provided that no
RPS of a series will be subject to optional redemption during any Non-Call
Period to which such series of RPS is subject. See "Description of RPS --
Redemption -- Optional Redemption" in the Statement of Additional Information.
MANDATORY REDEMPTION. The Fund will be required to redeem, at a redemption
price equal to $25,000 per share plus accumulated but unpaid dividends to the
date fixed by the Board of Trustees for redemption (whether or not earned or
declared), certain of the RPS Outstanding to the extent permitted under the 1940
Act and Massachusetts law, if the Fund fails to maintain as of each Valuation
Date assets having in the aggregate a Discounted Value at least equal to the RPS
Basic Maintenance Amount or as of the last Business Day of any calendar month
fails to maintain the 1940 Act Asset Coverage and such failure is not cured on
or before the RPS Basic Maintenance Cure Date or the 1940 Act Cure Date (herein
respectively referred to as a "Cure Date"), as the case may be. The number of
shares of RPS to be redeemed will be equal to the lesser of (a) the minimum
number of shares of RPS the redemption of which, if deemed to have occurred
immediately prior to the opening of business on the Cure Date, would result in
the satisfaction of the RPS Basic Maintenance Amount or the 1940 Act Asset
Coverage, as the case may be, on such Cure Date (provided that if there is no
such minimum number of shares the redemption of which would have such result,
all RPS then outstanding will be redeemed), and (b) the maximum number of shares
of RPS that can be redeemed out of funds expected to be legally available
therefor.
LIQUIDATION
Upon a liquidation, dissolution or winding up of the affairs of the Fund,
whether voluntary or involuntary, the holders of RPS then outstanding will be
entitled, before any assets of the Fund will be distributed among or paid over
to the holders of the Common Shares or any other class of stock of the Fund
junior to the RPS as to liquidation payments, to be paid an amount equal to the
liquidation preference with respect to such shares. The liquidation preference
for the RPS is $25,000 per share plus an amount equal to all dividends thereon
(whether or not earned or declared) accumulated but unpaid to the date of final
distribution in same-day funds, together with any applicable Additional
Dividends in connection with the liquidation of the Fund. After any such
payment, the holders of RPS will not be entitled to any further participation in
any distribution of assets of the Fund.
VOTING RIGHTS
Except as otherwise indicted in this Prospectus or the Statement of
Additional Information and except as otherwise required by applicable law,
holders of RPS will have
S-25
equal voting rights with holders of Common Shares and any other Preferred Shares
(one vote per share) and will vote together with holders of Common Shares and
any other Preferred Shares as a single class.
The 1940 Act and the RPS Provisions require that the holders of Preferred
Shares, including the RPS, 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 full years' dividends on the RPS are unpaid. The holders of
RPS will vote as a separate class or classes on certain other matters as
required under the RPS Provisions, the 1940 Act and Massachusetts law. In
addition, each series of RPS may vote as a separate series under certain
circumstances.
REMARKETING
GENERAL
The Fund's RPS Provisions provide with respect to each series of the RPS
that the Applicable Dividend Rate for each Dividend Period of such series
(except the Initial Dividend Period) (a) unless such Dividend Period commences
during a Non-Payment Period, will be equal to the lower of the rate per annum
that the Remarketing Agent advises results on the Remarketing Date preceding the
first day of such Dividend Period from implementation of the remarketing
procedures set forth in the RPS Provisions and the applicable Maximum Dividend
Rate, or (b) if such Dividend Period commences during a Non-Payment Period, will
be equal to the Non-Payment Period Rate. During a Non-Payment Period, each
Dividend Period commencing after the first day thereof will be a 7-day Dividend
Period with respect to such series, the RPS of such series will not be subject
to Tender and Dividend Reset, and the holders of RPS of such series will not be
able to tender their shares in a Remarketing.
The Remarketing Agent for each series of RPS will be Merrill Lynch, Pierce,
Fenner & Smith Incorporated. For its services in determining the Applicable
Dividend Rate for each series of RPS and remarketing such shares, the
Remarketing Agent will receive from the Fund a fee of approximately .25% per
annum of the average amount of RPS outstanding, provided that should the
Dividend Period with respect to a series of RPS be a Special Dividend Period of
365 days or more, then during such Dividend Period the fee for each Outstanding
share of such series will be determined by mutual consent of the Fund and the
Remarketing Agent, based upon the selling concessions that would be applicable
to an underwriting of a fixed or variable rate preferred stock issue with a
similar dividend period at the commencement of such Dividend Period. The
Remarketing Agent will pay to selected broker-dealers a portion of the fee
described above, reflecting shares sold through such broker-dealers to
purchasers in Remarketings. Under certain circumstances, shares of RPS tendered
in a Remarketing may be tendered or purchased by the Remarketing Agent for its
own account.
REMARKETING SCHEDULE
Each Remarketing for a series of RPS will take place over a two-day period
consisting of the Remarketing Date (normally each Monday with respect to Series
A RPS and each fourth Monday with respect to Series B RPS) and the Settlement
Date (normally each
S-26
Tuesday with respect to Series A RPS and each fourth Tuesday with respect to
Series B RPS). Such dates or the method of establishing such dates shall be
determined by the Board of Trustees from time to time.
The Series A RPS will generally have Dividend Periods of seven days and the
Series B RPS will generally have Dividend Periods of 28 days (each with the
exception of the Initial Dividend Period), 7-day Dividend Periods (which may
result from the non-payment of dividends or a failure to remarket) and Special
Dividend Periods. If the 28th day of a Dividend Period for a series of RPS is a
day which is not immediately preceding a Business Day, then such Dividend
Period, in the Remarketing Agent's discretion, may be adjusted to end on a day
which immediately precedes a Business Day and may range in length from 25 to 31
days, and the subsequent Dividend Period for such series shall be increased or
decreased by the number of days by which such Dividend Period was respectively
decreased or increased. Further, if a Dividend Period which is not a 7-day
Dividend Period is immediately preceded by a 7-day Dividend Period, then such
Dividend Period shall be decreased or increased by the smallest number of days,
if any, necessary for such Dividend Period to end on the day such Dividend
Period would have ended if it had not been immediately preceded by a seven-day
Dividend Period.
RESTRICTIONS ON TRANSFER
GENERAL. By the terms of each series of RPS, unless, during a Non-Payment
Period with respect to such series, the Fund has waived this requirement, a
purchaser may sell, transfer or otherwise dispose of any RPS of such series held
by it only pursuant to orders placed in a Remarketing therefor or if such
purchaser or its Agent Member advises the Remarketing Agent of such transfer.
SECURITIES DEPOSITORY. The Depository Trust Company ("DTC") will initially
act as Securities Depository for the Agent Members with respect to RPS of each
series. Except as discussed below, as long as DTC is the Securities Depository,
one certificate for the outstanding RPS of each series will be registered in the
name of Cede & Co. ("Cede"), as nominee of the Securities Depository, and Cede
will be the holder of record of all RPS of each series. Each certificate will
bear a legend to the effect that such certificate is issued subject to the
provisions contained in the RPS Provisions. Unless the Fund shall have waived
this requirement during a Non-Payment Period with respect to a series, the Fund
will issue stop transfer instructions to the Paying Agent for RPS of such
series. If the Fund shall have waived the foregoing requirement during a
Non-Payment Period with respect to a series, a holder of RPS of such series may
obtain a certificate or certificates for such shares.
SECONDARY MARKET. The Remarketing Agent has advised the Fund that it may
maintain a secondary market in each series of the RPS outside of Remarketings.
The Remarketing Agent would earn customary brokerage commissions for trades in
the secondary market, which would be in addition to the annual remarketing fee
paid by the Fund. However, the Remarketing Agent has no obligation to make a
secondary market for either series of the RPS outside of Remarketings, and there
can be no assurance that a secondary market for either series of the RPS will
develop or, if it does develop, that it will provide holders with liquidity of
investment. The Remarketing Agent reserves the right to terminate its market
making activities in either series of the RPS at any time without notice. The
RPS will not be registered on any stock exchange or on the National
S-27
Association of Securities Dealers Automated Quotation System. If the Remarketing
Agent purchases RPS in the secondary market or in a Remarketing, it may be in
the position of owning RPS subject to a Remarketing at the time it determines
the Applicable Dividend Rate for such shares in such Remarketing and may tender
such shares in such Remarketing. As a result, the Remarketing Agent may have a
potential conflict of interest in establishing the Applicable Dividend Rate for
such shares.
TENDER BY HOLDERS
Each series of RPS is subject to Tender and Dividend Reset only at the end
of each Dividend Period applicable to such share.
With respect to each series of RPS, except during a Non-Payment Period for
such series, at the end of the Initial Dividend Period, and at the end of each
subsequent Dividend Period, each holder of RPS of such series may elect on a
share-for-share basis to tender some or all of its shares to the Remarketing
Agent for remarketing at a price of $25,000 per share, or to hold some or all of
its shares for the next applicable Dividend Period (which will be either a 7-day
Dividend Period with respect to Series A RPS or a 28-day Dividend Period with
respect to Series B RPS or, if designated by the Board of Trustees, a Special
Dividend Period). However, in the event that (a) the Board of Trustees has
designated such Dividend Period as a Special Dividend Period and (b) there is no
Remarketing Agent, the Remarketing Agent is not required to conduct a
Remarketing or the Remarketing Agent is unable to remarket in the Remarketing
following such Remarketing Date all RPS of such series tendered (or deemed
tendered) at a price of $25,000 per share, then, except during a Non-Payment
Period, the next succeeding Dividend Period for all RPS of such series will be a
7-day Dividend Period.
RPS of each series may be tendered only in a Remarketing with respect to
such series which commences on the Remarketing Date immediately prior to the end
of the current Dividend Period with respect thereto. By 9:00 am., New York City
time, on such Remarketing Date, the Remarketing Agent will, after canvassing the
market and considering prevailing market conditions at the time for such shares
and similar securities, provide to holders of such shares non-binding
indications of the Applicable Dividend Rate for such shares for the next
succeeding 7-day Dividend Period with respect to Series A RPS or 28-day Dividend
Period with respect to Series B RPS; provided, however, that if the Board of
Trustees has designated a Special Dividend Period with respect to such series,
the Remarketing Agent will provide to holders of RPS of such series a
non-binding indication only of the Applicable Dividend Rate for such Special
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 (BUT NOT GREATER THAN THE APPLICABLE MAXIMUM DIVIDEND RATE) AND WILL
NOT BE DETERMINED UNTIL AFTER A HOLDER IS REQUIRED TO ELECT TO HOLD OR SELL ITS
RPS.
By 12:00 noon, New York City time, on any Remarketing Date with respect to
a series of RPS, each holder of RPS of such series must notify the Remarketing
Agent of its desire (on a share-by-share basis) either to tender such share at a
price of $25,000 per share or to continue to hold such share for the next
Dividend Period for such series (i.e., a 7-day Dividend Period with respect to
Series A RPS, a 28-day Dividend Period with respect to Series B RPS or a Special
Dividend Period). Any such notice is irrevocable and
S-28
may not be waived, except that the Remarketing Agent may, in its sole
discretion, (a) at the request of a tendering holder that has tendered one or
more shares of RPS of such series to the Remarketing Agent, waive such holder's
tender, and thereby enable such holder to continue to hold such share or shares
for a 7-day Dividend Period with respect to Series A RPS or a 28-day Dividend
Period with respect to Series B RPS or a designated Special Dividend Period, if
applicable, as agreed to by the holder and the Remarketing Agent at such time,
so long as such tendering holder has indicated to the Remarketing Agent that it
would accept the new Applicable Dividend Rate for such series for such Dividend
Period, such waiver to be contingent upon the Remarketing Agent's being able to
remarket all shares of such series tendered to it in such Remarketing, and (b)
at the request of a holder that has elected to hold one or more of its RPS of
such series, waive such holder's election with respect thereto. Notwithstanding
the foregoing, any holder or prospective purchaser of RPS of such series may
informally indicate to the Remarketing Agent its Applicable Dividend Rate
preferences for such series. The Applicable Dividend Rate with respect to a
Dividend Period may, however, be greater or less than such informal rate
preferences.
When RPS are tendered in a Remarketing therefor, the Remarketing Agent will
use its best efforts to remarket such tendered shares on behalf of the holders
thereof, but there can be no assurance that the Remarketing Agent will be able
to remarket all RPS tendered. If the Remarketing Agent is unable to find a
purchaser or purchasers for all RPS tendered in a Remarketing therefor, the
shares to be sold in such Remarketing will be selected either pro rata or by lot
from among all the tendered shares. If any RPS so tendered is not remarketed, a
holder thereof may be required to continue to hold some or all of its shares at
least until the end of the next Dividend Period therefor or sell such shares
outside a Remarketing. Thus, under certain circumstances, shares of RPS may be
illiquid investments. If one or more RPS of any series which have been tendered
in a Remarketing with respect to such series are not remarketed, all RPS of such
series will have successive 7-day Dividend Periods and all RPS of such series
will be entitled to dividends at the Maximum Dividend Rate until the first day
of the next successive Dividend Period for such series on the first day of which
all RPS of such series tendered for remarketing have been remarketed.
Neither the Remarketing Agent nor the Fund is obligated to purchase shares
of RPS in a Remarketing or otherwise, nor is the Fund required to redeem shares
of RPS in the event of failed Remarketings.
Subject to the condition set forth in the next sentence, holders of RPS
that fail on a Remarketing Date for such shares to elect to tender or hold such
shares will be deemed to have elected to continue to hold such shares for the
next applicable Dividend Period. If, on a Remarketing Date for RPS of any
series, the current Dividend Period with respect to such shares is a Special
Dividend Period of more than 90 days, or the succeeding Dividend Period with
respect to such shares has been designated by the Board of Trustees as a Special
Dividend Period of more than 90 days, then holders of such shares that fail to
tender or hold such shares will be deemed to have elected to tender such shares.
The Remarketing Agent may purchase tendered shares for its own account.
S-29
APPLICABLE DIVIDEND RATES
By 3:00 p.m., New York City time, on each Remarketing Date with respect to
a series of RPS, the Remarketing Agent will determine the Applicable Dividend
Rate for such series to the nearest one thousandth (.001) of 1% per annum for
the next Dividend Period (i.e., a 7-day Dividend Period with respect to Series A
RPS, a 28-day Dividend Period with respect to Series B RPS or, if designated, a
Special Dividend Period). The Applicable Dividend Rate for each such Dividend
Period, except as otherwise described herein, will be the dividend rate per
annum that the Remarketing Agent determines to be the lowest rate that will
enable it to remarket on behalf of the holders thereof the RPS of such series in
such Remarketing and tendered to it on such Remarketing Date at a price of
$25,000 per share. The Applicable Dividend Rate for RPS of each series will be
determined as aforesaid by the Remarketing Agent in its sole discretion and will
be conclusive and binding on the Fund and all holders of RPS of such series.
Except during a Non-Payment Period for a series of RPS, the Applicable
Dividend Rate for any Dividend Period for such series will not be more than the
Maximum Dividend Rate applicable to such series. The Maximum Dividend Rate for a
series of RPS will depend upon the credit rating or ratings assigned to such
shares and upon the duration of the Dividend Period for such series.
The Maximum Dividend Rate for any Dividend Period for a series of RPS at
any date on which the Applicable Dividend Rate for such series is determined
will be the Applicable Percentage of the Reference Rate.
"Reference Rate" means (a) with respect to any Dividend Period of less than
one year, the higher of the applicable "AA" Composite Commercial Paper Rate and
the Taxable Equivalent of the Short-Term Municipal Bond Rate, or (b) with
respect to any Special Dividend Period of one year or longer, the Treasury Rate.
The Applicable Percentage used in determining the Maximum Dividend Rate for
any Dividend Period will vary with the lower of the credit rating or ratings
assigned at such time to the RPS by S&P and Moody's (or, if S&P or Moody's, or
both, shall not make such rating available, the equivalent of either or both of
such ratings by a Substitute Rating Agency or two Substitute Rating Agencies or,
in the event only one such rating shall be available, such rating) as follows:
<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 Paying Agent and
the Remarketing Agent of its intent to allocate income taxable for federal
income tax purposes to the RPS prior to the Remarketing establishing the
Applicable Dividend Rate for such shares, the applicable percentage in the
foregoing table shall be divided by the quantity 1 minus (a) in the case of
capital gains dividends, the greater of the maximum marginal
S-30
regular federal income tax rate on capital gains applicable to individuals or
corporations, whichever is greater, or (b) in the case of ordinary income
dividends, the maximum marginal regular federal income tax rate on ordinary
income applicable to individuals or corporations, whichever is greater. If the
ratings for the RPS are split between two of the foregoing categories, the lower
rating will determine the prevailing rating.
There is no minimum Applicable Dividend Rate in respect of any Dividend
Period for a series of RPS.
ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME
If the Fund intends to allocate any net capital gains or other income
taxable for federal income tax purposes to any dividend on a series of RPS, the
Fund may notify the Remarketing Agent and the Paying Agent of the amount to be
so allocated seven days prior to the Remarketing on which the Applicable
Dividend Rate for such dividend is to be established. Whenever the Remarketing
Agent receives such notice from the Fund, it will in turn notify the holders of
RPS of such series and prospective purchasers believed by it to be interested in
purchasing RPS of such series in such Remarketing. If the Fund does not give
advance notice of such an allocation, the Fund will make certain payments to the
affected holders of RPS to offset the tax effect of such allocation.
NOTIFICATION OF RESULTS
Subject to a failure to remarket, by 3:30 p.m., New York City time, on each
Remarketing Date with respect to a series of RPS, the Remarketing Agent will
advise by telephone each holder of tendered shares and each purchaser thereof
(or the Agent Member thereof, who in turn will advise such holder or purchaser)
(a) of the number of shares such holder or purchaser is to sell or purchase and
(b) to give instructions to its Agent Member to deliver such shares against
payment therefor or to pay the purchase price against delivery, as appropriate.
The Remarketing Agent will also advise each holder or purchaser that is to
continue to hold, or to purchase, RPS of such series of the Applicable Dividend
Rate for such shares.
RATING AGENCY GUIDELINES
The Fund intends that, so long as shares of any series of RPS 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 RPS of ratings of "aaa" from
Moody's and AAA from S&P. Moodys 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 RPS. The guidelines described herein and in the
Statement of Additional Information 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
S-31
requirements necessary for Moody's and S&P to issue the above-described ratings
for shares of each series of RPS, 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 RPS 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 RPS Basic Maintenance Amount and, in addition, so long as S&P is
rating the RPS, the Fund intends to maintain a Minimum Liquidity Level. The RPS
Basic Maintenance Amount includes the sum of (i) the aggregate liquidation value
of each series of RPS then Outstanding and (ii) certain accrued and projected
payment obligations of the Fund. 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 RPS Basic Maintenance Amount as of such Valuation
Date; provided, however, that in the event that, as of the immediately preceding
Valuation Date, the aggregate Discounted Value of the Fund's Eligible Assets
exceeded the RPS 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 RPS 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 RPS Basic
Maintenance Amount on or prior to the RPS Basic Maintenance Cure Date (as
defined in the Statement of Additional Information), 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 RPS 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 RPS may, at any time,
change or withdraw any such rating. As set
S-32
forth in the RPS 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 RPS. A rating agency's guidelines will apply to shares of any series
of RPS only so long as such rating agency is rating such shares.
As recently described by Moody's and S&P, a preferred shares rating is an
assessment of the capacity and willingness of an issuer to pay preferred shares
obligations. The ratings on any series of the RPS are not recommendations to
purchase, hold or sell shares of any series of RPS, 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 RPS will be able to sell such shares in a
Remarketing. 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. The Fund's Common Shares
have not been rated by a nationally recognized statistical rating organization.
OTHER INFORMATION
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
each Fund and all cash, including proceeds from the sale of shares of each Fund
and of securities in each Fund's investment portfolio, are held by State Street
Bank and Trust Company, 225 West Franklin Street, Boston, Massachusetts 02110,
as custodian. The custodian also provides accounting services to each Fund.
PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD
Each Fund's Proxy Voting Policy and Procedures are included as Appendix E
to this Statement of Additional Information. Information on how each Fund voted
proxies relating to portfolio securities during the most recent twelve-month
period ended June 30 is available without charge, upon request, by calling (800)
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 each Fund performs an
annual audit of each Fund's financial statements. Each Fund's Board of Trustees
has engaged , located at , to be each Fund's
independent registered public accounting firm.
S-33
FINANCIAL STATEMENTS
Incorporated herein by reference in their respective entireties are (i) the
audited financial statements of the Acquiring Fund for the fiscal year ended
October 31, 2004, as included in Appendix C hereto and (ii) the audited
financial statements of the Target Fund for fiscal year ended October 31, 2004,
as included in Appendix D hereto.
S-34
APPENDIX A
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION
In order to consummate the Reorganization and in consideration of the
promises and the covenants and agreements hereinafter set forth, and intending
to be legally bound, Van Kampen XXXXXX, a registered closed-end investment
company, File No. 811-XXXX (the "Target Fund") and Van Kampen XXXXXX (the
"Acquiring Fund"), a registered closed-end investment company, File No.
811-XXXX, each hereby agree as follows:
1. Representations and Warranties of the Acquiring Fund.
The Acquiring Fund represents and warrants to, and agrees with, the
Target Fund that:
(a) The Acquiring Fund is a trust, with transferable shares, duly
organized, validly existing and in good standing in conformity
with the laws of its jurisdiction of organization, and has the
power to own all of its assets and to carry out this
Agreement. The Acquiring Fund has all necessary federal, state
and local authorizations to carry on its business as it is now
being conducted and to carry out this Agreement.
(b) The Acquiring Fund is duly registered under the Investment
Company Act of 1940, as amended (the "1940 Act") as a
[non-]diversified, closed-end management investment company
and such registration has not been revoked or rescinded and is
in full force and effect. The Acquiring Fund has elected and
qualified for the special tax treatment afforded regulated
investment companies ("RICs") under Section 851 of the
Internal Revenue Code (the "Code") at all times since its
inception and intends to continue to so qualify until
consummation of the reorganization contemplated hereby (the
"Reorganization") and thereafter.
(c) The Target Fund has been furnished with the Acquiring Fund's
Annual Report to Shareholders for the fiscal year ended XXXX,
2004, and the audited financial statements appearing therein,
having been audited by Deloitte & Touche LLP, independent
registered public accounting firm, fairly present the
financial position of the Acquiring Fund as of the respective
dates indicated, in conformity with accounting principles
generally accepted in the United States applied on a
consistent basis.
(d) An unaudited statement of assets, liabilities and capital of
the Acquiring Fund and an unaudited schedule of investments of
the Acquiring Fund, each as of the Valuation Time (as defined
in Section 5(d) of this Agreement), will be furnished to the
Target Fund, at or prior to the Closing Date (as defined in
Section 7(a) herein), for the purpose of determining the
number of Acquiring Fund Common Shares and Acquiring Fund APS
to be issued pursuant to Section 6 of this Agreement; each
will fairly present the financial position of the Acquiring
Fund as of the Valuation Time in conformity with generally
accepted accounting principles applied on a consistent basis.
(e) The Acquiring Fund has full power and authority to enter into
and perform its obligations under this Agreement. The
execution, delivery and performance of this Agreement has been
duly authorized by all necessary action of its Board of
Trustees, and this Agreement constitutes a valid and binding
contract enforceable in accordance with its terms, subject to
the effects of bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar
A-1
laws relating to or affecting creditors' rights generally and
court decisions with respect thereto.
(f) There are no material legal, administrative or other
proceedings pending or, to the knowledge of the Acquiring
Fund, threatened against it which assert liability on the part
of the Acquiring Fund or which materially affect its financial
condition or its ability to consummate the Reorganization. The
Acquiring Fund is not charged with or, to the best of its
knowledge, threatened with any violation or investigation of
any possible violation of any provisions of any federal, state
or local law or regulation or administrative ruling relating
to any aspect of its business.
(g) The Acquiring Fund is not obligated under any provision of its
Declaration of Trust, as amended, or its by-laws, as amended,
and is not a party to any contract or other commitment or
obligation, and is not subject to any order or decree which
would be violated by its execution of or performance under
this Agreement, except insofar as the Funds have mutually
agreed to amend such contract or other commitment or
obligation to cure any potential violation as a condition
precedent to the Reorganization.
(h) There are no material contracts outstanding to which the
Acquiring Fund is a party that have not been disclosed in the
N-14 Registration Statement (as defined in subsection (k)
below) or that will not otherwise be disclosed to the Target
Fund prior to the Valuation Time.
(i) The Acquiring Fund has no known liabilities of a material
amount, contingent or otherwise, other than those shown on its
statements of assets, liabilities and capital referred to in
subsection (c) above, those incurred in the ordinary course of
its business as an investment company, and those incurred in
connection with the Reorganization. As of the Valuation Time,
the Acquiring Fund will advise the Target Fund in writing of
all known liabilities, contingent or otherwise, whether or not
incurred in the ordinary course of business, existing or
accrued as of such time, except to the extent disclosed in the
financial statements referred to in subsection (c) above.
(j) No consent, approval, authorization or order of any court or
government authority is required for the consummation by the
Acquiring Fund of the Reorganization, except such as may be
required under the Securities Act of 1933, as amended (the
"1933 Act"), the Securities Exchange Act of 1934, as amended
(the "1934 Act") and the 1940 Act or state securities laws
(which term as used herein shall include the laws of the
District of Columbia and Puerto Rico).
(k) The registration statement filed by the Acquiring Fund on Form
N-14, which includes the proxy statement of the Target Fund
and the Acquiring Fund with respect to the transactions
contemplated herein (the "Joint Proxy Statement/Prospectus"),
and any supplement or amendment thereto or to the documents
therein (as amended or supplemented, the "N-14 Registration
Statement"), on its effective date, at the time of the
shareholders' meetings referred to in Section 8(a) of this
Agreement and at the Closing Date, insofar as it relates to
the Acquiring Fund, (i) complied or will comply in all
material respects with the provisions of the 1933 Act, the
1934 Act and the 1940 Act and the rules and regulations
thereunder and (ii) did not or will not contain any
A-2
untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading; and the Joint
Proxy Statement/Prospectus included therein did not or will
not contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements
therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that the
representations and warranties in this subsection only shall
apply to statements in or omissions from the N-14 Registration
Statement made in reliance upon and in conformity with
information furnished by the Acquiring Fund for use in the
N-14 Registration Statement.
(l) The Acquiring Fund is authorized to issue an unlimited number
of common shares of beneficial interest, par value $.01 per
share (the "Acquiring Fund Common Shares"), and XXXX preferred
shares of beneficial interest, par value $.01 per share. The
Board of Trustees of the Acquiring Fund has designated XXXX
preferred shares as Auction Preferred Shares ("Acquiring Fund
APS"). Each outstanding Acquiring Fund Common Share and each
Acquiring Fund APS of the Acquiring Fund is fully paid and,
except as provided in Section 5.1 of the Acquiring Fund's
Declaration of Trust, nonassessable, and has full voting
rights.
(m) The Acquiring Fund Common Shares and the Acquiring Fund APS to
be issued to the Target Fund pursuant to this Agreement will
have been duly authorized and, when issued and delivered
pursuant to this Agreement, will be legally and validly issued
and will be fully paid and, except as provided in Section 5.1
of the Acquiring Fund's Declaration of Trust, nonassessable
and will have full voting rights, and no shareholder of the
Acquiring Fund will have any preemptive right of subscription
or purchase in respect thereof.
(n) At or prior to the Closing Date, the Acquiring Fund Common
Shares to be transferred to the Target Fund for distribution
to the shareholders of the Target Fund on the Closing Date
will be duly qualified for offering to the public in all
states of the United States in which the sale of shares of the
Funds presently are qualified, and there will be a sufficient
number of such shares registered under the 1933 Act and, as
may be necessary, with each pertinent state securities
commission to permit the transfers contemplated by this
Agreement to be consummated.
(o) At or prior to the Closing Date, the Acquiring Fund APS to be
transferred to the Target Fund on the Closing Date will be
duly qualified for offering to the public in all states of the
United States in which the sale of APS of the Target Fund
presently are qualified, and there are a sufficient number of
Acquiring Fund APS registered under the 1933 Act and with each
pertinent state securities commission to permit the transfers
contemplated by this Agreement to be consummated.
(p) At or prior to the Closing Date, the Acquiring Fund will have
obtained any and all regulatory, trustee and shareholder
approvals necessary to issue the Acquiring Fund Common Shares
and the Acquiring Fund APS to the Target Fund.
(q) The Acquiring Fund has filed, or intends to file, or has
obtained extensions to file, all federal, state and local tax
returns which are required to be filed by it, and has paid or
has obtained extensions to pay, all federal, state and local
taxes shown on said returns to be due and owing and all
assessments received by it, up to and including the taxable
year in which the Closing Date occurs. All tax liabilities of
the Acquiring Fund have been adequately provided for on its
books, and no tax deficiency or liability of the Acquiring
Fund has been asserted and no question with respect thereto
has been raised by the Internal Revenue Service or by any
state or local tax authority for taxes in excess of those
already paid, up to and including the taxable year in which
the Closing Date occurs.
(r) The Acquiring Fund has elected to qualify and has qualified as
a RIC as of and since its inception; has been a RIC under the
Code at all times since the end of its first taxable year when
it so qualified; qualifies and will continue to qualify as a
RIC under the Code; and has satisfied the distribution
requirements imposed by the Code for each of its taxable
years.
2. Representations and Warranties of the Target Fund.
The Target Fund represents and warrants to, and agrees with, the
Acquiring Fund that:
(a) The Target Fund is a trust, with transferable shares, duly
organized, validly existing and in good standing in conformity
with the laws of the jurisdiction of its organization, and has
the power to own all of its assets and to carry out this
Agreement. The Target Fund has all necessary federal, state
and local authorizations to carry on its business as it is now
being conducted and to carry out this Agreement.
A-3
(b) The Target Fund is duly registered under the 1940 Act as a
[non-]diversified, closed-end management investment company,
and such registration has not been revoked or rescinded and is
in full force and effect. The Target Fund has elected and
qualified for the special tax treatment afforded RICs under
Section 851 of the Code at all times since its inception, and
intends to continue to so qualify through its taxable year
ending upon liquidation.
(c) As used in this Agreement, the term "Target Fund Investments"
shall mean (i) the investments of the Target Fund shown on the
schedule of its investments as of the Valuation Time furnished
to the Acquiring Fund; and (ii) all other assets owned by the
Target Fund or liabilities incurred as of the Valuation Time.
(d) The Target Fund has full power and authority to enter into and
perform its obligations under this Agreement. The execution,
delivery and performance of this Agreement has been duly
authorized by all necessary action of its Board of Trustees
and this Agreement constitutes a valid and binding contract
enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar laws relating to or affecting
creditors' rights generally and court decisions with respect
thereto.
(e) The Acquiring Fund has been furnished with the Target Fund's
Annual Report to Shareholders for the fiscal year ended XXXX,
2004, and the audited financial statements appearing therein,
having been audited by Deloitte & Touche LLP, independent
registered public accounting firm, fairly present the
financial position of the Target Fund as of the respective
dates indicated, in conformity with accounting principles
generally accepted in the United States applied on a
consistent basis.
(f) An unaudited statement of assets, liabilities and capital of
the Target Fund and an unaudited schedule of investments of
the Target Fund, each as of the Valuation Time, will be
furnished to the Acquiring Fund at or prior to the Closing
Date for the purpose of determining the number of shares of
Acquiring Fund Common Shares and Acquiring Fund APS to be
issued to the Target Fund pursuant to Section 3 of this
Agreement; each will fairly present the financial position of
the Target Fund as of the Valuation Time in conformity with
generally accepted accounting principles applied on a
consistent basis.
(g) There are no material legal, administrative or other
proceedings pending or, to the knowledge of the Target Fund,
threatened against it which assert liability on the part of
the Target Fund or which materially affect its financial
condition or its ability to consummate the Reorganization. The
Target Fund is not charged with or, to the best of its
knowledge, threatened with any violation or investigation of
any possible violation of any provisions of any federal, state
or local law or regulation or administrative ruling relating
to any aspect of its business.
(h) There are no material contracts outstanding to which the
Target Fund is a party that have not been disclosed in the
N-14 Registration Statement or will not otherwise be disclosed
to the Acquiring Fund prior to the Valuation Time.
(i) The Target Fund is not obligated under any provision of its
Declaration of Trust, as amended, or its by-laws, as amended,
or a party to any contract or other commitment or obligation,
and is not subject to any order or decree which would be
violated by its execution of or performance under this
Agreement, except insofar as the Funds have
A-4
mutually agreed to amend such contract or other commitment or
obligation to cure any potential violation as a condition
precedent to the Reorganization.
(j) The Target Fund has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its
statements of assets, liabilities and capital referred to
above, those incurred in the ordinary course of its business
as an investment company and those incurred in connection with
the Reorganization. As of the Valuation Time, the Target Fund
will advise the Acquiring Fund in writing of all known
liabilities, contingent or otherwise, whether or not incurred
in the ordinary course of business, existing or accrued as of
such time.
(k) The Target Fund has filed, or intends to file, or has obtained
extensions to file, all federal, state and local tax returns
which are required to be filed by it, and has paid or has
obtained extensions to pay, all federal, state and local taxes
shown on said returns to be due and owing and all assessments
received by it, up to and including the taxable year in which
the Closing Date occurs. All tax liabilities of the Target
Fund have been adequately provided for on its books, and no
tax deficiency or liability of the Target Fund has been
asserted and no question with respect thereto has been raised
by the Internal Revenue Service or by any state or local tax
authority for taxes in excess of those already paid, up to and
including the taxable year in which the Closing Date occurs.
(l) At both the Valuation Time and the Closing Date, the Target
Fund will have full right, power and authority to sell,
assign, transfer and deliver the Target Fund Investments. At
the Closing Date, subject only to the obligation to deliver
the Target Fund Investments as contemplated by this Agreement,
the Target Fund will have good and marketable title to all of
the Target Fund Investments, and the Acquiring Fund will
acquire all of the Target Fund Investments free and clear of
any encumbrances, liens or security interests and without any
restrictions upon the transfer thereof (except those imposed
by the federal or state securities laws and those
imperfections of title or encumbrances as do not materially
detract from the value or use of the Target Fund Investments
or materially affect title thereto).
(m) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the
Target Fund of the Reorganization, except such as may be
required under the 1933 Act, the 1934 Act, the 1940 Act or
state securities laws.
(n) The N-14 Registration Statement, on its effective date, at the
time of the shareholders' meetings called to vote on this
Agreement and on the Closing Date, insofar as it relates to
the Target Fund (i) complied or will comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and
the 1940 Act and the rules and regulations thereunder, and
(ii) did not or will not contain any untrue statement of a
material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein
not misleading; and the Joint Proxy Statement/Prospectus
included therein did not or will not contain any untrue
statement of a material fact or omit to state any material
fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in
this subsection shall apply only to statements in or omissions
from the N-14 Registration Statement made in reliance upon and
in conformity with information furnished by the Target Fund
for use in the N-14 Registration Statement.
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(o) The Target Fund is authorized to issue an unlimited number of
common shares of beneficial interest, par value $.01 per share
(the "Target Fund Common Shares"), and XXXX preferred shares
of beneficial interest, par value $.01 per share. The Board of
Trustees of the Acquiring Fund has designated XXXX preferred
shares as Target Fund Preferred Shares (the "Target Fund
Preferred Shares"). Each outstanding Target Fund Common Share
and each of the outstanding Target Fund Preferred Shares is
fully paid and, except as provided in Section 5.1 of the
Target Fund's Declaration of Trust, nonassessable, and has
full voting rights.
(p) All of the issued and outstanding Target Fund Common Shares
and Target Fund Preferred Shares were offered for sale and
sold in conformity with all applicable federal and state
securities laws.
(q) The books and records of the Target Fund made available to the
Acquiring Fund and/or its counsel are substantially true and
correct and contain no material misstatements or omissions
with respect to the operations of the Target Fund.
(r) The Target Fund will not sell or otherwise dispose of any of
the Acquiring Fund Common Shares or Acquiring Fund APS to be
received in the Reorganization, except in distribution to the
shareholders of the Target Fund, as provided in Section 3 of
this Agreement.
(s) The Target Fund has elected to qualify and has qualified as a
"RIC" under the Code as of and since its inception; has been a
RIC under the Code at all times since the end of its first
taxable year when it so qualified; qualifies and will continue
to qualify as a RIC under the Code for its taxable year ending
upon its liquidation; and has satisfied the distribution
requirements imposed by the Code for each of its taxable
years.
3. The Reorganization.
(a) Subject to receiving the requisite approvals of the
shareholders of the Target Fund, and to the other terms and
conditions contained herein, (i) the Target Fund agrees to
convey, transfer and deliver to the Acquiring Fund and the
Acquiring Fund agrees to acquire from the Target Fund, on the
Closing Date, all of the Target Fund Investments (including
interest accrued as of the Valuation Time on debt
instruments), and assume substantially all of the liabilities
of the Target Fund, in exchange for that number of Target Fund
Common Shares and Target Fund Preferred Shares provided in
Section 4 of this Agreement. Pursuant to this Agreement, as
soon as practicable after the Closing Date, the Target Fund
will distribute all Acquiring Fund Common Shares and Acquiring
Fund APS received by it to its shareholders in exchange for
their Target Fund Common Shares and Target Fund Preferred
Shares. Such distributions shall be accomplished by the
opening of shareholder accounts on the share ledger records of
the Acquiring Fund in the amounts due the shareholders of the
Target Fund based on their respective holdings in the Target
Fund as of the Valuation Time.
(b) If it is determined that the portfolios of the Target Fund and
the Acquiring Fund, when aggregated, would contain investments
exceeding certain percentage limitations imposed upon the
Acquiring Fund with respect to such investments, the Target
Fund, if requested by the Acquiring Fund, will dispose of a
sufficient amount of such investments as may be necessary to
avoid violating such limitations as of the Closing Date.
Notwithstanding the foregoing, (a) nothing herein will require
the Target Fund to dispose of any portfolios, securities or
other investments, if, in the reasonable judgment of the
Target Fund's trustees or investment adviser, such disposition
would adversely affect the tax-free nature of the
Reorganization for federal income tax purposes or would
otherwise not be in the best interests of the Target Fund, and
(b) nothing will permit the Target Fund to dispose of any
portfolio securities or other investments if, in the
reasonable judgment of the Acquiring Fund's trustees or
investment adviser, such disposition would adversely affect
the tax-free nature of the Reorganization for federal income
tax purposes or would otherwise not be in the best interests
of the Acquiring Fund.
(c) Prior to the Closing Date, the Target Fund shall declare a
dividend or dividends which, together with all such previous
dividends, shall have the effect of distributing to their
respective shareholders all of their respective net investment
company taxable income to and including the Closing Date, if
any (computed without regard to any deduction for dividends
paid), and all of its net capital gain, if any, realized to
and including the Closing Date. In this regard and in
connection with the Reorganization, the last dividend period
for the Target Fund Preferred Shares prior to the Closing Date
may be shorter than the dividend period for such Target Fund
Preferred Shares determined as set forth in the applicable
Certificate of Vote pertaining to such Target Fund Preferred
Shares.
(d) The Target Fund will pay or cause to be paid to the Acquiring
Fund any interest the Target Fund receives on or after the
Closing Date with respect to any of the Target Fund
Investments transferred to the Acquiring Fund hereunder.
A-6
(e) The Valuation Time shall be 4:00 p.m., Eastern time, on XXXX,
2005, or such earlier or later day and time as may be mutually
agreed upon in writing (the "Valuation Time").
(f) Recourse for liabilities assumed from the Target Fund by the
Acquiring Fund in the Reorganization will be limited to the
net assets acquired by the Acquiring Fund. The known
liabilities of the Target Fund, as of the Valuation Time,
shall be confirmed to the Acquiring Fund pursuant to Section
2(j) of this Agreement.
(g) The Target Fund will be terminated following the Closing Date
by terminating its registration under the 1940 Act and its
organization under Massachusetts law and will withdraw its
authority to do business in any state where it is required to
do so.
(h) The Acquiring Fund will file with the Secretary of State of
The Commonwealth of Massachusetts, as required, any amendment
to its Certificate of Vote establishing the powers, rights and
preferences of the Acquiring Fund APS prior to the closing of
the Reorganization.
4. Issuance and Valuation of Acquiring Fund Common Shares and Acquiring
Fund APS in the Reorganization.
Acquiring Fund Common Shares and Acquiring Fund APS of an aggregate net asset
value or aggregate liquidation preference, as the case may be, equal to the
value of the assets of the Target Fund acquired in the Reorganization determined
as hereinafter provided, reduced by the amount of liabilities of the Target Fund
assumed by the Acquiring Fund in the Reorganization, shall be issued by the
Acquiring Fund to the Target Fund in exchange for such assets of the Target
Fund. The Acquiring Fund will issue to the Target Fund (i) a number of Acquiring
Fund Common Shares, the aggregate net asset value of which will equal the
aggregate net asset value of the Target Fund Common Shares, determined as set
forth below, and (ii) a number of Acquiring Fund APS, the aggregate liquidation
preference and value of which will equal the aggregate liquidation preference
and value of the Target Fund Preferred Shares, determined as set forth below.
The net asset value of each of the Funds and the liquidation preference and
value of each of the Target Fund Preferred Shares and the Acquiring Fund APS
shall be determined as of the Valuation Time in accordance with the regular
procedures of the investment adviser, and no formula will be used to adjust the
net asset value so determined of any Fund to take into account differences in
realized and unrealized gains and losses. Values in all cases shall be
determined as of the Valuation Time. The value of the Target Fund Investments to
be transferred to the Acquiring Fund shall be determined pursuant to the regular
procedures of the investment adviser.
Such valuation and determination shall be made by the Acquiring Fund in
cooperation with the Target Fund and shall be confirmed in writing by the
Acquiring Fund to the Target Fund. The net asset value per share of the
Acquiring Fund Common Shares and the liquidation preference and value per share
of the Acquiring Fund APS shall be determined in accordance with such procedures
and the Acquiring Fund shall certify the computations involved. For purposes of
determining the net asset value of each of a Target Fund Common Share and an
Acquiring Fund Common Share, the value of the securities held by the applicable
Fund plus any cash or other assets (including interest accrued but not yet
received) minus all liabilities (including accrued expenses) and the aggregate
liquidation value of the outstanding shares of Target Fund Preferred Shares or
Acquiring Fund APS, as the case may be, is divided by the total number of Target
Fund Common Shares or Acquiring Fund Common Shares, as the case may be,
outstanding at such time.
A-7
The Acquiring Fund shall issue to the Target Fund separate certificates or
share deposit receipts for the Acquiring Fund Common Shares and the Acquiring
Fund APS, each registered in the name of the Target Fund. The Target Fund shall
then distribute the Acquiring Fund Common Shares and the Acquiring Fund APS to
the holders of Target Fund Common Shares and Target Fund Preferred Shares by
redelivering the certificates or share deposit receipts evidencing ownership of
(i) the Acquiring Fund Common Shares to EquiServe Trust Company, N.A., as the
transfer agent and registrar for the Acquiring Fund Common Shares, for
distribution to the holders of Target Fund Common Shares on the basis of such
holder's proportionate interest in the aggregate net asset value of the Target
Fund Common Shares and (ii) the Acquiring Fund APS to Deutsche Bank Trust
Company Americas, as the transfer agent and registrar for the Acquiring Fund
APS, for distribution to the holders of Target Fund Preferred Shares on the
basis of such holder's proportionate interest in the aggregate liquidation
preference and value of the Target Fund Preferred Shares. With respect to any
Target Fund shareholder holding certificates evidencing ownership of Target Fund
Common Shares as of the Closing Date, and subject to the Acquiring Fund being
informed thereof in writing by the Target Fund, the Acquiring Fund will not
permit such shareholder to receive new certificates evidencing ownership of the
Acquiring Fund Common Shares or Acquiring Fund APS, exchange Acquiring Fund
Common Shares or Acquiring Fund APS credited to such shareholder's account for
shares of other investment companies managed by the Adviser or any of its
affiliates, or pledge or redeem such Acquiring Fund Common Shares or Acquiring
Fund APS, in any case, until notified by the Target Fund or its agent that such
shareholder has surrendered his or her outstanding certificates evidencing
ownership of Target Fund Common Shares or Target Fund Preferred Shares or, in
the event of lost certificates, posted adequate bond. The Target Fund, at its
own expense, will request its shareholders to surrender their outstanding
certificates evidencing ownership of Target Fund Common Shares or Target Fund
Preferred Shares, as the case may be, or post adequate bond therefor.
No fractional shares of Acquiring Fund Common Shares will be issued to
holders of Target Fund Common Shares unless such shares are held in a Dividend
Reinvestment Plan account. In lieu thereof, the Acquiring Fund's transfer agent,
EquiServe Trust Company, N.A., will aggregate all fractional Acquiring Fund
Common Shares to be issued in connection with the Reorganization (other than
those issued to a Dividend Reinvestment Plan account) and sell the resulting
full shares on the New York Stock Exchange at the current market price for
Acquiring Fund Common Shares for the account of all holders of such fractional
interests, and each such holder will receive such holder's pro rata share of the
proceeds of such sale upon surrender of such holder's certificates representing
Acquiring Fund Common Shares.
5. Payment of Expenses.
(a) With respect to expenses incurred in connection with the
Reorganization, the Target Fund and the Acquiring Fund will
share, in proportion to their respective projected 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 and a registration statement on
Form N-14; SEC and state securities commission filing fees and
legal and audit fees in connection with the Reorganization;
costs of printing and distributing the Joint Proxy Statement/
Prospectus; legal fees incurred preparing each Fund's board
materials, attending each Fund's board meetings and preparing
the minutes; auditing fees associated with each Fund's
financial statements; stock exchange fees, rating agency fees,
portfolio transfer taxes (if any) and any similar expenses
incurred in connection with the Reorganization.
(b) If for any reason the Reorganization is not consummated, no
party shall be liable to any other party for any damages
resulting therefrom, including, without limitation,
consequential damages, and the investment adviser shall pay
all expenses incurred by each Fund in connection with the
Reorganization.
A-8
6. Covenants of the Funds.
(a) Each Fund covenants to operate its business as presently
conducted between the date hereof and the Closing Date.
(b) The Target Fund agrees that following the consummation of the
Reorganization, it will terminate in accordance with the laws
of The Commonwealth of Massachusetts and any other applicable
law, it will not make any distributions of any Acquiring Fund
Common Shares or Acquiring Fund APS other than to its
respective shareholders and without first paying or adequately
providing for the payment of all of its respective liabilities
not assumed by the Acquiring Fund, if any, and on and after
the Closing Date it shall not conduct any business except in
connection with its termination.
(c) The Target Fund undertakes that if the Reorganization is
consummated, it will file an application pursuant to Section
8(f) of the 1940 Act for an order declaring that the Target
Fund has ceased to be a registered investment company.
(d) The Acquiring Fund will file the N-14 Registration Statement
with the Securities and Exchange Commission (the "Commission")
and will use its best efforts to provide that the N-14
Registration Statement becomes effective as promptly as
practicable. Each Fund agrees to cooperate fully with the
other, and each will furnish to the other the information
relating to itself to be set forth in the N-14 Registration
Statement as required by the 1933 Act, the 1934 Act the 1940
Act, and the rules and regulations thereunder and the state
securities laws.
(e) The Acquiring Fund has no plan or intention to sell or
otherwise dispose of the Target Fund Investments, except for
dispositions made in the ordinary course of business.
(f) Each of the Funds agrees that by the Closing Date all of its
federal and other tax returns and reports required to be filed
on or before such date shall have been filed and all taxes
shown as due on said returns either have been paid or adequate
liability reserves have been provided for the payment of such
taxes.
The intention of the parties is that the transaction
contemplated by this Agreement will qualify as a
reorganization within the meaning of Section 368(a) of the
Internal Revenue Code. Neither the Acquiring Fund nor the
Target Fund shall take any action or cause any action to be
taken (including, without limitation, the filing of any tax
return) that is inconsistent with such treatment or results in
the failure of the transaction to qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue
Code. At or prior to the Closing Date, the Acquiring Fund and
the Target Fund will take such action, or cause such action to
be taken, as is reasonably necessary to enable Skadden, Arps,
Slate, Meagher & Flom LLP ("Skadden"), special counsel to the
Funds, to render the tax opinion required herein (including,
without limitation, each party's execution of representations
reasonably requested by and addressed to Skadden.
In connection with this covenant, the Funds agree to
cooperate with each other in filing any tax return, amended
return or claim for refund, determining a liability for taxes
or a right to a refund of taxes or participating in or
conducting any audit or other proceeding in respect of taxes.
The Acquiring Fund agrees to retain for a period of ten (10)
years following the Closing Date all returns, schedules and
work papers and all material records or other documents
relating to tax matters of the Target Fund for each of such
Fund's taxable period first ending after the Closing Date and
for all prior taxable periods.
After the Closing Date, the Target Fund shall
prepare, or cause its agents to prepare, any federal, state or
local tax returns required to be filed by such fund with
respect to its final taxable year ending with its complete
liquidation and for any prior periods or taxable years and
further shall cause such tax returns to be duly filed with the
appropriate taxing authorities. Notwithstanding the
aforementioned provisions of this subsection, any expenses
incurred by the Target Fund (other than for payment of taxes)
in connection with the preparation and filing of said tax
returns after the Closing Date shall be borne by such Fund to
the extent such expenses have been accrued by such Fund in the
ordinary course without regard to the Reorganization; any
excess expenses shall be borne by the investment adviser or an
affiliate thereof.
A-9
(g) The Target Fund agrees to mail to its shareholders of record
entitled to vote at the special meeting of shareholders at
which action is to be considered regarding this Agreement, in
sufficient time to comply with requirements as to notice
thereof, a combined proxy statement and prospectus which
complies in all material respects with the applicable
provisions of Section 14(a) of the 1934 Act and Section 20(a)
of the 1940 Act, and the rules and regulations, respectively,
thereunder.
(h) Following the consummation of the Reorganization, the
Acquiring Fund will continue its business as a diversified,
closed-end management investment company registered under the
1940 Act.
7. Closing Date.
(a) Delivery of the assets of the Target Fund to be transferred,
together with any other Target Fund Investments, and the
Acquiring Fund Common Shares and Acquiring Fund APS to be
issued as provided in this Agreement, shall be made at such
place and time as the Funds shall mutually agree on the next
full business day following the Valuation Time, or at such
other time and date agreed to by the Funds, the date and time
upon which such delivery is to take place being referred to
herein as the "Closing Date." To the extent that any Target
Fund Investments, for any reason, are not transferable on the
Closing Date, the Target Fund shall cause such Target Fund
Investments to be transferred to the Acquiring Fund's account
with its custodian at the earliest practicable date
thereafter.
(b) The Target Fund will deliver to the Acquiring Fund on the
Closing Date confirmation or other adequate evidence as to the
tax basis of the Target Fund Investments delivered to the
Acquiring Fund hereunder.
(c) As soon as practicable after the close of business on the
Closing Date, the Target Fund shall deliver to the Acquiring
Fund a list of the names and addresses of all of the
shareholders of record of the Target Fund on the Closing Date
and the number of Target Fund Common Shares and Target Fund
Preferred Shares owned by each such shareholder, certified to
the best of its knowledge and belief by the transfer agent for
the Target Fund or by its President.
8. Conditions of the Target Fund.
The obligations of the Target Fund hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the Board of
Trustees of the Target Fund and by the affirmative vote of the
holders of a majority of each of the outstanding Target Fund
Common Shares and Target Fund Preferred Shares, each voting
separately as a class; and that the Acquiring Fund shall have
delivered to the Target Fund a copy of the resolution
approving this Agreement adopted by the Board of Trustees of
the Acquiring Fund, and a certificate setting forth the vote
of holders of Acquiring Fund Common Shares approving the
issuance of additional Acquiring Fund Common Shares, each
certified by its Secretary.
(b) That the Target Fund shall have received from the Acquiring
Fund a statement of assets, liabilities and capital, with
values determined as provided in Section 4 of this Agreement,
together with a schedule of such Fund's investments, all as of
the Valuation Time, certified on the Target Fund's behalf by
its President (or any Vice President) or its Treasurer, and a
certificate signed by the Fund's President (or any Vice
President) and its Treasurer, dated as of the Closing Date,
certifying that as of the Valuation Time and as of the Closing
Date there has been no material adverse change in the
financial position of the Target Fund since the date of such
Fund's most recent Annual or Semi-Annual Report,
A-10
as applicable, other than changes in its portfolio securities
since that date or changes in the market value of its
portfolio securities.
(c) That the Acquiring Fund shall have furnished to the Target
Fund a certificate signed by the Acquiring Fund's President
(or any Vice President) or its Treasurer, dated as of the
Closing Date, certifying that, as of the Valuation Time and as
of the Closing Date, all representations and warranties of the
Acquiring Fund made in this Agreement are true and correct in
all material respects with the same effect as if made at and
as of such dates, and that the Acquiring Fund has complied
with all of the agreements and satisfied all of the conditions
on its part to be performed or satisfied at or prior to each
of such dates.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) The Target Fund shall have received the opinion(s) of Skadden,
counsel for the Acquiring Fund, dated as of the Closing Date,
addressed to the Target Fund substantially in the form and to
the effect that:
(i) the Acquiring Fund is duly formed and validly
existing under the laws of its state of organization;
(ii) the Acquiring Fund is registered as a closed-end,
management investment company under the 1940 Act;
(iii) this Agreement and the Reorganization provided for
herein and the execution of this Agreement have been
duly authorized and approved by all requisite action
of the Acquiring Fund, and this Agreement has been
duly executed and delivered by the Acquiring Fund and
(assuming this Agreement is a valid and binding
obligation of the other party hereto) is a valid and
binding obligation of the Acquiring Fund;
(iv) neither the execution or delivery by the Acquiring
Fund of this Agreement nor the consummation by the
Acquiring Fund of the transactions contemplated
hereby violate any provision of any statute or any
published regulation or any judgment or order
disclosed to counsel by the Acquiring Fund as being
applicable to the Acquiring Fund;
(v) the Acquiring Fund Common Shares and Acquiring Fund
APS have each been duly authorized and, upon issuance
thereof in accordance with this Agreement, each will
be validly issued, fully paid and, except as provided
in Section 5.1 of the Acquiring Fund's Declaration of
Trust, nonassessable; and
(vi) to their knowledge and subject to the qualifications
set forth below, the execution and delivery by the
Acquiring Fund of this Agreement and the consummation
of the transactions herein contemplated do not
require, under the laws of its state of organization
or any state in which the Acquiring Fund is qualified
to do business or the federal laws of the United
States, the consent, approval, authorization,
registration, qualification or order of, or filing
with, any court or governmental agency or body
(except such as have been obtained). Counsel need
express no opinion, however, as to any such consent,
approval, authorization, registration, qualification,
order or filing which may be required as a result of
the involvement of other parties to this Agreement in
the transactions herein contemplated because of their
legal or regulatory status or because of any other
facts specifically pertaining to them;
A-11
(f) The Target Fund shall have obtained an opinion from Skadden,
Arps, dated as of the Closing Date, addressed to the Target
Fund, that the consummation of the transactions set forth in
this Agreement comply with the requirements of a
reorganization as described in Section 368(a) of the Internal
Revenue Code.
(g) That all proceedings taken by each of the Funds and its
counsel in connection with the Reorganization and all
documents incidental thereto shall be satisfactory in form and
substance to the others.
(h) That the N-14 Registration Statement shall have become
effective under the 1933 Act, and no stop order suspending
such effectiveness shall have been instituted or, to the
knowledge of the Acquiring Fund, be contemplated by the SEC.
9. Acquiring Fund Conditions.
The obligations of the Acquiring Fund hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the Board of
Trustees of the Acquiring Fund and that the issuance of
additional Acquiring Fund Common Shares shall have been
approved by the affirmative vote of a majority of votes cast,
where total votes cast represented over 50% of all securities
entitled to vote; and the Target Fund shall have delivered to
the Acquiring Fund a copy of the resolution approving this
Agreement adopted by the Target Fund's Board of Trustees, and
a certificate setting forth the vote of the holders of Target
Fund Common Shares and Target Fund Preferred Shares obtained,
each certified by its Secretary.
(b) That the Target Fund shall have furnished to the Acquiring
Fund a statement of its assets, liabilities and capital, with
values determined as provided in Section 4 of this Agreement,
together with a schedule of investments with their respective
dates of acquisition and tax costs, all as of the Valuation
Time, certified on such Fund's behalf by its President (or any
Vice President) or its Treasurer, and a certificate signed by
such Fund's President
A-12
(or any Vice President) or its Treasurer, dated as of the
Closing Date, certifying that as of the Valuation Time and as
of the Closing Date there has been no material adverse change
in the financial position of the Target Fund since the date of
such Fund's most recent Annual Report or Semi-Annual Report,
as applicable, other than changes in the Target Fund
Investments since that date or changes in the market value of
the Target Fund Investments.
(c) That the Target Fund shall have furnished to the Acquiring
Fund a certificate signed by such Fund's President (or any
Vice President) or its Treasurer, dated the Closing Date,
certifying that as of the Valuation Time and as of the Closing
Date all representations and warranties of the Target Fund
made in this Agreement are true and correct in all material
respects with the same effect as if made at and as of such
dates and the Target Fund has complied with all of the
agreements and satisfied all of the conditions on its part to
be performed or satisfied at or prior to such dates.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) That the Acquiring Fund shall have received the opinion of
Skadden, counsel for the Target Fund, dated as of the Closing
Date, addressed to the Acquiring Fund, substantially in the
form and to the effect that:
(i) the Target Fund is duly formed and validly existing
under the laws of its state of organization;
(ii) the Target Fund is registered as a closed-end,
management investment company under the 1940 Act;
(iii) this Agreement and the Reorganization provided for
herein and the execution of this Agreement have been
duly authorized by all requisite action of the
Target Fund, and this Agreement has been duly
executed and delivered by the Target Fund and
(assuming this Agreement is a valid and binding
obligation of the other party hereto) is a valid and
binding obligation of the Target Fund;
(iv) neither the execution or delivery by the Target Fund
of this Agreement nor the consummation by the Target
Fund of the transactions contemplated hereby violate
any provision of any statute, or any published
regulation or any judgment or order disclosed to
them by the Target Fund as being applicable to the
Target Fund; and
(v) to their knowledge and subject to the qualifications
set forth below, the execution and delivery by the
Target Fund of the Agreement and the consummation of
the transactions herein contemplated do not require,
under the laws of its state of organization or any
state in which the Target Fund is qualified to do
business, or the federal laws of the United States,
the consent, approval, authorization, registration,
qualification or order of, or filing with, any court
or governmental agency or body (except such as have
been obtained under the 1933 Act, 1934 Act, the 1940
Act or the rules and regulations thereunder).
Counsel need express no opinion, however, as to any
such consent, approval, authorization, registration,
qualification, order or filing
A-13
which may be required as a result of the involvement
of other parties to this Agreement in the
transactions herein contemplated because of their
legal or regulatory status or because of any other
facts specifically pertaining to them;
(f) That the Acquiring Fund shall have obtained an opinion from
Skadden, counsel for the Target Fund, dated as of the Closing
Date, addressed to the Acquiring Fund, that the consummation
of the transactions set forth in this Agreement comply with
the requirements of a reorganization as described in Section
368(a) of the Code.
(g) That the N-14 Registration Statement shall have become
effective under the 1933 Act and no stop order suspending such
effectiveness shall have been instituted or, to the knowledge
of the Target Fund, be contemplated by the SEC.
(h) That all proceedings taken by the Target Fund and its counsel
in connection with the Reorganization and all documents
incidental thereto shall be satisfactory in form and substance
to the Acquiring Fund.
(i) That prior to the Closing Date the Target Fund shall have
declared a dividend or dividends which, together with all such
previous dividends, shall have the effect of distributing to
its shareholders all of its net investment company taxable
income for the period to and including the Closing Date, if
any (computed without regard to any deduction for dividends
paid), and all of its net capital gain, if any, realized to
and including the Closing Date. In this regard, the last
dividend period for the Target Fund Preferred Shares may be
shorter than the dividend period for such APS determined as
set forth in the applicable Certificate of Vote.
10. Termination, Postponement and Waivers.
(a) Notwithstanding anything contained in this Agreement to the
contrary, this Agreement may be terminated and the
Reorganization abandoned at any time (whether before or after
adoption thereof by the shareholders of the Funds) prior to
the Closing Date, or the Closing Date may be postponed, (i) by
mutual consent of the Boards of Trustees of the
A-14
Funds, (ii) by the Board of Trustees of the Target Fund if any
condition of the Target Fund's obligations set forth in
Section 8 of this Agreement has not been fulfilled or waived
by such Board; or (iii) by the Board of Trustees of the
Acquiring Fund if any condition of the Acquiring Fund's
obligations set forth in Section 9 of this Agreement have not
been fulfilled or waived by such Board.
(b) If the transactions contemplated by this Agreement have not
been consummated by December 31, 2005, this Agreement
automatically shall terminate on that date, unless a later
date is mutually agreed to by the Boards of Trustees of the
Funds.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no
further effect, and there shall not be any liability on the
part of any Fund or persons who are their directors, trustees,
officers, agents or shareholders in respect of this Agreement.
(d) At any time prior to the Closing Date, any of the terms or
conditions of this Agreement may be waived by the Board of
Trustees of any Fund (whichever is entitled to the benefit
thereof), if, in the judgment of such Board after consultation
with its counsel, such action or waiver will not have a
material adverse effect on the benefits intended under this
Agreement to the shareholders of their respective fund, on
behalf of which such action is taken.
(e) The respective representations and warranties contained in
Sections 1 and 2 of this Agreement shall expire with, and be
terminated by, the consummation of the Reorganization, and
neither Fund nor any of its officers, trustees, agents or
shareholders shall have any liability with respect to such
representations or warranties after the Closing Date. This
provision shall not protect any officer, trustee, agent or
shareholder of either Fund against any liability to the entity
for which that officer, trustee, agent or shareholder so acts
or to its shareholders, to which that officer, trustee, agent
or shareholder otherwise would be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless
disregard of the duties in the conduct of such office.
(f) If any order or orders of the Commission with respect to this
Agreement shall be issued prior to the Closing Date and shall
impose any terms or conditions which are determined by action
of the Boards of Trustees of the Funds to be acceptable, such
terms and conditions shall be binding as if a part of this
Agreement without further vote or approval of the shareholders
of the Funds unless such terms and conditions shall result in
a change in the method of computing the number of Acquiring
Fund Common Shares or Acquiring Fund APS to be issued to the
Acquired Funds, as applicable, in which event, unless such
terms and conditions shall have been included in the proxy
solicitation materials furnished to the shareholders of the
Funds prior to the meetings at which the Reorganization shall
have been approved, this Agreement shall not be consummated
and shall terminate unless the Funds promptly shall call a
special meeting of shareholders at which such conditions so
imposed shall be submitted for approval.
11. Indemnification.
(a) Each party (an "Indemnitor") shall indemnify and hold the
other and its officers, trustees, agents and persons
controlled by or controlling any of them (each an "Indemnified
A-15
Party") harmless from and against any and all losses, damages,
liabilities, claims, demands, judgments, settlements,
deficiencies, taxes, assessments, charges, costs and expenses
of any nature whatsoever (including reasonable attorneys'
fees) including amounts paid in satisfaction of judgments, in
compromise or as fines and penalties, and counsel fees
reasonably incurred by such Indemnified Party in connection
with the defense or disposition of any claim, action, suit or
other proceeding, whether civil or criminal, before any court
or administrative or investigative body in which such
Indemnified Party may be or may have been involved as a party
or otherwise or with which such Indemnified Party may be or
may have been threatened (collectively, the "Losses") arising
out of or related to any claim of a breach of any
representation, warranty or covenant made herein by the
Indemnitor, provided, however, that no Indemnified Party shall
be indemnified hereunder against any Losses arising directly
from such Indemnified Party's (i) willful misfeasance, (ii)
bad faith, (iii) gross negligence or (iv) reckless disregard
of the duties involved in the conduct of such Indemnified
Party's position.
(b) The Indemnified Party shall use its best efforts to minimize
any liabilities, damages, deficiencies, claims, judgments,
assessments, costs and expenses in respect of which indemnity
may be sought hereunder. The Indemnified Party shall give
written notice to Indemnitor within the earlier of ten (10)
days of receipt of written notice to Indemnified Party or
thirty (30) days from discovery by Indemnified Party of any
matters which may give rise to a claim for indemnification or
reimbursement under this Agreement. The failure to give such
notice shall not affect the right of Indemnified Party to
indemnity hereunder unless such failure has materially and
adversely affected the rights of the Indemnitor; provided that
in any event such notice shall have been given prior to the
expiration of the Survival Period. At any time after ten (10)
days from the giving of such notice, Indemnified Party may, at
its option, resist, settle or otherwise compromise, or pay
such claim unless it shall have received notice from
Indemnitor that Indemnitor intends, at Indemnitor's sole cost
and expense, to assume the defense of any such matter, in
which case Indemnified Party shall have the right, at no cost
or expense to Indemnitor, to participate in such defense. If
Indemnitor does not assume the defense of such matter, and in
any event until Indemnitor states in writing that it will
assume the defense, Indemnitor shall pay all costs of
Indemnified Party arising out of the defense until the defense
is assumed; provided, however, that Indemnified Party shall
consult with Indemnitor and obtain indemnitor's prior written
consent to any payment or settlement of any such claim.
Indemnitor shall keep Indemnified Party fully apprised at all
times as to the status of the defense. If Indemnitor does not
assume the defense, Indemnified Party shall keep Indemnitor
apprised at all times as to the status of the defense.
Following indemnification as provided for hereunder,
Indemnitor shall be subrogated to all rights of Indemnified
Party with respect to all third parties, firms or corporations
relating to the matter for which indemnification has been
made.
12. Other Matters.
A-16
(a) All covenants, agreements, representations and warranties made
under this Agreement and any certificates delivered pursuant
to this Agreement shall be deemed to have been material and
relied upon by each of the parties, notwithstanding any
investigation made by them or on their behalf.
(b) All notices hereunder shall be sufficiently given for all
purposes hereunder if in writing and delivered personally or
sent by registered mail or certified mail, postage prepaid.
Notice to the Target Fund shall be addressed to the Target
Fund c/o Van Kampen Asset Management, 1221 Avenue of the
Americas, New York, New York 10020, Attention: General
Counsel, or at such other address as the Target Fund may
designate by written notice to the Acquiring Fund. Notice to
the Acquiring Fund shall be addressed to the Acquiring Fund
c/o Van Kampen Asset Management, 1221 Avenue of the Americas,
New York, New York 10020, Attention: General Counsel, or at
such other address and to the attention of such other person
as the Acquiring Fund may designate by written notice to the
Target Fund. Any notice shall be deemed to have been served or
given as of the date such notice is delivered personally or
mailed.
(c) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the
Reorganization, constitutes the only understanding with
respect to the Reorganization, may not be changed except by a
letter of agreement signed by each party and shall be governed
by and construed in accordance with the laws of the State of
Illinois applicable to agreements made and to be performed in
said state.
(d) It is expressly agreed that the obligations of the Funds
hereunder shall not be binding upon any of their respective
trustees, shareholders, nominees, officers, agents, or
employees personally, but shall bind only the trust property
of the respective Fund as provided in such Fund's Declaration
of Trust. The execution and delivery of this Agreement has
been authorized by the trustees of each Fund and signed by
authorized officers of each Fund, acting as such, and neither
such authorization by such trustees, nor such execution and
delivery by such officers shall be deemed to have been made by
any of them individually or to impose any liability on any of
them personally, but shall bind only the trust property of
each Fund as provided in such Funds' Declaration of Trust.
This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original but all
such counterparts together shall constitute but one instrument.
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to
be executed and delivered by their duly authorized officers as of the day and
year first written above.
A-17
VAN KAMPEN XXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXX
-----------------------------------------
[Name]
[Title]
Attest: [Name]
[Title]
VAN KAMPEN XXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXX
-----------------------------------------
[Name]
[Title]
Attest: [Name]
[Title]
A-18
APPENDIX B
ARTICLES OF AMENDMENT TO
THE CERTIFICATE OF VOTE OF TRUSTEES
CHANGING THE TIMING OF CERTAIN REPORTS TO RATING
AGENCIES
Van Kampen Select Sector 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 6 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 6 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.
A. The listed definition for the defined term "RP Basic
Maintenance Report" in Section 1 of Part I of the
Certificate of Vote is hereby amended to replace such
definition with the following:
"RP 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 RP Basic Maintenance Amount, the net asset value
and market trading price per Common Share, and the
total return percentage for the relevant valuation
period.
B. The defined term "Quarterly Valuation Date" in
Section 1 of Part I of the Certificate of Vote and
the listed definition for "Quarterly Valuation Date"
are hereby amended to replace such defined term and
definition with the following:
"Annual Valuation Date" shall mean the last Business
Day of each fiscal year of the Fund.
C. Section 6 (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. Section 7 (b) (ii) of Part I of the Certificate of
Vote is hereby amended to replace the sentences: "The
Fund will also deliver an RP Basic Maintenance Report
to Moody's and S&P on any Valuation Date that (A) the
Discounted Value of Moody's Eligible Assets or S&P
Eligible Assets, as the case may be, is greater than
the RP Basic Maintenance Amount by 5% or less or (B)
on the date which the Fund redeems Common Shares. The
Fund will also deliver an RP Basic Maintenance Report
to S&P upon its request." with the following
sentences:
The Fund shall also deliver to S&P (if S&P is then
rating the RP), Moody's (if Moody's is then rating
the RP) and the Paying Agent and Remarketing Agent
(if either S&P or Moody's is then rating the RP) an
RP 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 RP) and Moody's (if
Moody's is then rating the RP) an RP Basic
Maintenance Report whenever (i) the Fund shall have
redeemed RP 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 RP 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 7 (b) (iii) of Part I of the Certificate of
Vote is hereby amended to replace such section with
the following:
Within ten Business Days after 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 RP), Moody's (if Moody's is then rating the RP)
and the Paying Agent and Remarketing Agent (if either
S&P or Moody's is then rating the RP)
(A) the mathematical accuracy of the calculations
reflected in the RP Basic Maintenance Report prepared
by the Fund date
and
(B) 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 RP) of an aggregate
Discounted Value at least equal to the RP Basic
2
Maintenance Amount and Moody's Eligible Assets (if
Moody's is then rating the RP) of an aggregate
Discounted Value at least equal to the RP Basic
Maintenance Amount (such confirmation being herein
called the "Accountant's Confirmation").
F. The final clause of Section 9 (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, if any, 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, if any, by the
Fund's independent accountants to confirm that the
Fund is in compliance with these standards; or
3
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 Select Sector Municipal Trust.
Before me,
-----------------------------
Notary Public
My commission expires:
-----------------------
4
Federal Identification
No. 36-7051237
THE COMMONWEALTH OF MASSACHUSETTS
Office of the Massachusetts Secretary of State
Michael Joseph Connolly, Secretary
One Ashburton Place, Boston, Mass. 02108
CERTIFICATE OF VOTE OF TRUSTEES ESTABLISHING
TWO SERIES OF PREFERRED SHARES
I, Ronald A. Nyberg, Vice President and Secretary of Van
Kampen Merritt Select Sector Municipal Trust (the "Fund") located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, do of the trustees of the Fund
held on November 19, 1993, the following vote establishing and designating two
series of preferred shares of beneficial interest and determining the relative
rights and preferences thereof was duly adopted:
5
First: Pursuant to authority expressly vested in the Board of
Trustees of the Fund by Article VI of its Declaration of Trust (which, as
hereafter amended or restated from time to time is, together with this
Certificate of Vote, herein called the "Declaration of Trust"), the Board of
Trustees hereby authorizes the issuance of two series of its authorized
preferred shares of beneficial interest, $.01 par value, liquidation preference
of $25,000 per share, designated, respectively, as "Series A Remarketed
Preferred Shares" or "Series A RP(R)" and "Series B Remarketed Preferred Shares"
or "Series B RP(R)" (collectively, the Series A Remarketed Preferred Shares and
Series B Remarketed Preferred Shares are referred to herein as "Remarketed
Preferred Shares" or "RP(R)").
Second: The preferences, voting powers, qualifications, and
special or relative rights or privileges of such class of preferred shares of
beneficial interest are as follows:
DESIGNATION
SERIES A REMARKETED PREFERRED SHARES: A series of 680
preferred shares of beneficial interest, $.01 par value, liquidation preference
$25,000 per share, is hereby designated "Series A Remarketed Preferred Shares."
Each share of Series A Remarketed Preferred Shares shall be issued on December
21, 1993; have a dividend rate for its Initial Dividend Period equal to 2.55%
per annum; have an Initial Dividend Period ending Monday, January 10, 1994; 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 Series A Remarketed
Preferred Shares shall constitute a separate class of preferred shares of
beneficial interest of the Fund, and each share of Series A Remarketed Preferred
Shares shall be identical except as provided in Section 4 of this Part I of this
Certificate of Vote.
SERIES B REMARKETED PREFERRED SHARES: A series of 680 preferred shares of
beneficial interest, $.01 par value, liquidation preference $25,000 per share,
is hereby designated "Series B Remarketed Preferred Shares." Each share of
Series B Remarketed Preferred Shares shall be issued on December 21, 1993; have
a dividend rate for its Initial Dividend Period equal to 2.55% per annum; have
an Initial Dividend Period ending Monday, January 17, 1994; 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 Series B Remarketed Preferred
Shares shall constitute a separate class of preferred shares of beneficial
interest of the Fund, and each share of Series B Remarketed Preferred Shares
shall be identical except as provided in Section 4 of this Part I of this
Certificate of Vote.
- ---------------------
* Registered trademark of Merrill Lynch & Co. Inc.
6
No holder of any series of RP shall, solely by reason of being
such holder, have any right to acquire, purchase or subscribe for any RP, common
shares of beneficial interest, $.01 par value, of the Fund or other securities
of the Fund which it may hereafter issue or sell (whether out of the number of
shares authorized by the Declaration of Trust, or out of any shares acquired by
the Fund after the issuance thereof, or otherwise).
PART I.
1. DEFINITIONS. As used in Parts I and II hereof, the
following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa),
unless the context otherwise requires:
"'AA' Composite Commercial Paper Rate," on any date for any
Dividend Period, means (i) the interest equivalent of the rate on commercial
paper placed on behalf of issuers whose corporate bonds are rated AA by S&P and
Aa by Moody's, or the equivalent of such rating by another nationally recognized
statistical rating organization, as such rate is 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 the Federal Reserve Bank
of New York does not make available such a rate, then the arithmetic average of
the interest equivalent of such rates on commercial paper placed on behalf of
such issuers, as quoted on a discount basis or otherwise by the Commercial Paper
Dealers to the Remarketing Agent for the close of business on the Business Day
immediately 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
Dealers or, if none of the Commercial Paper Dealers quotes such a rate, by any
Substitute Commercial Paper Dealer or 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
such Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers,
by the remaining Commercial Paper Dealer or Commercial Paper Dealers. If the
number of Dividend Period days shall be (i) fewer than 49 days, such rate shall
be the interest equivalent of the 30-day rate on such commercial paper; (ii) 49
or more days but fewer than 70 days, such rate shall be the interest equivalent
of the 60-day rate on such commercial paper; (iii) 70 or more days but fewer
than 85 days, such rate shall be the arithmetic average of the interest
equivalent of the 60-day and 90-day rates on such commercial paper; (iv) 85 or
more days but fewer than 91 days, such rate shall be the interest equivalent of
the 90-day rate on such commercial paper and (v) 91 days but less than one year,
such rate shall be the interest equivalent of the 180-day rate on such
commercial paper. 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.
7
"Accountant's Confirmation" shall have the meaning set forth
in paragraph (b)(iii)(B) of Section 7 of this Part I.
"Additional Dividend" means payment to a Holder of RP of an
amount which, after taking into account the 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 defined
below) to be equal to the dollar amount of the dividends which would have been
received by such Holder if the Retroactive Taxable Allocations had not been
made. Such Additional Dividend shall be calculated (a) without consideration
being given to the time value of money, (b) assuming that no Holder of RP is
subject to the federal alternative minimum tax with respect to dividends
received from the Fund, (c) assuming the portion of the dividend to which each
Retroactive Taxable Allocation applies would be taxable in the hands of each
Holder of RP at (i) in the case of an allocation of capital gains, the maximum
marginal regular federal income tax rate on net capital gains applicable to
individuals or corporations in effect during the taxable year in question,
whichever is greater, or (ii) in the case of an allocation of ordinary income,
the maximum marginal regular federal income tax rate on ordinary income
applicable to individuals or corporations in effect during the taxable year in
question, whichever is greater, and (d) assuming the Additional Dividend will
not be subject to federal income tax.
"Adviser" means Van Kampen Merritt Investment Advisory Corp.
"Agent Member" means a designated member of the Securities
Depository that will maintain records for a beneficial owner of one or more
shares of RP.
"Anticipation Notes" means the following municipal securities:
tax anticipation notes, revenue anticipation notes, and tax and revenue
anticipation notes.
"Applicable Dividend Rate" for any series of RP means, with
respect to the Initial Dividend Period for such series, the initial dividend
rate per annum described in the "Designation" of this Certificate of Vote and,
with respect to any subsequent Dividend Period for such series, the dividend
rate per annum that (i) except for a Dividend Period commencing during a
Non-Payment Period will be equal to the lower of the rate per annum that the
Remarketing Agent advises results on the Remarketing Date preceding the first
day of such Dividend Period from implementation of the remarketing procedures
described herein in Part II and the Maximum Dividend Rate or (ii) for each
Dividend Period commencing during a Non-Payment Period, will be equal to the
Non-Payment Period Rate.
"Applicable Percentage" for any series of RP on any
Remarketing Date shall mean the percentage, determined as set forth below, based
on the prevailing rating of such series by Moody's and S&P (or, if Moody's or
S&P, or both, shall not make such rating available, the equivalent of wither or
both of such ratings by a Substitute Rating Agency or two Substitute Rating
Agencies or, in the event only one such rating shall be available, such rating)
in effect at the close of business on the Business Day next preceding such
Remarketing Date:
8
<Table>
<Caption>
Applicable
Percentage of
Prevailing Rating Reference Rate
----------------- --------------
Moody's S&P
------- ---
aa3 or higher AA- or higher 110%
a3 to a1 A- to A+ 125%
baa3 to baa1 BBB- to BBB+ 150%
ba3 to ba1 BB- to BB+ 200%
Below ba3 Below BB- 250%
</Table>
provided, however, that in the event the Fund has notified the Paying Agent and
the Remarketing Agent of its intent to allocate income taxable for federal
income tax purposes to the RP prior to the Remarketing Agent establishing the
Applicable Dividend 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 RP for such Dividend Period that represents the allocation of
taxable income to the RP. If the ratings for the RP are split between two of the
foregoing credit rating categories, the lower rating will determine the
prevailing rating.
"Beneficial Owner" means a person who is listed as the
beneficial owner of one or more shares of RP on the records of the Paying Agent
or, with respect to any share of RP not registered in the name of the Securities
Depository on the share transfer books of the Fund, the person in whose name
such share is so registered.
"Board of Trustees" or "Trustees" means the Board of Trustees
of the Fund.
"Business Day" means a day on which the New York Stock
Exchange, Inc. is open for trading, and is not a day on which banks in The City
of New York are authorized or obligated by law to close.
"Closing Transaction" 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.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Merrill Lynch, Pierce, Fenner
& Smith Incorporated and such other commercial paper dealers as the Fund may
from time to time appoint, or in lieu of any thereof, their respective
affiliates or successors, if such entity is a commercial paper dealer.
"Commission" means the Securities and Exchange Commission.
9
"Common Shares" means the common shares of beneficial
interest, par value $.01 per share, of the Fund.
"Cure Date" means the RP Basic Maintenance Cure Date or the
1940 Act Cure Date, as the case may be.
"Date of Original Issue" means, with respect to any series of
RP, the date on which the Fund initially issues such series.
"Declaration of Trust" means the Declaration of Trust, as
amended, of the Fund, including this Certificate of Vote establishing and fixing
the rights and preferences of the two series of RP.
"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 4 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.
"Discount Factor" means a Moody's Discount Factor or an S&P
Discount Factor, as the case may be.
"Discounted Value" of any asset of the Fund means the market
value thereof, reduced by the discounts required under guidelines established by
Moody's and the guidelines established by S&P in connection with the Fund's
receipt of ratings on the RP from Moody's and S&P, provided that with respect to
Moody's Eligible Asset, Discounted Value shall not exceed the par value at any
time. The fair market value of the Fund's portfolio securities shall be computed
based upon pricing services provided by the Pricing Service or such other
pricing service determined from time to time by the Trustees, provided that S&P
and Moody's have informed the Fund in writing that use of such pricing service
will not adversely affect such rating agency's then current rating of the RP.
"Dividend Coverage Amount," as of any Valuation Date, shall
mean, with respect to each series of RP, (i) the aggregate amount of dividends
that will accumulate on such RP to (but not including) the first Dividend
Payment Date for such share that follows such Valuation Date plus any
liabilities that will become payable prior to or on such payment date, less (ii)
the combined value of Deposit Securities irrevocably deposited for the payment
of dividends on such RP and Receivables for Municipal Securities Sold which
become due prior to the Dividend Payment Date and interest with respect to
municipal securities which is payable to the Fund prior to the Dividend Payment
Date.
"Dividend Coverage Assets," as of any Valuation Date, shall
mean, with respect to each of the RP, 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.
10
"Dividend Payment Date" has the meaning described in Part I,
Section 3(e) of this Certificate of Vote.
"Dividend Period," with respect to any series of RP, means a
7-day Dividend Period, a 28-day Dividend Period or a Special Dividend Period.
"DTC" means The Depository Trust Company, which will register
the shares of RP in the name of its nominee, Cede & Co.
"Eligible Assets" means Moody's Eligible Assets or S&P
Eligible Assets as the case may be.
"Fund" means Van Kampen Merritt Select Sector Municipal Trust,
a Massachusetts business trust, which is the issuer of the shares of RP.
"Holder" of RP means, unless the context otherwise requires, a
person who is listed in the records of the Paying Agent as the beneficial owner
of one or more shares of RP.
"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 Series A Remarketed
Preferred Shares and Series B Remarketed Preferred Shares, means the period
commencing on and including the Date of Original Issue thereof and ending on
Monday, January 10, 1994 and Monday, January 17, 1994, respectively.
"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.
"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.
"Mandatory Redemption Price" means $25,000 per share of RP
plus an amount equal to accumulated but unpaid dividends thereon to the date of
redemption (whether or not earned or declared).
"Marginal Tax Rate" means 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.
"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
11
Pricing Service values portfolio securities at the mean between the quoted bid
and asked price or the yield equivalent when quotations are readily available.
Securities for which quotations are not readily available are valued at fair
value as determined by the Pricing Service using methods which include
consideration of yields or prices or 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. In the
event that the Pricing Service is unable to value a security, the security shall
be valued at the lower of two dealer bids, at least one of which shall be in
writing, obtained by the Fund from dealers who are members of the National
Association of Securities Dealers, Inc. and make a market in the security.
"Maximum Dividend Rate," with respect to any series of RP,
means the maximum dividend rate for shares of such series of RP determined with
reference to the credit rating assigned to such shares and the duration of the
applicable dividend period. The Maximum Dividend Rate for any Dividend Period at
any date on which an Applicable Dividend Rate is determined will be the
Applicable Percentage of the Reference Rate.
"Maximum Potential Additional Dividend Liability," as of any
Valuation Date, means the aggregate amount of Additional Dividends that would be
due if the Fund were to make Retroactive Taxable Allocations, with respect to
any taxable year, estimated based upon dividends paid and the amount of
undistributed realized net capital gains and other taxable income earned by the
Fund, as of the end of the calendar month immediately preceding such Valuation
Date, and assuming such Additional Dividends are fully taxable.
"Minimum Liquidity Level" has the meaning set forth in Part I,
Section 8 of this Certificate of Vote.
"Moody's" means Moody's Investors Service, Inc.
"Moody's Discount Factor" means, for purposes of determining
the Discounted Value of any Moody's Eligible Asset, the percentage determined by
reference to (a) the rating on such asset and (b) the shortest 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
<Table>
<Caption>
MOODY'S EXPOSURE PERIOD AAA(1) AA(1) A(1) BAA(1) OTHER(2) VMIG-1(1,3,4) SP-1+(3,4)
- ----------------------- ------ ----- ---- ------ -------- ------------- --------
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
</Table>
12
eight weeks...........................
- --------------------
(1) Moody's rating.
(2) California municipal securities not rated by Moody's but rated BBB-, BBB
or BBB+ by S&P.
(3) California municipal securities rated MIG-1 or VMIG-1 or, if not rated
by Moody's, rated SP-1+ by S&P
which do not mature or have a demand feature at par exercisable within
the Moody's Exposure Period and which do not have a long-term rating.
(4) For the purposes of the definition of Moody's Eligible Assets, these
securities will have an assumed rating of "A" by Moody's.
Notwithstanding the foregoing, (a) no Moody's Discount Factor
will be applied to short-term municipal securities so long as such municipal
securities are rated at least MIG-1, VMIG-1 or P-1 by Moody's which mature or
have a demand feature at par exercisable within the Moody's Exposure Period and
the Moody's Discount Factor for such municipal securities will be 125% so 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 (b) no Moody's Discount Factor will be applied to cash or to
Receivables for Municipal Securities Sold.
"Moody's Eligible Assets" means cash, Receivables for
Municipal Securities Sold or a municipal security that (i) pays interest in
cash, (ii) is publicly rated Baa or better 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) will 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 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 maximum underlying
obligor requirement described above, any municipal security backed by the
guaranty, letter of credit or insurance issued by a third party will be deemed
to be issued by such third party if the issuance of such third party credit is
the sole determinant of the rating of 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
13
Assets; such BBB, Baa and A-rated municipal securities, if any, together with
any municipal securities issued by issuers located within the same state or
territory and rated A by Moody's or AA by S&P, may comprise no more than 40% of
total Moody's Eligible Assets; and such BBB, Baa, A and AA-rated municipal
securities, if any, together with any municipal securities issued by issuers
located within the same state or territory and rated Aa by Moody's or AAA by
S&P, may comprise no more than 60% of total Moody's Eligible Assets.
For purposes of applying the foregoing requirements, a
municipal security shall be deemed to be rated BBB by S&P if rated BBB, BBB- or
BBB+ by S&P. For purposes of Minimum Issue Size, Maximum Underlying Obligor and
Maximum State or Territory Concentration, Moody's Eligible Assets shall be
calculated without including cash and municipal securities rated MIG-1 or VMIG-1
or, if not rated by Moody's, rated SP-1+ by S&P, which either mature or have a
demand feature at par exercisable within the Moody's Exposure Period. Where the
Fund sells an asset and agrees to repurchase such asset in the future, the
Discounted Value of such asset will constitute a Moody's Eligible Asset and the
amount the Fund is required to pay upon repurchase of such asset will count as a
liability for the purposes of the RP Basic Maintenance Amount. Where the Fund
purchases an asset and agrees to sell it to a third party in the future, cash
receivable by the Fund thereby will constitute a Moody's Eligible Asset if the
long-term debt of such other party is rated at least A2 by Moody's and such
agreement has a term of 30 days or less; otherwise the Discounted Value of such
asset will constitute a Moody's Eligible Asset. For the purposes of calculation
of Moody's Eligible Assets, municipal securities which have been called for
redemption by the issuer thereof shall be valued at the lower of market value or
the call price of such municipal securities. The Discounted Value of municipal
securities of territories other than Puerto Rico is limited to no more than 10%
of Moody's Eligible Assets.
Notwithstanding the foregoing, an asset will not be considered
a Moody's Eligible Asset if (x) it is subject to any material lien, mortgage,
pledge, security interest or agreement of any kind (collectively, "Liens"),
except for (i) 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 assets as a Moody's Eligible Asset, (ii) Liens for taxes that are
not then due and payable or that can be paid thereafter without penalty, (iii)
Liens to secure payment for services rendered or cash advanced to the fund by
the Adviser, the Paying Agent, the Administrator, the Remarketing Agent or State
Street Bank and Trust Company and (iv) Liens by virtue of any repurchase
agreement; or (y) it is irrevocably deposited by the Fund for the payment of any
amounts set forth in (A)(i) through (A)(vii) under "RP Basic Maintenance
Amount."
"Moody's Exposure Period" shall mean a period commencing on a
given Valuation Date and ending 46 days thereafter.
"Moody's Hedging Transaction" means a transaction by the Fund
in options on securities, futures contracts based on the Municipal Index or on
Treasury Bonds and options on such futures contracts.
14
"Moody's Volatility Factor" means 272% (or 302% where notice
of a Special Dividend Period of greater than 28 days but less than 50 days has
been given but not yet exercised), as long as there has been no increase enacted
to the Marginal Tax Rate. If such an increase is enacted but not yet
implemented, the Moody's Volatility Factor shall be as follows:
<Table>
<Caption>
Moody's Moody's
% Change in Volatility Volatility
Marginal Tax Rate Factor Factor*
----------------- ------ ------
Less than or equal to 5%............................ 292% 323%
Greater than 5% but less than 10%................... 313 347
Greater than 10% but less than 15%.................. 338 373
Greater than 15% but less than 20%.................. 364 402
Greater than 20% but less than 25%.................. 396 436
Greater than 25% but less than 30%.................. 432 474
Greater than 30% but less than 35%.................. 472 518
Greater than 35% but less than 40%.................. 520 570
</Table>
* Applicable where a notice of Special Dividend Period of greater than 28
days but less than 50 days has been given but not yet exercised.
"Municipal Index" means The Bond Buyer Municipal Bond Index.
"1940 Act" means the Investment Company Act of 1940, as
amended.
"1940 Act Cure Date" means the last Business Day of the
calendar month following the failure by the Fund to maintain the 1940 Act RP
Asset Coverage as of the last Business Day of any calendar month in which any
shares of RP are Outstanding.
"1940 Act RP Asset Coverage" means asset coverage (determined
in accordance with Section 18 of the 1940 Act) of at least 200% with respect to
senior securities which are shares, including the RP (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 shares of a closed-end
investment company as a condition of paying dividends on its common shares).
"Non-Call Period" has the meaning described in "Specific
Redemption Provisions," below.
"Non-Payment Period" has the meaning set forth in Part I,
Section 3(g) of this Certificate of Vote.
"Non-Payment Period Rate" has the meaning set forth in Part I,
Section 3(g) of this Certificate of Vote.
"Notice of Redemption" has the meaning set forth in Part I,
Section 4(d) of this Certificate of Vote.
15
"Optional Redemption Price" shall mean (i) $25,000 per share
of RP in the case of a 7-day Dividend Period, 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 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).
"Outstanding" shall mean, as of any date, shares of RP
theretofore issued by the Fund except, without duplication, (i) any of the
shares of RP theretofore cancelled or delivered to the Paying Agent for
redemption or redeemed by the Fund, or with respect to which the Fund has given
notice of redemption and irrevocably deposited with the Paying Agent sufficient
funds to redeem such shares of RP, (ii) any shares of RP as to which the Fund or
any affiliate thereof is a Holder, and (iii) any shares of RP represented by any
certificate in lieu of which a new certificate has been executed and delivered
by the Fund; provided, however, that for so long as Moody's is rating the RP,
any RP to which an affiliate shall be considered Outstanding for purposes of
determining the RP Basic Maintenance Amount.
"Paying Agent" means Bankers Trust Company, or any successor
company or entity, which has entered into a Paying Agent Agreement with the Fund
to act, among other things, as the transfer agent, registrar, dividend and
redemption price disbursing agent, settlement agent and agent for certain
notifications for the Fund in connection with the shares of RP in accordance
with such agreement.
"Paying Agent Agreement" means an agreement to be entered into
between the Fund and the Paying Agent.
"Preferred Shares" shall mean the authorized preferred shares
of beneficial interest, par value $.01 per share, of the Fund, and includes the
RP.
"Premium Call Period" has the meaning described in "Specific
Redemption Provisions," below.
"Pricing Service" means Kenny Information Systems, Inc. and
any successor pricing service approved in writing by Moody's (if Moody's is then
rating the RP) and S&P (if S&P is then rating the RP).
"Projected Dividend Amount" means, with respect to the shares
of any series of RP, on any Valuation Date, the amount equal to (i) the number
of days, if any, from and after the last day of the then current Dividend Period
until 48 calendar days from such Valuation Date, multiplied by (ii) a rate equal
to the Maximum Dividend Rate for a Dividend Period of 28 days or less (or at the
Non-Payment Period Rate if such calculation is made during a Non-Payment Period)
multiplied by the larger of (A) the applicable Moody's Volatility Factor or (B)
the applicable S&P Volatility Factor.
"Quarterly Valuation Date" shall mean the last Business Day of
each calendar quarter, commencing December 31, 1993.
16
"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.
A "record holder" of RP shall mean the Securities Depository
or its nominee or such other person or persons listed in the share transfer
books of the Fund as the registered holder of one or more shares of RP.
"Reference Rate" means (a), with respect to any Dividend
Period of less than one year, the higher of the applicable "AA" Composite
Commercial Paper Rate and the Taxable Equivalent of the Short-Term Municipal
Bond Rate, and (b), with respect to any Special Dividend Period of one year or
longer, the Treasury Rate.
"Remarketing" means each periodic operation of the process for
remarketing shares of RP as described in Part II of this Certificate of Vote.
"Remarketing Agent" means Merrill Lynch, Pierce, Fenner &
Smith Incorporated and any additional or successor companies or entities which
have entered into an agreement with the Fund to follow the remarketing
procedures for the purposes of determining the Applicable Dividend Rate.
"Remarketing Agreement" means an agreement entered into
between the Fund and the Remarketing Agent which provides, among other things,
that the Remarketing Agent will follow certain procedures for remarketing shares
of RP on behalf of the Holders as provided in the RP Provisions for the purpose
of determining the Applicable Dividend Rate that will enable the Remarketing
Agent to remarket RP tendered to it at $25,000 per share for the next Dividend
Period.
"Remarketing Date" means with respect to any series of RP the
last Business Day of a Dividend Period for such series.
"Retroactive Taxable Allocation" has the meaning set forth in
Part I, Section 3(i) of this Statement.
"RP Basic Maintenance Amount" as of any Valuation Date means
the dollar amount equal to (A) the sum of (i) the product of the number of
shares of RP Outstanding on such date multiplied by $25,000; (ii) the aggregate
amount of dividends
17
that will have accumulated at the Applicable Rate (whether or not earned or
declared) to (but not including) the next Dividend Payment Date for each of the
RP Outstanding that follows such Valuation Date (or a date 47 days after such
Valuation Date, whichever is sooner); (iii) the amount equal to the Projected
Dividend Amount (based on the number of shares of RP Outstanding on such date);
(iv) the amount of anticipated Fund expenses for the 90 days subsequent to such
Valuation Date; (v) the premium, if any, resulting from the designation of a
Premium Call Period; (vi) the amount of the Fund's Maximum Potential Additional
Dividend Liability as of such Valuation Date; and (vii) any current liabilities
as of such Valuation Date, to the extent not reflected in any of (A)(i) through
(A)(vi) (including, without limitation, any amounts described below as required
to be treated as liabilities in connection with the Fund's transactions in
futures and options and including payables for municipal securities purchased as
of such Valuation Date); less (B) either (i) the face value of any Fund assets
irrevocably deposited by the Fund for the payment of any of (A)(i) through
(A)(vii) if, with respect to any such liability, such assets mature by the
payment date for such liability 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 (ii) the Discounted
Value of such assets.
For purposes of the RP Basic Maintenance Amount in connection
with S&P's rating of the RP, 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 RP Basic Maintenance Amount in connection
with Moody's rating of the RP, with respect to any transactions by the Fund in
futures contracts, options on futures contracts and securities options, the Fund
shall include as liabilities (i) 10% of the exercise price of a call option
written by the Fund, (ii) the exercise price of any written put option.
"RP Basic Maintenance Cure Date" means the third Business Day
after a failure by the Fund to have Eligible Assets with an aggregate Discounted
Value at least equal to the RP Basic Maintenance Amount on any Valuation Date.
"RP 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 RP Basic Maintenance Amount.
"RP Provisions" means the rights and preferences of the shares
of RP established by this Certificate of Vote of Trustees establishing the
shares of RP.
"S&P" means Standard & Poor's Ratings Group and its
successors.
18
"S&P Discount Factor" shall mean, for purposes of calculating
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 on the date of such determination, in accordance with the table
set forth below:
<Table>
<Caption>
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
</Table>
- --------------------
* S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for
short-term municipal securities will be 115%, so long as such municipal
securities are rated A-1+ or SP-1+ by S&P and mature or have a demand feature
exercisable in 30 days or less, or 125% if such municipal securities are not
rated by S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's; provided, however,
that any such Moody's-rated short-term municipal securities which have demand
features exercisable within 30 days or less must be backed by a letter of
credit, liquidity facility or guarantee from a bank or other financial
institution with a short-term rating of at least A-1+ from S&P; and further
provided that such Moody's-rated short-term municipal securities may comprise no
more than 50% of short-term municipal securities that qualify as S&P Eligible
Assets and (ii) no S&P Discount Factor will be applied to cash or to Receivables
for Municipal Securities Sold. For purposes of the foregoing, Anticipation Notes
rated SP-1+ or, if not rated by S&P, rated MIG-1 or VMIG-1 by Moody's, which do
not mature or have a demand feature at par exercisable in 30 days and which do
not have a long-term rating, shall be considered to be short-term municipal
securities.
"S&P Eligible Asset" shall mean cash (excluding any cash
irrevocably deposited by the Fund for the payment of any liabilities within the
meaning of RP 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 by 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
19
an original issue size below $20 million (but in no event below $10 million), is
issued by an issuer with a total of at least $50 million of securities
outstanding. Solely for purposes of this definition, the term "municipal
securities" means any obligation the interest on which is exempt from regular
Federal income taxation and which is issued by any of the fifty United States,
the District of Columbia or any of the territories of the United States, their
subdivisions, counties, cities, towns, villages, school districts and agencies
(including authorities and special districts created by the states), and
federally sponsored agencies such as local housing authorities. Notwithstanding
the foregoing limitations:
1. Municipal securities of any one issuer or guarantor
(excluding bond issuers) 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. 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" on a given Valuation Date means the
period commencing on such date and ending three Business Days thereafter, as
such exposure period may be modified by the Trustees of the Fund, provided,
however, that any such modification shall not adversely affect the then-current
S&P rating of the RP.
"S&P Hedging Transaction" means futures contracts based on the
Municipal Index or Treasury Bonds, put or call options on such contracts
purchased by the Fund and covered call options or secured put options on
portfolio securities written by the Fund.
"S&P Volatility Factor" shall mean, for each series of RP, (i)
during the Initial Dividend Period, 277%; and (ii) thereafter, depending on the
applicable Reference Rate or Treasury Rate, the following percentages:
<Table>
<Caption>
Rate Percentage
---- ----------
---------------------------------------------------------------------------------------
Taxable Equivalent of the Short-Term
Municipal Bond Rate............................................... 277%
---------------------------------------------------------------------------------------
30-day "AA" Composite Commercial Paper Rate....................... 228%
---------------------------------------------------------------------------------------
180-day "AA" Composite Commercial Paper Rate...................... 217%
---------------------------------------------------------------------------------------
1-year U.S. Treasury Bill Rate.................................... 198%
---------------------------------------------------------------------------------------
2-year U.S. Treasury Note Rate.................................... 185%
---------------------------------------------------------------------------------------
20
---------------------------------------------------------------------------------------
3-year U.S. Treasury Note Rate.................................... 178%
---------------------------------------------------------------------------------------
4-year U.S. Treasury Note Rate.................................... 171%
---------------------------------------------------------------------------------------
5-year U.S. Treasury Note Rate.................................... 169%
---------------------------------------------------------------------------------------
</Table>
Notwithstanding the foregoing, the S&P Volatility Factor may
mean such other potential dividend rate increase factor as S&P advises the Fund
in writing is applicable.
"Securities Depository" means DTC or any successor company or
other entity selected by the Fund as securities depository for a series of RP
that agrees to follow the procedures required to be followed by such securities
depository in connection with the shares of RP.
"Settlement Date" means the first Business Day after a
Remarketing Date applicable to a share of RP.
"7-day Dividend Period," means the Dividend Period generally
applicable to Series A RP and generally containing seven days and, with respect
to any series of RP, means (a) any Dividend Period commencing after a failed
Remarketing for such series, or (b) any Dividend Period commencing after the
first day of, and during, a Non-Payment Period with respect to such series and,
in all such cases, generally containing seven days.
"Special Dividend Period" means a Dividend Period established
by the Board of Trustees for shares of RP as described in Part I, Section 3(d)
of this Certificate of Vote.
"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 Remarketing Agent, 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
Remarketing Agent, 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 but unpaid dividends plus a premium expressed
as a percentage of $25,000 as determined by the Board of Trustees after
consultation with the Remarketing Agent; provided that during any Special
Dividend Period of 365 or more days, if on the date of determination of the
Applicable Dividend Rate for such series, such Applicable Dividend Rate equals
or exceeds the Treasury Rate, the Fund may redeem RP without regard to any
Non-Call Period or Premium Call Period at the Mandatory Redemption Price.
"Substitute Commercial Paper Dealer" shall mean CS First
Boston or Morgan Stanley & Co. 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.
21
"Substitute Rating Agency" and "Substitute Rating Agencies"
shall mean a nationally recognized statistical rating organization or two
nationally recognized statistical rating organizations selected by the Fund to
act as the substitute rating agency or substitute rating agencies, as the case
may be, to determine the credit ratings of the shares of RP.
"Substitute U.S. Government Securities Dealer" shall mean CS
First Boston or Morgan Stanley & Co. or their respective affiliates or
successors, if such entity is a U.S. Government securities dealer; provided that
none of such entities shall be a U.S. Government Securities Dealer.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on
any date means 90% of the quotient of (a) the per annum rate expressed on an
Interest Equivalent basis equal to the Kenny S&P 30-day High Grade Index or any
successor index (the "Kenny Index"), made available for the Business Day
immediately preceding such date but in any event not later than 8:30 a.m, New
York City time, on such date by Kenny Information Systems Inc. or any successor
thereto, based upon 30-day yield evaluations at par of bonds the interest on
which is excludable for regular federal income tax purposes under the Code of
"high grade" component issuers selected by Kenny Information Systems Inc. or any
such successor from time to time in its discretion, which component issuers
shall include, without limitation, issuers of general obligation bonds but shall
exclude any bonds the interest on which constitutes an item of tax preference
under Section 57(a)(5) of the Code or successor provisions, for purposes of the
"alternative minimum tax," divided by (b) 1.00 minus the Marginal Tax Rate
(expressed as a decimal); provided, however, that if the Kenny Index is not made
so available by 8:30 a.m., New York City time, on such date by Kenny Information
Systems Inc. or any successor, the Taxable Equivalent of the Short-Term
Municipal Bond Rate shall mean the quotient of (i) the per annum rate expressed
on an Interest Equivalent basis equal to the most recent Kenny Index so made
available for any preceding Business Day, divided by (ii) 1.00 minus the
Marginal Tax Rate (expressed as a decimal). For so long as RP are rated by
Moody's and/or S&P, the Fund will not use a successor index to the Kenny S&P
30-day High Grade Index unless it receives confirmation in writing from Moody's
and/or S&P, as the case may be, that the use of such successor index would not
impair the then current rating of the RP.
"Tender and Dividend Reset" means the process pursuant to
which shares of RP may be tendered in a Remarketing or held and become subject
to the new Applicable Dividend Rate determined by the Remarketing Agents in such
Remarketing.
"Treasury Bonds" means United States Treasury Bonds backed by
the full faith and credit of the United States government with remaining
maturities of ten years or more.
"Treasury Rate," on any date for any Dividend Period, means:
(a) 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 Dividend Period, as quoted in The Wall
Street Journal on such
22
date for the Business Day next preceding such date; or (b) 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
Dividend Period which is one year or less and expressed as a bond equivalent in
the case of any longer Dividend Period) on the most recently auctioned
non-callable direct obligations of the U.S. Government (excluding "flower"
bonds) with a remaining maturity within three months of the duration of such
Dividend Period as quoted on a discount basis or otherwise by the U.S.
Government Securities Dealer to the Remarketing 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.
"28-day Dividend Period" means the Dividend Period generally
applicable to Series B RP and generally containing 28 days.
"U.S. Government Securities Dealer" means Merrill Lynch,
Pierce, Fenner & Smith, Incorporated and such other U.S. Government securities
dealers as the Fund may from time to time appoint, or lieu thereof, 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 RP Basic Maintenance Amount and the Minimum
Liquidity Level, each Business Day beginning with the Date of Original Issue
provided, however, that the Fund may designate the last Business Day of each
week as a Valuation Date upon written consent of Moody's (if Moody's is rating
the RP) and S&P (if S&P is rating the RP).
"Variation Margin" means, in connection with outstanding
purchase or sale positions in futures contracts and outstanding sales positions
with respect to options thereon by the Fund, the amount of cash or 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.
2. FRACTIONAL SHARES.
(a) No fractional shares of RP shall be issued.
(b) Any RP which at any time hereafter have been redeemed,
exchanged, or otherwise acquired by the Fund shall return to
the status of authorized and
23
unissued Preferred Shares of the Fund without designation as
to series. Upon the redemption, exchange, or other acquisition
by the Fund of all outstanding RP, all provisions of this
Certificate of Vote shall cease to be of further effect and
shall cease to be a part of the Declaration of Trust.
(c) The RP of each series shall rank on a parity with shares of
any other series of Preferred Shares of the Fund as to the
payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the
Fund.
3. DIVIDENDS.
(a) Holders of shares of RP will be entitled to receive, when, as
and if declared by the Fund, out of funds legally available
therefor, cumulative cash dividends, at the rates per annum
set forth in this Certificate of Vote under "Designation" for
the Initial Dividend Period and, in the case of any other
Dividend Period, at the Applicable Dividend Rate for the
applicable Dividend Period and no more (except as otherwise
provided in Section 3(i) of this Certificate of Vote), payable
on the respective dates set forth below and, except as
described below, set by the Remarketing Agent in accordance
with the remarketing procedures described in Part II of this
Certificate of Vote.
(b) Initial Dividend Payment Date and Dividend Period. The
Initial Dividend Period for shares of RP will commence on
their Date of Original Issue and end on Monday, January 10,
1994 for Series A Remarketed Preferred Shares and on Monday,
January 17, 1994, for Series B Remarketed Preferred Shares.
Dividends for such Initial Dividend Period will be paid when,
as and if declared out of funds legally available therefor, on
Tuesday, January 11, 1994 for Series A Remarketed Preferred
Shares and on Tuesday, January 18, 1994, for Series B
Remarketed Preferred Shares, in each case to the Securities
Depository (or such other record holder) as of the Business
Day preceding the date of such payment. Dividends for each
Dividend Period thereafter will be payable when, as and if
declared, on each Dividend Payment Date, subject to certain
exceptions.
(c) Subsequent Dividend Periods.
(i) After the Initial Dividend Period for each share of
RP, a Dividend Period therefor will commence on each
Dividend Payment Date (which, except during a
Non-Payment Period, will be a Settlement Date). Each
subsequent Dividend Period with respect to Series A
Remarketed Preferred Shares will comprise, beginning
with and including the date on which it commences, 7
consecutive days and with respect to Series B
Remarketed Preferred Shares, will comprise, beginning
with and including the date on which it commences, 28
consecutive days or, with respect to each series, in
24
the event the Board of Trustees has designated such
Dividend Period as a Special Dividend Period, such
number of consecutive days or whole years as shall be
designated by the Board of Trustees. Notwithstanding
the foregoing, any adjustment of the remarketing
schedule by the Remarketing Agent which includes an
adjustment of a Settlement Date will lengthen or
shorten Dividend Periods by causing them always to
end on and include the day before the Settlement Date
as so adjusted.
(ii) Except during a Non-Payment Period, by 12:00 noon,
New York City time on the Remarketing Date in the
Remarketing, the holder of such shares may elect to
tender such shares or to hold such shares for the
next Dividend Period. If the holder of such shares of
RP fails to tender such shares on such Remarketing
Date, such holder will continue to hold such shares
at the Applicable Dividend Rate determined in such
Remarketing for the next Dividend Period; provided
that, if there is no Remarketing Agent, the
Remarketing Agent is not required to conduct a
Remarketing or the Remarketing Agent is unable to
remarket in the Remarketing on the Remarketing Date
all shares tendered to them at a price of $25,000 per
share, then the next Dividend Period for such shares
and for all other shares will be a 7-day Dividend
Period and the Applicable Dividend Rate therefor will
be the Maximum Dividend Rate for a 7-day Dividend
Period. If a share of RP is tendered (or deemed
tendered) but not sold in a Remarketing, the holder
of such share will hold such share for a 7-day
Dividend Period at the Maximum Dividend Rate
therefor.
(d) Special Dividend Periods for RP. The Board of Trustees may at
any time designate a subsequent Dividend Period with respect
to all shares of RP on the Remarketing Date next preceding the
commencement of such Dividend Period as a Special Dividend
Period with such number of days or whole years (subject to
adjustment as described above) as the Board of Trustees shall
specify; provided that (i) written notice of any such
designation, of the Maximum Dividend Rate, if applicable, and
Specific Redemption Provisions, if applicable, in respect
thereof and of the consequences of failure to tender, or to
elect to hold, shares must be given at least seven days prior
to such Remarketing Date to the Remarketing Agent, the Paying
Agent, the Securities Depository and the holders of shares of
RP which are to be subject to such Special Dividend Period;
(ii) no Special Dividend Period may commence during a
Non-Payment Period; (iii) in respect of any Special Dividend
Period of 365 or more days, the Board of Trustees, after
consultation with the Remarketing Agent, may establish
Specific Redemption Provisions; provided further that prior to
such designation, the Fund shall provide a RP Basic
Maintenance Report showing, as of the third Business Day next
preceding such proposed Special Dividend Period, (x) Moody's
Eligible Assets, assuming for the
25
purposes of calculating Moody's Eligible Assets, in connection
with a RP Basic Maintenance Amount required to be prepared
pursuant to this provision, a Moody's Exposure Period of
"eight weeks or less but greater than seven weeks" (if Moody's
is then rating the RP) and (y) S&P Eligible Assets (if S&P is
then rating the RP), each with a Discounted Value at least
equal to the RP Basic Maintenance Amount as of such Business
Day (assuming for purposes of the foregoing calculation that
the Maximum Dividend Rate is the Maximum Dividend Rate on such
Business Day as if such Business Day were the last Business
Day prior to the proposed Special Dividend Period). If for any
reason, subsequent to giving notice of the designation of a
Special Dividend Period with respect to a series of RP, the
Board of Trustees determines to rescind such designation,
written notice of such determination shall be given to the
Remarketing Agent, the Paying Agent, the Securities Depository
and the Holders of RP which were to be subject to such Special
Dividend Period, at least two Business Days prior to such
previously proposed Special Dividend Period, and the next
succeeding Dividend Period of such series of RP shall be a
7-day Dividend Period. The existence or rescission of any
Special Dividend Period will not affect the current Dividend
Period or prevent the Board of Trustees from establishing
other Special Dividend Periods of similar duration or in any
way restrict the Maximum Dividend Rate or Specific Redemption
Provisions which may be designated in connection with any
other Special Dividend Period. The Board of Trustees will not
designate a Dividend Period as a Special Dividend Period
unless it receives written confirmation from each of S&P and
Moody's that the establishment of such Special Dividend Period
would not impair the rating then assigned by S&P or Moody's of
shares to RP. In addition, the Board of Trustees will not
change the frequency of the Valuation Dates unless it receives
confirmation in writing from each of S&P and Moody's that such
change would not so impair the then current rating of the RP.
(e) Dividend Payment Dates. Dividends on each share of RP will
accumulate from its Date of Original Issue and will be
payable, when, as and if declared out of funds legally
available therefor by the Board of Trustees, on the applicable
Dividend Payment Dates to the Securities Depository (or such
other record holder) as of the Business Day preceding the
applicable Dividend Payment Date. The Dividend Payment Dates
will be: (i) with respect to a Special Dividend Period of more
than 28 days, the first Business Day of each calendar month
after the designation of such Special Dividend Period and the
day after the last day thereof; and (ii) with respect to any
other Dividend Period, the day after the last day thereof;
provided that, if any such day is not a Business Day, the
Dividend Payment Date will be the first Business Day after
such day.
(f) Dividend Payments.
26
(i) So long as there is a Securities Depository with
respect to shares of RP, each dividend on such shares
will be paid to the Securities Depository or its
nominee as the record holder of all shares. The
Securities Depository will credit the accounts of the
Agent Members of the beneficial owners of shares in
accordance with the Securities Depository's normal
procedures. Each Agent Member will be responsible for
holding or disbursing such payments to the holders of
the shares of RP for which it is acting in accordance
with the instructions of such holders. Dividends on
any share in arrears with respect to any past
Dividend Payment Date may be declared and paid at any
time, without reference to any regular Dividend
Payment Date, to the holder thereof as of a date not
exceeding five Business Days preceding the date of
payment thereof as may be fixed by the Board of
Trustees. Any dividend payment made on shares of RP
will be first credited against the dividends
accumulated but unpaid (whether or not earned or
declared) with respect to the earliest Dividend
Payment Date on which dividends were not paid.
Holders of shares of RP will not be entitled to any
dividends, whether payable in cash, property or
shares, in excess of full cumulative dividends
thereon. Except for the late charge described in
paragraph (g) of this Section 3, holders of shares of
RP will not be entitled to any interest or other
additional amount on any dividend payment on any
share of RP which may be in arrears.
(ii) The amount of declared dividends for each share of RP
payable on each Dividend Payment Date in respect of a
7-day Dividend Period, a 28-day Dividend Period or a
Special Dividend Period of fewer than 365 days will
be computed by the Fund by multiplying the Applicable
Dividend Rate in effect with respect to dividends
payable on such share on such Dividend Payment Date
by a fraction the numerator of which will be the
number of days such share was Outstanding from and
including its Date of Original Issue or the preceding
Dividend Payment Date, as the case may be, to and
including the last day of such Dividend Period, and
the denominator of which will be 365, and then
multiplying the rate so obtained by $25,000, and the
amount of declared dividends for each share of RP in
respect of a Special Dividend Period of 365 or more
days will be computed on the basis of a 360-day year
of twelve 30-day months.
(g) Non-Payment Period; Late Charge. A Non-Payment Period will
commence if the Fund fails to (i) declare, prior to 12:00
noon, New York City time, on any Dividend Payment Date for
shares of RP, for payment on or within three Business Days
after such Dividend Payment Date to the persons who held such
shares as of 12:00 noon, New York City time, on the Business
Day preceding such Dividend Payment Date, the full amount
27
of any dividend on such shares of RP payable on such Dividend
Payment Date or (ii) deposit, irrevocably in trust, in
same-day funds, with the Paying Agent by 12:00 noon, New York
City time, (A) on or within three Business Days after any
Dividend Payment Date for shares of RP the full amount of any
dividend on such shares (whether or not earned or declared)
payable on such Dividend Payment Date or (B) on or within
three Business Days after any redemption date for shares of RP
called for redemption, the Mandatory Redemption Price or the
Optional Redemption Price per share. Such Non-Payment Period
will consist of the period commencing on and including the
aforementioned Dividend Payment Date or redemption date, as
the case may be, and ending on and including the Business Day
on which, by 12:00 noon, New York City time, all unpaid
dividends and unpaid redemption prices shall have been so
deposited or shall have otherwise been made available to the
applicable holders in same-day funds; provided that, a
Non-Payment Period will not end during the first seven days
thereof unless the Fund shall have given at least three days'
written notice to the Paying Agent, the Remarketing Agent and
the Securities Depository and thereafter will not end unless
the Fund shall have given at least fourteen days' written
notice to the Paying Agent, the Remarketing Agent, the
Securities Depository and all holders of shares of RP. The
Applicable Dividend Rate for each Dividend Period for shares
of RP, commencing during a Non-Payment Period, will be equal
to the Non-Payment Period Rate; any share for which a Special
Dividend Period would otherwise have commenced on the first
day of a Non-Payment Period will have, instead, a 7-day
Dividend Period; and each Dividend Period for shares of RP
commencing after the first day of, and during, a Non-Payment
Period shall be a 7-day Dividend Period. Any dividend on
shares of RP due on any Dividend Payment Date for such shares
(if, prior to 12:00 noon, New York City time, on such Dividend
Payment Date, the Fund has declared such dividend payable on
or within three Business Days after such Dividend Payment Date
to the persons who held such shares as of 12:00 noon, New York
City time, on the Business Day preceding such Dividend Payment
Date) or redemption price with respect to such shares not paid
to such persons when due (if such non-payment is not solely
due to the willful failure of the Fund) but paid to such
persons in the same form of funds by 12:00 noon, New York City
time, on any of the first three Business Days after such
Dividend Payment Date or due date, as the case may be, will
incur a late charge to be paid therewith to such persons and
calculated for such period of non-payment at the Non-Payment
Period Rate applied to the amount of such non-payment based on
the actual number of days comprising such period divided by
365. For the purposes of the foregoing, payment to a person in
same-day funds on any Business Day at any time will be
considered equivalent to payment to that person in New York
Clearing House (next-day) funds at the same time on the
preceding Business Day, and any payment made after 12:00 noon,
New York City time, on any Business Day shall be considered to
have been
29
made instead in the same form of funds and to the same person
before 12:00 noon, New York City time, on the next Business
Day. The Non-Payment Period Rate for any series of RP will be
250% (300% at any time the Fund has notified the Remarketing
Agent of its intent to allocate income that is taxable for
federal income tax purposes to the RP of such series prior to
any Remarketing with respect to such shares) of the Reference
Rate.
(h) Restrictions on Dividends and Other Payments.
(i) Under the 1940 Act, the Fund may not declare
dividends or make other distributions on Common
Shares or purchase any such shares if, at the time of
the declaration, distribution or purchase, as
applicable (and after giving effect thereto), asset
coverage (as defined in the 1940 Act) with respect to
the Outstanding shares of RP would be less than 200%
(or such other percentage as may in the future be
required by law).
(ii) In addition, for so long as any shares of RP are
Outstanding, (A) the Fund will not declare, pay or
set apart for payment any dividend or other
distribution (other than a dividend or distribution
paid in Common Shares or other shares of beneficial
interest, if any, ranking junior to shares of RP as
to dividends and upon liquidation, or options,
warrants or rights to subscribe for or purchase
Common Shares or other shares) in respect of Common
Shares or any other shares of beneficial interest of
the Fund ranking junior to or on a parity with shares
of RP as to dividends or upon liquidation, or call
for redemption, redeem, purchase or otherwise acquire
for consideration any Common Shares or any other such
junior shares of beneficial interest (except by
conversion into or exchange for shares of the Fund
ranking junior to the RP as to dividends and upon
liquidation) or any such parity shares (except by
conversion into or exchange for shares of the Fund
ranking junior to or on a parity with the RP as to
dividends and upon liquidation), unless (1) full
cumulative dividends on shares of RP through the most
recently ended Dividend Period (or, if such
transaction is on a Dividend Payment Date, through
the Dividend Period ending on the day prior to such
Dividend Payment Date) shall have been paid or shall
have been declared and sufficient funds for the
payment thereof deposited with the Paying Agent and
(2) the Fund has redeemed the full number of shares
of RP required to be redeemed by any provision for
mandatory redemption contained in the RP Provisions,
and (B) the Fund will not declare, pay or set apart
for payment any dividend or other distribution (other
than a dividend or distribution paid in Common Shares
or other shares, if any, ranking junior to shares of
RP as to dividends and upon liquidation, or options,
warrants or rights to
29
subscribe for or purchase, Common Shares or other
shares of beneficial interest) or any such parity
shares (except by conversion into or exchange for
shares of the Fund ranking junior to or on a parity
with the RP as to dividends and upon liquidation),
unless immediately after such transaction the
Discounted Value of the Fund's Eligible Assets would
at least equal the RP Basic Maintenance Amount.
(i) Additional Dividends. If the Fund allocates any net capital
gains or other income taxable for federal income tax purposes
to RP without having given advance notice of such allocation
to the Paying Agent and the Remarketing Agent as provided in
Section 2 of Part II (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 Remarketing Agent, the Paying 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 Paying Agent, for distribution
to such holders, within 30 days after the notice described
above is given to the Remarketing Agent and the Paying Agent.
4. REDEMPTION.
(a) Optional Redemption.
(i) After the Initial Dividend Period, upon giving a
Notice of Redemption, as provided below, the Fund at
its option may redeem shares of RP, in whole or in
part, on the next succeeding scheduled Dividend
Payment Date applicable to those shares of RP called
for redemption, out of funds legally available
therefor, at a redemption price equal to the Optional
Redemption Price; provided that no share of RP will
be subject to optional redemption during any Non-Call
Period.
(ii) So long as either Moody's or S&P is rating the RP, no
RP shall be redeemed pursuant to this Section 4(a)
unless (A) on the date on which the Fund intends to
give notice of such redemption pursuant to paragraph
(d) of this Section 4, 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 any applicable premium) due to holders of
RP by reason of the redemption of such shares on such
30
redemption date, and (B) on the date on which the
Fund intends to give notice of such redemption and on
the redemption date, Moody's Eligible Assets (if
Moody's is then rating the RP) and S&P Eligible
Assets (if S&P is then rating the RP) each at least
equal the RP Basic Maintenance Amount, and would at
least equal the RP Basic Maintenance Amount
immediately subsequent to such redemption if such
redemption were to occur on such date.
(b) Mandatory Redemption.
(i) The Fund will redeem, at a redemption price equal to
the Mandatory Redemption Price, certain of the shares
of the Outstanding RP to the extent permitted under
the 1940 Act and Massachusetts law, if the Fund fails
to maintain as of each Valuation Date assets having
in the aggregate a Discounted Value at least equal to
the RP Basic Maintenance Amount or as of the last
Business Day of any calendar month fails to maintain
the 1940 Act RP Asset Coverage and such failure is
not cured on or before the RP Basic Maintenance Cure
Date or the 1940 Act Cure Date (herein respectively
referred to as a "Cure Date"), as the case may be.
The number of shares of RP to be redeemed will be
equal to the lesser of (A) the minimum number of
shares of RP the redemption of which, if deemed to
have occurred immediately prior to the opening of
business on the Cure Date, would result in the
satisfaction of the RP Basic Maintenance Amount or
the 1940 Act RP Asset Coverage, as the case may be,
on such Cure Date (provided that, if there is no such
minimum number of shares the redemption of which
would have such result, all shares of RP then
outstanding will be redeemed), and (B) the maximum
number of shares of RP can be redeemed out of funds
expected to be legally available therefor.
(ii) The Fund will effect such a mandatory redemption not
earlier than 20 days and not later than 40 days after
such Cure Date, except that if the Fund does not have
funds legally available for the redemption of all of
the required number of shares of RP which are subject
to mandatory redemption or the Fund otherwise is
unable to effect such redemption on or prior to 40
days after such Cure Date, the Fund will redeem those
shares of RP which it was unable to redeem on the
earliest practicable date on which it is able to
effect such redemption.
(c) Allocation. If fewer than all the outstanding shares of RP
are to be redeemed, the number of shares of RP to be so
redeemed will be a whole number of shares and will be
determined by the Board of Trustees (subject to the provisions
described above under subparagraph (b)) and the Fund
31
will give a Notice of Redemption. Unless certificates
representing shares are held by persons other than the
Securities Depository or its nominee, the Securities
Depository, upon receipt of such Notice of Redemption, shall
use its best efforts to determine by 10:00 a.m. New York City
time on the second Business Day immediately succeeding the
date on which it receives such Notice of Redemption, by lot
the number of shares of RP to be redeemed from the account of
each Agent Member (which may include the Remarketing Agent,
holding shares for its own account) and shall immediately
notify the Paying Agent of such determination. The Paying
Agent, upon receipt of such notice, will in turn determine by
lot the number of shares to be redeemed from the accounts of
the holders of the shares whose Agent Members have been
selected by the Securities Depository. In doing so, the Paying
Agent may determine that shares will be redeemed from the
accounts of some holders, which may include the Remarketing
Agent, without shares being redeemed from the accounts of
other holders. Notwithstanding the foregoing, if any
certificates for shares of RP are not held by the Securities
Depository or its nominee, the shares to be redeemed will be
selected by the Fund by lot.
(d) Notice of Redemption.
(i) The Fund will give 30 days' Notice of Redemption. In
the event the Fund obtains appropriate exemptive or
no-action relief from the 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 RP. Such notice shall be given by telephone or
facsimile, to the Securities Depository (and any
other record holder), the Paying Agent and the
Remarketing Agent, and promptly confirmed in writing.
The Paying Agent will use its reasonable efforts to
provide telephonic notice to each holder of shares of
RP called for redemption not later than the close of
business on the Business Day on which the Paying
Agent determines the shares to be redeemed (as
described above) (or, during a Non-Payment Period
with respect to such shares, not later than the close
of business on the Business Day immediately following
the day on which the Paying 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
Paying Agent to each holder of record of shares of RP
called for redemption, the Remarketing Agents and the
Securities Depository.
(ii) Every Notice of Redemption and other redemption
notice with respect to shares of RP will state: (a)
the redemption date, (b) the
32
number of shares of RP to be redeemed, (c) the
redemption price, (d) that dividends on the shares of
RP to be redeemed will cease to accumulate as of such
redemption date and (e) the provision of the RP
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.
(iii) Shares of RP, the holders of which shall have been
given Notice of Redemption, will not be transferable
outside of a Remarketing.
(e) Other Redemption Procedures.
(i) To the extent that any redemption for which Notice of
Redemption has been given is not made by reason of
the absence of legally available funds therefor, such
redemption will be made as soon as practicable to the
extent such funds become available. Failure to redeem
shares of RP will be deemed to exist at any time
after the date specified for redemption in a Notice
of Redemption when the Fund shall have failed, for
any reason whatsoever, to deposit with the Paying
Agent funds with respect to any shares for which such
Notice of Redemption has been given. Notwithstanding
the fact that the Fund may not have redeemed shares
of RP for which a Notice of Redemption has been
given, dividends may be declared and paid on such
shares and will include those shares for which Notice
of Redemption has been given.
(ii) Upon the deposit of funds sufficient to redeem shares
of RP with the Paying Agent and the giving of Notice
of Redemption, all rights of the holders of the
shares so called for redemption will cease and
terminate, except the right of the holders thereof to
receive the Optional Redemption Price or the
Mandatory Redemption Price, as the case may be, but
without any interest or other additional amount
(except for the late charge described under Part I,
Section 3(g) hereof, and such shares will no longer
be deemed Outstanding for any purpose. The Fund will
be entitled to receive from the Paying Agent,
promptly after the date fixed for redemption, any
cash deposited with the Paying Agent in excess of (i)
the aggregate redemption price of the shares of RP
called for redemption on such date and (ii) all other
amounts to which holders of shares of RP called for
redemption may be entitled. Any funds so deposited
that are unclaimed at the end of 90 days from such
redemption date will, to the extent permitted by law,
be repaid to the Fund, after which time the holders
of shares of RP so called for redemption will look
only to the Fund for payment of the redemption price
and all other amounts to which they may be entitled.
The Fund will be entitled to receive, from time to
time
33
after the date fixed for redemption, any interest on
the funds so deposited.
(iii) Nothing contained herein or in the Declaration of
Trust limits any legal right of the Fund or any
affiliate to purchase or otherwise acquire any shares
of RP outside of a Remarketing at any price, whether
higher or lower than the Optional Redemption Price or
Mandatory Redemption Price, so long as, at the time
of any such purchase, there is no arrearage in the
payment of dividends on the RP and the Fund is in
compliance with the 1940 Act RP Asset Coverage and
has assets with a Discounted Value at least equal, in
the aggregate, to the RP Basic Maintenance Amount
after giving effect to such purchase or acquisition
on the date thereof. Any shares which are purchased,
redeemed or otherwise acquired by the Fund shall have
no voting rights. If fewer than all the Outstanding
shares of the RP are redeemed or otherwise acquired
by the Fund, the Fund shall give notice of such
transaction in accordance with the procedures agreed
upon by the Board of Trustees. Subject to Section 18
of the 1940 Act and the RP Provisions, any shares of
RP redeemed or otherwise acquired by the Fund may be
reissued by the Fund; provided, however, that after
giving effect to such reissuance the Fund shall have
Eligible Assets with an aggregate Discounted Value at
least equal to the RP Basic Maintenance Amount.
(iv) The Fund has the right to arrange for others to
purchase from the holders thereof shares of RP which
are to be redeemed as described in paragraph 4(a)
above.
(v) The Remarketing Agent may, in its sole discretion,
modify the procedures concerning notification of
redemption described above so long as any such
modification does not adversely affect the holders of
the shares of RP.
(vi) In effecting any redemption pursuant to this Section
4, 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.
5. LIQUIDATION RIGHTS.
(a) Upon the dissolution, liquidation or winding up of the affairs
of the Fund, whether voluntary or involuntary, the Holders of
the RP 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
34
shares of the Fund ranking junior to the RP upon dissolution,
liquidation or winding up, an amount equal to the liquidation
preference with respect to such shares. The liquidation
preference for the RP 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
required to be made pursuant to Part I, Section 3(i) in
connection with the liquidation of the Fund.
(b) Neither the sale of all or substantially all the property or
business of the Fund, nor the merger or consolidation of the
Fund into or with any other corporation nor the merger or
consolidation of any other corporation into or with the Fund
nor a reorganization of the Fund shall be a dissolution,
liquidation or winding up, whether voluntary or involuntary,
for the purposes of this Section 5.
(c) After the payment to the Holders of the RP of the full
preferential amounts provided for in this Section 5, the
Holders of the RP as such shall have no right or claim to any
of the remaining assets of the Fund.
(d) In the event the assets of the Fund available for distribution
upon dissolution, liquidation or winding up of the Fund,
whether voluntary or involuntary, to the holders of the RP and
any shares of any other class or series of Preferred Shares
ranking on a parity with the RP with respect to the
distribution of assets upon such dissolution, liquidation or
winding up 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
5, no such distribution shall be made unless proportionate
distributive amounts shall be paid on account of the RP,
ratably, in proportion to the full distributable amounts for
which holders of all such parity shares are respectively
entitled upon such dissolution, liquidation or winding up.
(e) Subject to the rights of the holders of shares of any series
or class or classes of shares ranking on a parity with the RP
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 RP
as provided in paragraph (a) of this Section 5, but not prior
thereto, any other series or class or classes of shares
ranking junior to the RP 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 RP shall not be entitled to share therein.
6. VOTING RIGHTS.
35
(a) Except as otherwise provided in the Declaration of Trust or as
otherwise required by law, (i) each holder of RP shall be
entitled to one vote for each of the RP held on each matter
submitted to a vote of shareholders of the Fund, and (ii) the
holders of outstanding Preferred Shares, including RP, 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 RP, represented in person or by
proxy at said meeting, shall elect two trustees of the Fund,
each Preferred Share, including each of the RP, entitling the
holder thereof to one vote. Subject to paragraph (b) of this
Section 5, the holders of outstanding Common Shares shall
elect the balance of the trustees.
(b) During any period in which any one or more of the conditions
described below shall exist (such period being referred to
herein as a "Voting Period"), the number of trustees
constituting the Board of Trustees shall be automatically
increased by the smallest number that, when added to the two
trustees elected exclusively by the holders of Preferred
Shares, including RP, would constitute a majority of the Board
of Trustees as so increased by such smallest number, and the
holders of Preferred Shares, including RP, shall be entitled,
voting as a class on a one-vote-per-share basis (to the
exclusion of the holders of all other securities and class of
capital shares of the Fund), to elect such smallest number of
additional trustees, together with the two trustees that such
holders are in any event entitled to elect. A Voting Period
shall commence:
(i) if at the close of business on any Dividend Payment
Date accumulated dividends (whether or not earned or
declared) on Preferred Shares, including any
outstanding RP, 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 Paying Agent for the payment of such
accumulated dividends; or
(ii) if at any time holders of any other Preferred Shares
are entitled under the 1940 Act to elect a majority
of the trustees of the Fund.
Such Voting Period shall terminate if (i) the Fund thereafter shall pay, or
declare a dividend and deposit cash or securities with the Paying Agent equal
to, accumulated dividends payable on outstanding Preferred Shares; or (ii) such
voting right to the holders of any other Preferred Shares to elect a majority of
the trustees of the Fund shall cease. Upon the termination of a Voting Period,
the voting rights described in this paragraph (b) of Section 6 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 6.
36
(c) (i) As soon as practicable after the accrual of any right of
the holders of Preferred Shares to elect additional trustees
as described in paragraph (b) of this Section 6, the Fund
shall notify the Remarketing Agent and the Paying Agent and
the Remarketing 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 Remarketing Agent and
the Paying Agent or if the Remarketing 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
6 on a one-vote-per-share basis.
(ii) For purposes of determining any rights of the
Holders to vote on any matter, whether such right is created by this
Certificate of Vote, by the other provisions of the Declaration of Trust,
by statute or otherwise, no Holder shall be entitled to vote and no RP
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 Paying Agent for that purpose and the requisite Notice of
Redemption with respect to such shares shall have been given as provided in
Section 4 of this Part I. None of the RP held by the Fund or any affiliate
of the Fund shall have any voting rights or be deemed to be outstanding for
voting or other purposes.
(iii) The terms of office of all persons who are
Trustees of the Fund at the time of a special meeting of Holders and
holders of other Preferred Shares to elect trustees shall continue,
notwithstanding the election at such meeting by the Holders and such other
holders of the number of trustees that they are entitled to elect, and the
persons so elected by the Holders and such other holders, together with the
two incumbent trustees elected by the Holders and such other holders of
Preferred Shares and the remaining incumbent trustees elected by the
holders of the Common Shares, shall constitute the duly elected trustees of
the Fund.
(iv) Simultaneously with the termination of a Voting
Period, the terms of office of the additional trustees elected by the
Holders and holders of other Preferred Shares pursuant to paragraph (b) of
this Section 6 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 6
37
shall cease, subject to the provisions of the last sentence of paragraph
(b) of this Section 6.
(d) (i) So long as any of the RP are Outstanding, the Fund shall
not, without the affirmative vote of the Holders of the
Outstanding RP determined with reference to a "majority of
outstanding voting securities" as that term is defined in
Section 2(a)(42) of the 1940 Act (voting separately as one
class): (a) authorize, create or issue any class or series of
shares of beneficial interest ranking prior to or on a parity
with the RP 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 RP (except that,
notwithstanding the foregoing, but subject to the provisions
of Section 9(a)(iv), the Board of Trustees, without the vote
or consent of the Holders of RP, may from time to time
authorize and create, and the Fund may from time to time
issue, classes or series of Preferred Shares, including RP,
ranking on a parity with the RP 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 RP Asset
Coverage and RP Basic Maintenance Amount requirements,
provided that the Fund obtains written confirmation from
Moody's (if Moody's is then rating RP) and S&P (if S&P is then
rating RP) that the issuance of such class or series would not
impair the rating then assigned by such rating agency to the
RP), (b) amend, alter or repeal the provisions of the
Declaration of Trust, including this Certificate of Vote,
whether by merger, consolidation or otherwise, so as to affect
any preferences, right or power of such RP 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 RP 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 RP and such issuance would, at the time
thereof, cause the Fund not to satisfy the 1940 Act RP Asset
Coverage or the RP Basic Maintenance Amount, or (c) file a
voluntary application for relief under Federal bankruptcy law
or any similar application under state law for so long as the
Fund is solvent and does not foresee becoming insolvent.
(ii) The Board of Trustees, without the vote or
consent of the Holders of RP, 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 RP 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 RP 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
39
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 RP 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 RP (provided that, with respect to the Maximum Dividend
Rate, such amendment or alteration shall not, in any event, cause the
Maximum Dividend Rate to fall below the Maximum Dividend Rate that would
have resulted absent such amendment or alteration):
Deposit Securities
Discounted Value
Dividend Coverage Amount
Dividend Coverage Assets
Market Value
Maximum Potential
Additional Dividends
Liability
Maximum Dividend Rate
Minimum Liquidity Level
Moody's Discount Factor
Moody's Eligible Asset
Moody's Exposure Period
1940 Act Cure Date
1940 Act RP
Asset Coverage
Quarterly Valuation Date
Receivables for Municipal
Securities Sold
RP Basic
Maintenance Amount
RP Basic
Maintenance Cure Date
RP Basic
Maintenance Report
S&P Discount Factor
S&P Eligible Asset
S&P Exposure Period
Valuation Date
(e) Unless otherwise required by law, the Holders of the RP shall
not have any relative rights or preferences or other special
rights other than those
39
specifically set forth herein. The Holders of the RP shall
have no preemptive rights or rights to cumulative voting. In
the event that the Fund fails to pay any dividends on the RP,
the exclusive remedy of the Holders shall be the right to vote
for trustees pursuant to the provisions of this Section 6.
(f) Unless a higher percentage is provided for in the Declaration
of Trust, the affirmative vote of the Holders of a majority of
the outstanding RP, 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 RP 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 RP)
and S&P (if S&P is then rating the RP) 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 RP) and S&P (if S&P is
then rating the RP) of the results of any vote described in
the proceeding sentence.
(g) Right to Vote with Respect to Certain Other Matters. The
affirmative vote of the holders of a majority (unless a higher
percentage vote is required under the Declaration of Trust or
under this Certificate of Vote) of the outstanding shares of
each series of RP, 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
RP affected by a matter are substantially identical to the
interests of another series of RP 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 RP described
above will in each case be in addition to a separate vote of
40
the requisite percentage of Common Shares and RP necessary to
authorize the action in question.
7. ASSET MAINTENANCE.
(a) 1940 Act RP Asset Coverage. The Fund will maintain, with
respect to shares of RP, as of the last Business Day of each
month in which any shares of RP are Outstanding, 1940 Act RP
Asset Coverage.
(b) RP Basic Maintenance Amount.
(i) So long as RP are Outstanding, the Fund shall
maintain, on each Valuation Date, and shall verify to
its satisfaction that it is maintaining on such
Valuation Date,
(A) S&P Eligible Assets having an
aggregate Discounted Value equal to
or greater than the RP Basic
Maintenance Amount (if S&P is then
rating the RP) and
(B) Moody's Eligible Assets having an
aggregate Discounted Value equal to
or greater than the RP Basic
Maintenance Amount (if Moody's is
then rating the RP).
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 RP Basic Maintenance Amount as of such Valuation Date; provided,
however, that in the event that, as of the immediately preceding Valuation Date,
the aggregate Discounted Value of the Fund's Eligible Assets exceeded the RP
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 RP Basic
Maintenance Amount.
(ii) 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 maintain a Discounted Value of
Moody's Eligible Assets or S&P Eligible Assets in an
amount greater than or equal to the RP Basic
Maintenance Amount, and on the third Business Day
after the RP 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 RP),
Moody's (if Moody's is then rating the RP) and the
Paying
41
Agent and Remarketing Agent (if either S&P or Moody's
is then rating the RP) an RP Basic Maintenance Report
as of the date of such failure or such RP Basic
Maintenance Cure Date, as the case may be, which will
be deemed to have been delivered to the Paying Agent
and Remarketing Agent if the Paying Agent and
Remarketing Agent receives a copy or telecopy, telex
or other electronic transcription thereof and on the
same day the Fund mails to the Paying Agent and
Remarketing Agent for delivery on the next Business
Day the full RP Basic Maintenance Report. The Fund
will also deliver an RP Basic Maintenance Report to
Moody's and S&P on any Valuation Date that
(A) the Discounted Value of Moody's
Eligible Assets or S&P Eligible
Assets, as the case may be, is
greater than the RP Basic
Maintenance Amount by 5% or less or
(B) on any date which the Fund redeems
Common Shares.
The Fund will also deliver an RP Basic Maintenance Report to S&P upon its
request. A failure by the Fund to deliver an RP Basic Maintenance Report under
subparagraph (b)(ii) of this Section 7 shall be deemed to be delivery of an RP
Basic Maintenance Report indicating the Discounted Value for all assets of the
Fund is less than the RP Basic Maintenance Amount, as of the relevant Valuation
Date.
(iii) Within ten Business Days after 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 RP), Moody's (if Moody's is then rating the RP)
and the Paying Agent and Remarketing Agent (if either
S&P or Moody's is then rating the RP)
(A) the mathematical accuracy of the
calculations reflected in the RP
Basic Maintenance Report prepared
by the Fund on such date (and in
any other RP 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
(B) that, in such Report (and in such
randomly selected Report), the Fund
determined in accordance with this
Certificate of Vote whether the
Fund had, at such Quarterly
Valuation Date (and at the
Valuation Date addressed in such
randomly-selected Report), S&P
Eligible Assets (if S&P is then
rating the RP) of an aggregate
Discounted Value at least equal to
42
the RP Basic Maintenance Amount and
Moody's Eligible Assets (if Moody's
is then rating the RP) of an
aggregate Discounted Value at least
equal to the RP Basic Maintenance
Amount (such confirmation being
herein called the "Accountant's
Confirmation").
(iv) Within ten Business Days after the date of delivery
of an RP Basic Maintenance Report in accordance with
paragraph (b)(ii) of this Section 7 relating to any
Valuation Date on which the Fund failed to maintain a
Discounted Value of Moody's Eligible Assets or S&P
Eligible Assets in an amount greater than or equal to
the RP Basic Maintenance Amount, and relating to the
RP Basic Maintenance Cure Date with respect to such
failure to exceed or equal the RP Basic Maintenance
Amount, the Fund shall cause the Independent
Accountant to provide to S&P (if S&P is then rating
the RP), Moody's (if Moody's is then rating the RP)
and the Remarketing Agent (if either S&P or Moody's
is then rating the RP) an Accountant's Confirmation
as to such RP Basic Maintenance Report.
(v) If any Accountant's Confirmation delivered pursuant
to subparagraph (b)(iii) or (b)(iv) of this Section 7
shows that an error was made in the RP 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 RP) or
Moody's Eligible Assets (if Moody's is then rating
the RP), 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 RP Basic Maintenance Report to
S&P (if S&P is then rating the RP), Moody's (if
Moody's is then rating the RP) and the Remarketing
Agent (if either S&P or Moody's is then rating the
RP) promptly following receipt by the Fund of such
Accountant's Confirmation.
(vi) On or before 5:00 p.m., New York City time, on the
first Business Day after the Date of Original Issue
of the RP, the Fund shall complete and deliver to S&P
(if S&P is then rating the RP) and to Moody's (if
Moody's is then rating the RP), an RP Basic
Maintenance Report as of the close of business of
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 RP) and to
Moody's (if Moody's is then rating the RP) (i) the
mathematical
43
accuracy of the calculations reflected in such Report
and (ii) that the Discounted Value of S&P Eligible
Assets or Moody's Eligible Assets, as the case may
be, reflected thereon equals or exceeds the RP Basic
Maintenance Amount reflected thereon.
8. MINIMUM LIQUIDITY LEVEL. So long as S&P is rating the RP,
the Fund shall have, as of each Valuation Date, Dividend Coverage Assets, with
respect to each then Outstanding share of each series of RP, 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 RP. So long as S&P is rating the RP, 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.
9. COMPLIANCE PROCEDURES FOR ASSET MAINTENANCE.
(a) For so long as any of the RP 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 RP, engage in any one or more of the following
transactions:
(i) transactions in options on securities, futures
contracts or options on futures contracts except as
necessary to effect Closing Transactions and 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
44
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 RP
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 RP 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 RP 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 within the Moody's Exposure Period, at
the lower of the Discounted Value of the underlying
security of the option and the exercise price of the
option or (2) otherwise, it has no value; (B) if the
Fund writes a put option, the underlying asset will
be valued as follows: the lesser of (1) exercise
price and (2) the Discounted Value of the underlying
security; (C) if the Fund is a seller under a futures
contract, the underlying security will be valued at
the lower of (1) settlement price and (2) the
Discounted Value of the
45
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 RP
are rated by Moody's: (A) the Fund will not engage in
options and futures transactions for leveraging or
speculative purposes; (B) the Fund will not write or
sell any anticipatory contracts pursuant to which the
Fund hedges the anticipated purchase of an asset
prior to completion of such purchase; (C) the Fund
will not enter into an option or futures transaction
unless, after giving effect thereto, the Fund would
continue to have Moody's Eligible Assets with an
aggregate Discounted Value equal to or greater than
the RP Basic Maintenance Amount; (D) for purposes of
the RP 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 and the settlement price of
an underlying futures contract if the Fund writes put
options on futures contracts will constitute
liabilities of the Fund and (3) if the Fund writes
call options on futures contracts and does not own
the underlying futures contract, 105% of the Market
Value of the underlying futures contract will
constitute a liability of the Fund; (E) the Fund
shall enter into only exchange-traded futures and
shall write only exchange-traded options on exchanges
approved by Moody's; (F) where delivery may be made
to the Fund with any of a class of securities, the
Fund shall assume for purposes of the RP Basic
Maintenance Amount that it takes delivery of that
security which yields it the least value; (G) the
Fund will not engage in forward contracts; (H) the
Fund will enter into futures contracts as seller only
if it owns the underlying security; and (I) there
shall be a quarterly audit made of the Fund's futures
and options transactions, if any, by the Fund's
independent accountants to confirm that the Fund is
in compliance with these standards; or
(ii) incur any indebtedness, without prior written
approval of Moody's that such indebtedness would not
adversely affect the then current rating by Moody's
of the RP except that the Fund may, without obtaining
the written confirmation described above, incur
indebtedness for the purpose of clearing securities
transactions if the Discounted Value of Moody's
Eligible Assets would equal or exceed the RP Basic
Maintenance Amount after giving effect to such
indebtedness; provided, however, that any such
indebtedness
46
shall be repaid within 60 days and will not be
extended or renewed; or
(iii) issue any class or series of shares ranking prior to
or on a parity with the RP with respect to the
payment of dividends or the distribution of assets
upon dissolution, liquidation or winding up of the
Fund, or reissue any RP previously purchased or
redeemed by the Fund; or
(iv) engage in short sale transactions.
(b) For so long as any of the RP 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 S&P to the RP, engage in
any one or more of the following transactions:
(i) transactions in any reverse repurchase agreements; or
(ii) lend portfolio securities; or
(iii) borrow money, except that the Fund may, without
obtaining the written confirmation described above,
borrow money for the purposes of clearing securities
transactions if the Discounted Value of S&P Eligible
Assets would equal or exceed the RP Basic Maintenance
Amount after giving effect to such borrowing; or
(iv) issue any class or series of shares ranking prior to
or on a parity with the RP with respect to the
payment of dividends or the distribution of assets
upon dissolution, liquidation or winding up of the
Fund, or reissue any RP previously purchased or
redeemed by the Fund, or merge or consolidate with
any corporation; or
(v) engage in repurchase agreement transactions in which
the term of such repurchase obligation is longer than
90 days, in which the underlying security is a
security other than United States Treasury securities
(not inclusive of zero-coupon securities), demand
deposits, certificates of deposits or bankers
acceptances and in which the counter-party or its
affiliates have unsecured debt rated A-1+ by S&P; or
(vi) engage in short sale transactions; or
(vii) purchase or sell futures contracts or options thereon
or write uncovered put or uncovered call options on
portfolio securities except that (A) the Fund may
engage in any S&P Hedging Transactions based on the
Municipal Index, provided that the Fund shall not
engage in any S&P Hedging Transaction based on the
Municipal Index (other than Closing Transactions)
which would
47
cause the Fund at the time of such transaction to own
or have sold the least of (1) more than 1,000
outstanding futures contracts based on the Municipal
Index, (2) outstanding futures contracts based on the
Municipal Index and on the Treasury Bonds exceeding
in number 25% of the quotient of the fair market
value of the Fund's total assets divided by 100,000
or (3) outstanding futures contracts based on the
Municipal Index exceeding in number 10% of the
average number of daily traded futures contracts
based on the Municipal Index in the month prior to
the time of effecting such transaction as reported by
The Wall Street Journal and (B) the Fund may engage
in S&P Hedging Transactions based on Treasury Bonds,
provided that the Fund shall not engage in any S&P
Hedging Transaction based on Treasury Bonds (other
than Closing Transactions) which would cause the Fund
at the time of such transaction to own or have sold
the lesser of (1) outstanding futures contracts based
on Treasury Bonds and on the Municipal Index
exceeding in number 25% of the quotient of the fair
market value of the Fund's total assets divided by
100,000 or (2) outstanding futures contracts based on
Treasury Bonds exceeding in number 10% of the average
number of daily traded futures contracts based on
Treasury Bonds in the month prior to the time of
effecting such transaction as reported by The Wall
Street Journal. For so long as the RP 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 RP
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 RP 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 RP Basic Maintenance Amount, no
amounts on deposit with the Fund's custodian or
broker representing Initial Margin or Variation
Margin shall constitute S&P Eligible Assets. For so
long as the RP 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
48
writes a futures contract or option thereon which
requires delivery of an underlying security, the Fund
shall hold such underlying security.
PART II.
1. REMARKETING SCHEDULE. Each Remarketing shall take place over a two-day
period consisting of the Remarketing Date and the Settlement Date. Such
dates or the method of establishing such dates shall be determined by
the Trustees from time to time.
2. ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME. If the Fund
intends to allocate any net capital gains or other income taxable for federal
income tax purposes to any dividend on RP, the Fund may notify the Remarketing
Agent and the Paying Agent of the amount to be so included seven days prior to
the Remarketing on which the Applicable Dividend Rate for such dividend is to be
established. Whenever the Remarketing Agent receives such notice from the Fund,
it will in turn notify the holders of RP and prospective purchasers believed by
it to be interested in purchasing RP in such Remarketing.
3. PROCEDURE FOR REMARKETING. (a) Each share of RP of a series
is subject to Tender and Dividend Reset at the end of each Dividend Period for
such series and may be tendered in the Remarketing which commences on the
Remarketing Date immediately prior to the end of the current Dividend Period. By
9:00 a.m., New York City time, on each such Remarketing Date, the Remarketing
Agent shall, after canvassing the market and considering prevailing market
conditions at the time for shares of RP and similar securities, provide
Beneficial Owners non-binding indications of the Applicable Dividend Rate for
the next 7-day Dividend Period with respect to Series A RP or 28-day Dividend
Period with respect to Series B RP; provided that, if the Trustees have
designated the next Dividend Period as a Special Dividend Period, the
Remarketing Agent will provide to Beneficial Owners a non-binding indication
only of the Applicable Dividend Rate for such Special Dividend Period. The
actual Applicable Dividend Rate for such Dividend Period may be greater than or
less than the rate per annum indicated in such non-binding indications (but not
greater than the applicable Maximum Dividend Rate) and will not be determined
until after a Holder is required to elect to hold or sell its RP. By 12:00 noon,
New York City time, on such Remarketing Date, each Holder of shares of RP must
notify the Remarketing Agent of its desire, on a share-by-share basis, either to
tender such share of RP at a price of $25,000 per share or to continue to hold
such share for the next Dividend Period. Any notice given to the Remarketing
Agent to tender or hold shares for a particular Dividend Period shall be
irrevocable and may not be waived, except that the Remarketing Agent may, in its
sole discretion (i) at the request of a Holder that has tendered one or more
shares to the Remarketing Agent, waive such Holder's tender, and thereby enable
such Holder to continue to hold the share or shares for a 7-day Dividend Period
with respect to Series A RP or a 28-day Dividend Period with respect to Series B
RP or a designated Special Dividend Period, as agreed to by such Holder and the
Remarketing Agent at such time, so long as such tendering Holder has indicated
to the Remarketing Agent that it would accept the new Applicable Dividend
49
Rate for such Dividend Period, such waiver to be contingent upon the Remarketing
Agent's ability to remarket all shares of RP tendered in such Remarketing, and
(ii) at the request of a Holder that has elected to hold one or more of its
shares of RP, waive such Holder's election with respect thereto. Notwithstanding
the foregoing, any holder or prospective purchaser may informally indicate to
the Remarketing Agent its Applicable Dividend Rate preferences. The Applicable
Dividend Rate with respect to a Dividend Period may be greater or less than such
informal rate preferences.
(b) The right of each Holder to tender shares of RP in a
Remarketing shall be limited to the extent that (i) the Remarketing Agent
conducts a Remarketing pursuant to the terms of the Remarketing Agreement, (ii)
shares tendered have not been called for redemption and (iii) the Remarketing
Agent is able to find a purchaser or purchasers for tendered shares of RP at an
Applicable Dividend Rate for a 7-day Dividend Period with respect to Series A RP
or a 28-day Dividend Period with respect to Series B RP or a designated Special
Dividend Period, if any, not in excess of the Maximum Dividend Rate for such
Dividend Period.
(c) Subject to the condition set forth in the next sentence,
Holders of RP that fail on a Remarketing Date for such shares to elect to tender
or hold such shares will be deemed to have elected to continue to hold such
shares for the next applicable Dividend Period. If, on a Remarketing Date for RP
of any series, the current Dividend Period with respect to such shares is a
Special Dividend Period of more than 90 days, or the succeeding Dividend Period
with respect to such shares has been designated by the Board of Trustees as a
Special Dividend Period of more than 90 days, then Holders of such shares that
fail to tender or hold such shares will be deemed to have elected to tender such
shares.
4. DETERMINATION OF APPLICABLE DIVIDEND RATES. (a) By 3:00
p.m., New York City time, on each Remarketing Date, the Remarketing Agent shall
determine the Applicable Dividend Rate to the nearest one-thousandth (0.001) of
one percent per annum for the next Dividend Period. The Applicable Dividend Rate
for each such Dividend Period, except as otherwise required herein, shall be the
dividend rate per annum which the Remarketing Agent determines, in its sole
judgment, to be the lowest rate that will enable it to remarket on behalf of the
Holders thereof the shares of RP in such Remarketing and tendered to it on such
Remarketing Date at a price of $25,000 per share.
(b) If no Applicable Dividend Rate shall have been established
on a Remarketing Date in a Remarketing for the next Dividend Period, for any
reason (other than because there is no Remarketing Agent or the Remarketing
Agent is not required to conduct a Remarketing pursuant to the terms of the
Remarketing Agreement), then the Remarketing Agent, in its sole discretion,
shall, if necessary and except during a Non-Payment Period, after taking into
account market conditions as reflected in the prevailing yields on fixed and
variable rate taxable and tax-exempt debt securities and the prevailing dividend
yields on fixed and variable rate taxable and tax-exempt debt securities and the
prevailing dividend yields of fixed and variable rate preferred shares,
determine the Applicable Dividend Rate that would be the rate per annum that
would be the initial
50
dividend rate fixed in an offering on such Remarketing Date, assuming in each
case a comparable dividend period, issuer and security. If there is no
Remarketing because there is no Remarketing Agent or the Remarketing Agent is
not required to conduct a Remarketing pursuant to the Remarketing Agreement,
then, except during a Non-Payment Period, the Applicable Dividend Rate for the
subsequent Dividend Period and for each subsequent Dividend Period for which no
Remarketing takes place because of the foregoing shall be the applicable Maximum
Dividend Rate and the next succeeding Dividend Period shall be a 7-day Dividend
Period.
(c) In determining such Applicable Dividend Rate, the
Remarketing Agent shall, after taking into account market conditions as
reflected in the prevailing yields on fixed and variable rate taxable and
tax-exempt debt securities and the prevailing dividend yields of fixed and
variable rate preferred shares determined for the purpose of providing
non-binding indications of the Applicable Dividend Rate to Holders and potential
purchasers of shares of RP, (i) consider the number of shares of RP tendered and
the number of shares of RP potential purchasers are willing to purchase and (ii)
contact by telephone or otherwise current and potential Holders of shares of RP
subject to Tender and Dividend Reset to ascertain the dividend rates at which
they would be willing to hold shares of RP.
(d) The Applicable Dividend Rate shall be determined as
aforesaid by the Remarketing Agent in its sole discretion (except as otherwise
provided in this Statement with respect to an Applicable Dividend Rate that
shall be the Non-Payment Period Rate or the Maximum Dividend Rate) and shall be
conclusive and binding on Holders.
(e) Except during a Non-Payment Period, the Applicable
Dividend Rate for any Dividend Period shall not be more than the applicable
Maximum Dividend Rate.
5. ALLOCATION OF SHARES; FAILURE TO REMARKET AT $25,000 PER
SHARE. (a) If the Remarketing Agent is unable to remarket by 3:00 p.m., New York
City time, on a Remarketing Date all shares of RP tendered to it in the related
Remarketing at a price of $25,000 per share, (i) each Holder that tendered or
was deemed to have tendered shares of RP for sale shall sell a number 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, based on the number of orders
to purchase shares of RP in such Remarketing, and (ii) the next Dividend Period
shall be a 7-day Dividend Period and the Applicable Dividend Rate shall be the
Maximum Dividend Rate for a 7-day Dividend Period.
(b) If the allocation procedures described above would result
in the sale of a fraction of a share of RP, the Remarketing Agent shall, in its
sole discretion, round up or down the number of shares of RP sold by each Holder
on the applicable Settlement Date so that each share sold by a Holder shall be a
whole share of RP, and the total number of shares sold equals the total number
of shares purchased on such Settlement Date.
51
6. NOTIFICATION OF RESULTS; SETTLEMENT. (a) Subject to a
failure to remarket as described in Part II, Section 5 of this Statement, by
telephone at approximately 3:30 p.m., New York City time, on each Remarketing
Date, the Remarketing Agent shall advise each Holder of tendered shares and each
purchaser thereof (or the Agent Member thereof) (i) of the number of shares such
Holder or purchaser is to sell or purchase and (ii) to give instructions to its
Agent Member to deliver such shares against payment therefor or to pay the
purchase price against delivery as appropriate. The Remarketing Agent will also
advise each Holder or purchaser that is to continue to hold, or to purchase,
shares with a Dividend Period beginning on the Business Day following such
Remarketing Date of the Applicable Dividend Rate for such shares.
(b) In accordance with the Securities Depository's normal
procedures, on the Settlement Date, the transactions described above with
respect to each share of RP shall be executed through the Securities Depository,
if the Securities Depository or its nominee holds or is to hold the certificate
relating to the shares to be purchased, and the accounts of the respective Agent
Members of the Securities Depository shall be debited and credited and shares
delivered by book entry as necessary to effect the purchases and sales of shares
of RP in the related Remarketing. Purchasers of shares of RP shall make payment
to the Paying Agent in same-day funds against delivery to other purchasers or
their nominees of one or more certificates representing shares of RP, or, if the
Securities Depository or its nominee holds or is to hold the certificate
relating to the shares to be purchased, through their Agent Members in same-day
funds to the Securities Depository against delivery by book entry of shares of
RP through their Agent Members. The Securities Depository shall make payment in
accordance with its normal procedures. If the certificate for a series of RP is
not held by the Securities Depository or its nominee, payment with respect to
shares of such series will be made in same-day funds to the Paying Agent against
delivery of certificates for such shares. As long as the Securities Depository
or its nominee holds the certificates representing the RP of each series, no
share certificates will need to be delivered by any selling Holder to reflect
any transfer of RP effected in a Remarketing.
(c) If any Holder selling shares of RP in a Remarketing fails
to deliver such shares, the Agent Member of such selling Holder and of any other
person that was to have purchased shares of RP in such Remarketing may deliver
to any such other person a number of whole shares of RP that is less than the
number of shares that otherwise was to be purchased by such person. In such
event, the number of shares of RP to be so delivered shall be determined by such
Agent Member. Delivery of such lesser number of shares of RP shall constitute
good delivery.
(d) The Remarketing Agent and the Securities Depository each
will use its reasonable commercial efforts to meet the timing requirements set
forth in paragraphs (a) and (b) above; provided that, in the event that there is
a delay in the occurrence of any delivery or other event connected with a
Remarketing, the Remarketing Agent and the Securities Depository each will use
its reasonable commercial efforts to accommodate such delay in furtherance of
the Remarketing.
52
(e) Notwithstanding any of the foregoing provisions of this
Section 6, the Remarketing Agent may, in its sole discretion, modify the
settlement procedures set forth above with respect to any Remarketing, provided
any such modification does not adversely affect the Holders of RP or the Fund.
7. PURCHASE OF SHARES OF RP BY REMARKETING AGENT. The
Remarketing Agent may purchase for its own accounts shares of RP in a
Remarketing, provided that it purchases all tendered (or deemed tendered) shares
of RP not sold in such Remarketing to other purchasers and that the Applicable
Dividend Rate established with respect to such shares in such Remarketing is no
higher than the Applicable Dividend Rate that would have been established if the
Remarketing Agent had not purchased such shares. Except as provided in the
previous sentence, the Remarketing Agent shall not be obligated to purchase any
shares of RP that would otherwise remain unsold in a Remarketing. If the
Remarketing Agent owns any shares of RP subject to a Remarketing immediately
prior to such Remarketing and if all shares of RP have been sold in such
Remarketing, then the Remarketing Agent may sell such number of its shares in
such Remarketing as there are outstanding orders to purchase that have not been
filled by shares tendered for sale by other Holders. Neither the Fund, the
Paying Agent nor the Remarketing Agent shall be obligated in any case to provide
funds to make payment to a Holder upon such Holder's tender of its shares of RP
in a Remarketing unless, in each case, such shares of RP were acquired for the
account of the Fund, the Paying Agent or the Remarketing Agent, as the case may
be.
8. APPLICABLE DIVIDEND RATE DURING A NON-PAYMENT PERIOD. So
long as a Non-Payment Period shall continue, paragraphs 1, 2, 3, 4, 5, 6 and 7
of this Part II shall not be applicable to any of the shares of RP and the
shares of RP shall not be subject to Tender and Dividend Reset and the
Applicable Dividend Rate shall be the Non-Payment Period Rate.
9. TRANSFERS. Unless the Fund has elected, during a
Non-Payment Period, to waive this requirement, ownership of such shares of RP
will be maintained in book entry form by the Securities Depository, for the
account of a designated Agent Member which, in turn, shall maintain records of
such purchaser's beneficial ownership. Furthermore, unless the Fund shall have
elected, during a Non-Payment Period, to waive this requirement, a Beneficial
Owner may sell, transfer or otherwise dispose of any shares of RP held by it
only pursuant to orders placed in a Remarketing or, in the case of any transfer
other than pursuant to a Remarketing, if such Beneficial Owner or its Agent
Member advises the Remarketing Agent of such transfer and the Remarketing Agent
is provided such information about the new Beneficial Owner as may be required
by the Paying Agent.
10. MISCELLANEOUS. To the extent permitted by applicable law,
the Trustees of the Fund may interpret or adjust the provisions hereof to
resolve any inconsistency or ambiguity, or to remedy any formal defect.
11. SECURITIES DEPOSITORY; SHARE CERTIFICATES. (a) If there is
a Securities Depository, one certificate for each series of RP shall be issued
to the
53
Securities Depository and registered in the name of the Securities Depository or
its nominee. Each such certificate shall bear a legend to the effect that such
certificate is issued subject to the provisions contained in this Certificate of
Vote. Unless the Fund shall have elected, during a Non-Payment Period, to waive
this requirement, the Fund will also issue stop-transfer instructions to the
Paying Agent for the shares of RP. Except as provided in paragraph (b) below,
the Securities Depository or its nominee will be the only holder of certificates
representing shares of RP, and no Beneficial Owner shall receive certificates
representing its ownership interest in such shares.
(b) If the Applicable Dividend Rate applicable to any series
of RP shall be the Non-Payment Period Rate or there is no Securities Depository,
the Fund may at its option issue one or more new certificates with respect to
such series (without the legend referred to in paragraph 10(a) of this Part II)
registered in the names of the Beneficial Owners or their nominees and rescind
the stop-transfer instructions referred to in paragraph 10(a) of this Part II
with respect to such series.
54
IN WITNESS WHEREOF, the undersigned has caused this
Certificate of Vote to be executed as of December 14, 1993.
--------------------------------
Ronald A. Nyberg
Vice President and Secretary
State of Illinois )
) ss
County of DuPage )
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 Vice President and Secretary of Van Kampen
Merritt Select Sector Municipal Trust.
Before me,
--------------------------------
Notary Public
My commission expires:
----------------------
55
APPENDIX C
ACQUIRING FUND ANNUAL REPORT
DATED OCTOBER 31, 2004
[TO BE FILED BY AMENDMENT]
56
APPENDIX D
TARGET FUND ANNUAL REPORT
DATED OCTOBER 31, 2004
[TO BE FILED BY AMENDMENT]
57
APPENDIX E
MORGAN STANLEY INVESTMENT MANAGEMENT
PROXY VOTING POLICY AND PROCEDURES
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APPENDIX E
MORGAN STANLEY INVESTMENT MANAGEMENT
PROXY VOTING POLICY AND PROCEDURES
I. 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 applies to those MSIM
entities that provide discretionary investment management services and for which
a MSIM entity has authority to vote proxies. The policy 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 an "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 Board 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 recommendations in making proxy
voting decisions, they are in no way obligated to follow the ISS
recommendations. In addition to research, ISS
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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.
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 to MSIM's clients 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.
II. 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.
III. 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.
- Selection or ratification of auditors.
- Approval of financial statements, director and auditor reports.
- General updating/corrective amendments to the charter.
- Proposals to limit Directors' liability and/or broaden
indemnification of Directors.
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- Proposals requiring that a certain percentage (up to 66 2/3%) of the
company's Board members be independent Directors.
- Proposals requiring that members of the company's compensation,
nominating and audit committees be comprised of independent or
unaffiliated Directors.
- Proposals recommending set retirement ages or requiring specific
levels of stock ownership by Directors.
- Proposals to eliminate cumulative voting.
- Proposals to eliminate preemptive rights.
- Proposals for confidential voting and independent tabulation of
voting results.
- 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, proxies 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 five 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
- Proposals relating to capitalization changes that eliminate other
classes of stock and voting rights.
- Proposals to increase the authorization of existing classes of
common stock (or securities convertible into common stock) if: (i) a
clear and legitimate
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business purpose is stated; (ii) the number of shares requested 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.
- Proposals to create a new class of preferred stock or for issuances
of preferred stock up to 50% of issued capital.
- Proposals for share repurchase plans.
- Proposals to reduce the number of authorized shares of common or
preferred stock, or to eliminate classes of preferred stock.
- Proposals to effect stock splits.
- 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
- Proposals relating to Director fees, provided the amounts are not
excessive relative to other companies in the country or industry.
- 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.
- Proposals for the establishment of employee stock option Plans and
other employee ownership plans.
- Proposals for the establishment of employee retirement and severance
plans
ANTI-TAKEOVER MATTERS
- Proposals to modify or rescind existing supermajority vote
requirements to amend the charters or bylaws.
- 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 a shareholder, unless
otherwise determined by
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the Proxy Review Committee, will be voted against (notwithstanding
management support).
- Proposals to establish cumulative voting rights in the election of
directors.
- Proposals relating to capitalization changes that add classes of
stock which substantially dilute the voting interests of existing
shareholders.
- Proposals to increase the authorized number of shares of existing
classes of stock that carry preemptive rights or supervoting rights.
- Proposals to create "blank check" preferred stock.
- Proposals relating to changes in capitalization by 100% or more.
- Compensation proposals that allow for discounted stock options that
have not been offered to employees in general.
- Proposals to amend bylaws to require a supermajority shareholder
vote to pass or repeal certain provisions.
- 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
- 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, MSIM internal
company-specific knowledge.
- 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.
- 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.
- Proposals relating to Executive/Director stock option plans.
Generally, stock option plans should meet the following criteria:
(i) The stock option plan should be incentive based;
(ii) For mature companies, should be no more than 5% of the issued
capital at the time of approval;
(iii) For growth companies, should be no more than 10% of the
issued capital at the time of approval.
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ANTI-TAKEOVER PROVISIONS
- Proposals requiring shareholder ratification of poison pills.
- 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:
- Proposals requiring auditors to attend the annual meeting of
shareholders.
- Proposals requiring non-U.S. companies to have a separate Chairman
and CEO.
- Proposals requiring that members of the company's compensation,
nominating and audit committees be comprised of independent or
unaffiliated Directors.
- Proposals requiring that a certain percentage of the company's
members be comprised of independent and unaffiliated Directors.
- Proposals requiring diversity of Board membership relating to broad
based social, religious or ethnic groups.
- Proposals requiring confidential voting.
- Proposals to reduce or eliminate supermajority voting requirements.
- Proposals requiring shareholder approval for a shareholder rights
plan or poison pill.
- Proposals to require the company to expense stock options.
2. The following shareholder proposals will be voted as determined by the
Proxy Review Committee.
- Proposals that limit tenure of directors.
- Proposals to limit golden parachutes.
- Proposals requiring directors to own large amounts of stock to be
eligible for election.
- Proposals that request or require disclosure of executive
compensation in addition to the disclosure required by the
Securities and Exchange Commission ("SEC") regulations.
- Proposals that limit retirement benefits or executive compensation.
- Proposals requiring shareholder approval for bylaw or charter
amendments.
- Proposals requiring shareholder approval of executive compensation.
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- Proposals requiring shareholder approval of golden parachutes.
- Proposals to eliminate certain anti-takeover related provisions.
- Proposals to prohibit payment of greenmail.
3. The following shareholder proposals generally will not be supported,
unless otherwise determined by the Proxy Review Committee.
- Proposals to declassify the Board of Directors (if management
supports a classified board).
- Proposals requiring a U.S. company to have a separate Chairman and
CEO.
- Proposal 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.
- 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.
- Proposals that require inappropriate endorsements or corporate
actions.
- Proposals requiring adherence to workplace standards that are not
required or customary in market(s) to which the proposals relate.
IV. ADMINISTRATION OF PROXY POLICY 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.
(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
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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 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 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 to ISS, decisions of the Committee and
Special Committee so that, among other things, ISS will vote proxies
consistent with their decisions.
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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 party
to a merger or acquisition for which Morgan Stanley will be paid a
success fee if completed).
C. PROXY VOTING REPORTS
(a)MSIM will promptly provide a copy of these Policy and Procedures to
any client requesting them. 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.
(b)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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Appendix F
PRO FORMA FINANCIAL STATEMENTS
The following presents the pro forma financial statements for the combination of
the Van Kampen Strategic Sector Municipal Trust and Van Kampen Select Sector
Municipal Trust. The statements are presented as of October 31, 2004, the most
recent interim period for which financial information is currently available.
The unaudited Pro Forma Portfolio of Investments and Pro Forma Statement of
Assets and Liabilities reflect the financial position as if the transaction
occurred on October 31, 2004. The Pro Forma Statement of Operations reflects the
expenses for the twelve months ended October 31, 2004. The pro forma statements
give effect to the proposed exchange of Van Kampen Select Sector Municipal Trust
shares for the assets and liabilities of Van Kampen Strategic Sector Municipal
Trust, with Van Kampen Select Sector Municipal Trust being the surviving entity.
The proposed transaction will be accounted for as a tax-free reorganization in
accordance with accounting principles generally accepted in the United States.
The historical cost basis of the investments is carried over to the surviving
entity. There is no guarantee that the portfolio of investments of the surviving
entity on the closing date of the transaction will match the Pro Forma Portfolio
of Investments presented herein. All or a portion of the securities acquired in
the transaction could be sold by the surviving entity; however, there is no plan
or intention to sell securities acquired in the transaction other than in the
ordinary course of business.
VAN KAMPEN STRATEGIC SECTOR MUNICIPAL TRUST (VKS) -
VAN KAMPEN SELECT SECTOR MUNICIPAL TRUST (VKL)
PROFORMA PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2004
(UNAUDITED)
VKS VKL PROFORMA
PAR AMOUNT PAR AMOUNT PAR AMOUNT VKS VKL PROFORMA
(000) (000) (000) DESCRIPTION COUPON MATURITY MARKET VALUE MARKET VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Municipal Bonds 152.8%
ALABAMA 3.9%
$ 6,345 $ 6,345 Alabama St Muni Elec Auth Pwr
Supply Rev Ser A (MBIA Insd) (i) 5.500% 09/01/19 $ 7,198,656 $ 7,198,656
$ 1,315 1,315 Alabama St Univ Rev Gen Tuition
& Fee Ser B(Prerefunded @
01/01/12)(MBIA Insd) 5.250 03/01/33 $ 1,501,954 1,501,954
------------------------------------------
7,198,656 1,501,954 8,700,610
------------------------------------------
CALIFORNIA 16.5%
5,000 5,000 Alameda Corridor Transn Auth CA
Conv-Cap Apprec Sub Lien Ser A
Rfdg (AMBAC Insd) (a) 0/5.400 10/01/24 3,515,450 3,515,450
3,330 3,330 Anaheim, CA Ctf Partn Anaheim
Mem Hosp Assn Rfdg (Escrowed to
Maturity) (AMBAC Insd) 5.000 05/15/13 3,406,557 3,406,557
75 75 California Rural Home Mtg Fin
Auth Single Family Mtg Rev Ser
C (AMT) (GNMA Collateralized) 7.800 02/01/28 77,588 77,588
5,110 1,420 6,530 California St (AMBAC Insd) 5.125 10/01/27 5,327,533 1,480,449 6,807,982
1,000 1,000 California St Dept Wtr Res Pwr
Rev Ser A 5.750 05/01/17 1,135,590 1,135,590
1,000 1,000 California St Dept Wtr Res Pwr
Rev Ser A (AMBAC Insd) 5.500 05/01/16 1,142,280 1,142,280
2,000 2,000 California St Dept Wtr Res Pwr
Supply Rev Ser A (XLCA Insd) 5.375 05/01/17 2,226,720 2,226,720
5,000 5,000 California St Dept Wtr Res Pwr
Supply Rev Ser A (MBIA Insd) 5.375 05/01/22 5,463,800 5,463,800
5,000 5,000 Foothill/Eastern Corridor Agy CA
Toll Rd Rev Conv Cap Apprec
Rfdg (a) 0/5.800 01/15/20 4,079,700 4,079,700
1,500 1,500 Los Angeles, CA Uni Sch Dist Ser A
(FSA Insd) (c) 5.250 07/01/19 1,655,250 1,655,250
1,465 1,465 Los Angeles Cnty, CA Met Transn
Auth Sales Tax Rev Prop C 2nd Sr
Ser A Rfdg (AMBAC Insd) 5.000 07/01/23 1,511,030 1,511,030
2,000 2,000 Los Angeles Cnty, CA Pub Wks Fin
Auth Rev Sr Lien Ser A Rfdg (FSA
Insd) 5.500 10/01/18 2,327,140 2,327,140
3,500 3,500 Palm Springs, CA Fin Auth Lease
Rev Convention Ctr Proj Ser A
(MBIA Insd) 5.500 11/01/35 3,855,670 3,855,670
------------------------------------------
30,280,158 6,924,599 37,204,751
------------------------------------------
COLORADO 6.5%
1,000 1,000 Arapahoe Cnty, CO Cap Impt Tr Fd
Hwy Rev E-470 Proj Ser B
(Prerefunded @ 08/31/05) 7.000 08/31/26 1,072,730 1,072,730
5,000 5,000 Colorado Ed & Cultural Fac Charter
Sch Proj (XLCA Insd) 5.500 05/01/36 5,361,650 5,361,650
1,000 1,000 Colorado Hlth Fac Auth Rev
Catholic Hlth Initiatives Ser A
(Escrowed to Maturity) 5.500 03/01/32 1,050,690 1,050,690
1,000 1,000 Colorado Hlth Fac Auth Rev Hosp
Parkview Med Ctr Proj 6.500 09/01/20 1,096,930 1,096,930
1,000 1,000 Colorado Hlth Fac Auth Rev Hosp
Portercare Adventist Hlth 6.500 11/15/31 1,099,240 1,099,240
1,850 1,850 Colorado Hsg Fin Auth Multi-Family
Hsg Insd Mtg Ser A (AMT) 6.800 10/01/37 1,897,230 1,897,230
140 140 Colorado Hsg Fin Auth Single
Family Pgm Sr Ser C1 (AMT) 7.550 11/01/27 140,217 140,217
1,280 1,280 Fremont Custer & El Paso Cnty CO
Sch Dist No RE-2 Fremont (FSA Insd) 5.250 12/01/21 1,398,323 1,398,323
1,500 1,500 Montrose, CO Mem Hosp 6.000 12/01/33 1,507,740 1,507,740
------------------------------------------
9,568,757 5,055,993 14,624,750
------------------------------------------
CONNECTICUT 1.4%
1,500 1,500 Mashantucket Western Pequot Tribe
CT Spl Rev Ser A, 144-A Private
Placement (b) 6.400 09/01/11 1,604,460 1,604,460
1,500 1,500 Mashantucket Western Pequot Tribe
CT Spl Rev Ser A, 144-A Private
f Placement (Prerefunded @09/01/07)(b) 6.400 09/01/11 1,669,755 1,669,755
------------------------------------------
3,274,215 0 3,274,215
------------------------------------------
FLORIDA 0.5%
1,000 1,000 Escambia Cnty, FL Hlth Fac Auth
Hlth Fac Rev FL Hlthcare
(AMBAC Insd) 5.950 07/01/20 0 1,027,260 1,027,260
------------------------------------------
GEORGIA 3.6%
4,000 4,000 Augusta, GA Wtr & Swr Rev
(FSA Insd) (c) 5.250 10/01/22 4,365,560 4,365,560
1,870 1,870 Georgia Muni Elec Auth Pwr Rev
Ser A (FGIC Insd) 5.500 01/01/12 2,139,093 2,139,093
1,425 1,425 Georgia Muni Elec Auth Pwr Rev
Ser A Rfdg (Escrowed to Maturity)
(FGIC Insd) 5.500 01/01/12 1,615,423 1,615,423
------------------------------------------
8,120,076 0 8,120,076
------------------------------------------
ILLINOIS 11.2%
1,000 1,000 Chicago, IL Brd of Ed (Prerefunded
@ 12/01/10) (FGIC Insd) 5.500 12/01/31 1,142,400 1,142,400
2,000 2,000 Chicago, IL O'Hare Intl Arpt Rev
Gen Arpt Third Lien Ser A Rfdg
(AMT) (MBIA Insd) 5.375 01/01/32 2,069,560 2,069,560
2,540 2,540 Chicago, IL O'Hare Intl Arpt Rev
Second Lien Passenger Fac Ser A
(AMT) (AMBAC Insd) 5.375 01/01/32 2,628,341 2,628,341
1,700 1,700 Chicago, IL O'Hare Intl Arpt Spl
Fac Rev United Airl Proj Ser B
Rfdg (AMT) (d) (e) 5.200 04/01/11 255,000 255,000
5,000 5,000 Chicago, IL Proj Ser A Rfdg
(MBIA Insd) 5.500 01/01/38 5,429,450 5,429,450
950 935 1,885 Chicago, IL Tax Increment Alloc
Sub Cent Loop Redev Ser A (ACA Insd) 6.500 12/01/08 1,070,241 1,053,343 2,123,584
1,000 1,000 Chicago, IL Wastewtr Transmission
Rev Second Lien (Prerefunded @
01/01/10) (MBIA Insd) 6.000 01/01/30 1,161,970 1,161,970
1,635 1,635 Cook Cnty, IL Sch Dist No. 100
Berwyn South (FSA Insd) (i) 8.100 12/01/15 2,274,236 2,274,236
5,000 5,000 Cook Cnty, IL Ser A (FGIC Insd) 5.500 11/15/31 5,413,350 5,413,350
Page 1 of 5
VAN KAMPEN STRATEGIC SECTOR MUNICIPAL TRUST (VKS) -
VAN KAMPEN SELECT SECTOR MUNICIPAL TRUST (VKL)
PROFORMA PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2004
(UNAUDITED)
VKS VKL PROFORMA
PAR AMOUNT PAR AMOUNT PAR AMOUNT VKS VKL PROFORMA
(000) (000) (000) DESCRIPTION COUPON MATURITY MARKET VALUE MARKET VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
1,000 1,000 Illinois Fin Auth Rev Northwestern
Mem Hosp Ser A 5.500 08/15/43 1,040,080 1,040,080
2,800 2,800 Will Cnty, IL Fst Presv Dist Ser B
(FGIC Insd) * 12/01/16 1,662,304 1,662,304
------------------------------------------
18,732,922 6,467,353 25,200,275
------------------------------------------
INDIANA 3.8%
3,065 3,065 Allen Cnty, IN War Mem Coliseum
Additions Bldg Corp Ser A
(AMBAC Insd) 5.750 11/01/25 3,438,654 3,438,654
3,505 3,505 East Chicago, IN Elem Sch Bldg
Corp First Mtg Rfdg (AMBAC Insd) 6.250 01/05/16 4,184,725 4,184,725
1,000 1,000 Indiana St Dev Fin Auth Rev Rfdg
(AMT) 5.950 08/01/30 1,024,560 1,024,560
------------------------------------------
7,623,379 1,024,560 8,647,939
------------------------------------------
IOWA 0.8%
1,515 1,515 Des Moines, IA Pub Pkg Sys Rev Ser
A (FGIC Insd) 5.750 06/01/14 0 1,720,358 1,720,358
------------------------------------------
KANSAS 3.2%
1,735 1,735 Cowley Cnty, KS Uni Sch Dist No 465
Winfield Impt Rfdg (MBIA Insd) 5.250 10/01/21 1,897,014 1,897,014
1,000 500 1,500 Overland Park, KS Dev Corp Rev
First Tier Overland Park Ser A 7.375 01/01/32 1,023,550 511,775 1,535,325
3,500 3,500 Wamego, KS Pollutn Ctl Rev KS Gas
& Elec Co Proj Rfdg (MBIA Insd) 5.300 06/01/31 3,720,745 3,720,745
------------------------------------------
4,744,295 2,408,789 7,153,084
------------------------------------------
KENTUCKY 0.6%
1,280 1,280 Kenton Cnty, KY Arpt Brd Arpt Rev
Cincinnati/Northn KY Intl Ser A
Rfdg (AMT) (MBIA Insd) 6.100 03/01/07 0 1,387,469 1,387,469
------------------------------------------
LOUISIANA 9.5%
7,930 7,930 Ernest N Morial New Orleans LA
Exhibit Hall Auth Spl Tax Sr Sub
Ser A (AMBAC Insd) (i) 5.250 07/15/18 8,747,662 8,747,662
2,855 2,855 Louisiana St Gas & Fuels Tax Rev
Ser A (AMBAC Insd) 5.375 06/01/16 3,215,044 3,215,044
1,000 1,000 Louisiana Hsg Fin Agy Rev Azalea
Estates Ser A Rfdg (AMT)
(GNMA Collateralized) 5.375 10/20/39 1,015,880 1,015,880
2,000 2,000 New Orleans, LA Rfdg (FGIC Insd) 5.500 12/01/21 2,348,280 2,348,280
1,750 1,750 Saint Charles Parish, LA
Environmental Impt Rev LA Pwr & Lt
Co Proj Ser A (AMT) (AMBAC Insd) 6.875 07/01/24 1,808,835 1,808,835
1,250 3,000 4,250 Saint Charles Parish, LA Pollutn
Ctl Rev LA Pwr & Lt Co Proj (AMT)
(FSA Insd) 7.500 06/01/21 1,288,125 3,091,500 4,379,625
------------------------------------------
15,599,111 5,916,215 21,515,326
------------------------------------------
MARYLAND 0.8%
800 800 Maryland St Econ Dev Corp Student
Hsg Rev Collegiate Hsg Salisbury
Ser A 6.000 06/01/19 831,600 831,600
1,000 1,000 Maryland St Econ Dev Corp Univ MD
College Pk Proj 5.625 06/01/35 1,033,220 1,033,220
------------------------------------------
1,033,220 831,600 1,864,820
------------------------------------------
MASSACHUSETTS 2.5%
2,000 2,000 Massachusetts St Dev Fin Agy
Semass Sys Ser A (MBIA Insd) 5.625 01/01/15 2,248,460 2,248,460
1,705 1,705 Massachusetts St Hlth & Ed Fac
Auth Rev Vly Regl Hlth Sys Ser C
(Connie Lee Insd) (i) 7.000 07/01/09 2,008,712 2,008,712
1,235 1,235 Massachusetts St Indl Fin Agy Rev
Wtr Treatment Amern Hingham (AMT) 6.750 12/01/20 1,315,386 1,315,386
------------------------------------------
4,257,172 1,315,386 5,572,558
------------------------------------------
MISSISSIPPI 2.6%
2,000 2,000 Mississippi Business Fin Corp Sys
Energy Res Inc Proj 5.875 04/01/22 2,007,000 2,007,000
2,560 2,560 Mississippi Dev Bk Spl Oblig Cap
Proj & Equip Acquisition Ser A2
(AMBAC Insd) 5.000 07/01/24 2,755,379 2,755,379
615 615 Mississippi Home Corp Single
Family Rev Mtg Ser C (AMT) 7.600 06/01/29 647,011 647,011
(GNMA Collateralized)
235 235 Mississippi Home Corp Single
Family Rev Mtg Ser F (AMT)
(GNMA Collateralized) 7.550 12/01/27 236,906 236,906
217 217 Mississippi Home Corp Single
Family Rev Mtg Ser D (AMT)
(GNMA Collateralized) 8.100 12/01/24 228,002 228,002
-------------------------------------------
5,874,298 0 5,874,298
------------------------------------------
MISSOURI 3.7%
1,250 1,250 Cape Girardeau Cnty, MO Indl Dev
Auth Hlthcare Fac Rev Southeast
MO Hosp Assoc 5.625 06/01/27 1,274,338 1,274,338
3,855 3,855 Missouri St Hlth & Ed Fac Auth
Hlth Fac Rev SSM Hlthcare Ser AA
Rfdg (MBIA Insd) 6.400 06/01/10 4,530,088 4,530,088
2,250 2,250 Saint Charles, MO Ctfs Partn Ser B 5.500 05/01/18 2,421,540 2,421,540
------------------------------------------
0 8,225,966 8,225,966
------------------------------------------
NEVADA 0.6%
1,000 1,000 Clark Cnty, NV Indl Dev Rev
Southwest Gas Corp Proj Ser A
(AMT) (AMBAC Insd) 5.250 07/01/34 1,032,000 1,032,000
135 140 275 Nevada Hsg Div Single Family Pgm
Mezz Ser E (AMT) (FHA/VA Gtd) (i) 6.900 10/01/11 137,940 143,025 280,965
------------------------------------------
Page 2 of 5
VAN KAMPEN STRATEGIC SECTOR MUNICIPAL TRUST (VKS) -
VAN KAMPEN SELECT SECTOR MUNICIPAL TRUST (VKL)
PROFORMA PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2004
(UNAUDITED)
VKS VKL PROFORMA
PAR AMOUNT PAR AMOUNT PAR AMOUNT VKS VKL PROFORMA
(000) (000) (000) DESCRIPTION COUPON MATURITY MARKET VALUE MARKET VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
137,940 1,175,025 1,312,965
------------------------------------------
NEW JERSEY 15.5%
3,130 3,130 Casino Reinvestment Dev Auth
(AMBAC Insd) 5.250 01/01/21 3,477,899 3,477,899
5,000 5,000 Essex Cnty, NJ Impt Auth Rev Cnty
Gtd Proj Cons Rfdg (MBIA Insd) 5.125 10/01/19 5,493,350 5,493,350
700 700 New Jersey Econ Dev Auth Rev
Cigarette Tax 5.750 06/15/29 718,634 718,634
1,000 1,000 New Jersey Econ Dev Auth Rev
Cigarette Tax 5.500 06/15/31 1,007,060 1,007,060
2,000 2,000 New Jersey Econ Dev Auth Spl Fac
Rev Continental Airl Inc Proj (AMT) 6.250 09/15/29 1,453,040 1,453,040
2,500 2,500 New Jersey Econ Dev Auth Wtr Fac
Rev NJ Amern Wtr Co Inc Proj Ser A
(AMT) (FGIC Insd) 6.875 11/01/34 2,559,750 2,559,750
6,500 6,500 New Jersey Econ Dev Auth Wtr Fac
Rev NJ Amern Wtr Co Ser A (AMT)
(AMBAC Insd) 5.250 11/01/32 6,763,445 6,763,445
5,000 5,000 New Jersey St Tpk Auth Tpk Rev
Ser A (FSA Insd) 5.000 01/01/20 5,368,750 5,368,750
4,500 4,500 New Jersey St Transn Tr Fd Auth
Transn Sys Ser A (FGIC Insd) 5.000 06/15/20 4,850,865 4,850,865
3,000 3,000 New Jersey St Transn Tr Fd Auth
Transn Sys Ser A (FGIC Insd) 5.000 06/15/21 3,216,570 3,216,570
------------------------------------------
30,685,733 4,223,630 34,909,363
------------------------------------------
NEW MEXICO 1.3%
1,500 1,500 Jicarilla, NM Apache Nation Rev
Adj Ser A (Acquired 10/23/03, Cost
$1,514,910) (f) 5.000 09/01/18 1,574,220 1,574,220
1,250 1,250 Jicarilla, NM Apache Nation Rev
Adj Ser A (Acquired 10/23/03, Cost
$1,275,475) (f) 5.500 09/01/23 1,335,588 1,335,588
------------------------------------------
0 2,909,808 2,909,808
------------------------------------------
NEW YORK 17.8%
1,500 1,500 New York City Hsg Dev Corp
Multi-Family Hsg Rev Ser A (AMT) 5.500 11/01/34 1,549,770 1,549,770
970 920 1,890 New York City Indl Dev Agy Civic
Fac Rev Touro College Proj Ser A
(Acquired 6/25/99 to 6/29/99, Cost
$1,890,000) (f) 6.350 06/01/29 934,362 886,199 1,820,561
5 5 New York City Ser C 7.250 08/15/24 5,020 5,020
865 865 New York City Ser G 5.750 02/01/14 913,354 913,354
1,135 1,135 New York City Ser G (Prerefunded
@ 02/01/06) 5.750 02/01/14 1,207,981 1,207,981
5,000 5,000 New York City Ser H (MBIA Insd) 5.250 03/15/14 5,611,450 5,611,450
5,000 5,000 New York City Transitional Fin
Auth Future Tax Sec Ser B 5.000 08/01/22 5,307,150 5,307,150
4,000 4,000 New York City Transitional Fin
Auth Future Tax Sec Ser D
(MBIA Insd) 5.250 02/01/20 4,373,360 4,373,360
2,000 2,000 New York St Dorm Auth Lease Rev
Court Fac Ser A 5.500 05/15/20 2,191,780 2,191,780
190 190 New York St Dorm Auth Rev Mental
Hlth Svc Fac (FSA Insd) 5.875 08/15/16 218,247 218,247
1,555 1,555 New York St Dorm Auth Rev Mental
Hlth Svc Fac (Prerefunded @
08/15/10) (FSA Insd) (i) 5.875 08/15/16 1,801,390 1,801,390
2,000 2,000 New York St Dorm Auth Rev Secd
Hosp Gen Hosp Ser N Rfdg 5.750 02/15/18 2,247,120 2,247,120
1,500 1,500 New York St Med Care Fac Fin Agy
Rev NY Hosp Ser A (Prerefunded @
02/15/05) (AMBAC Insd) 6.800 08/15/24 1,552,095 1,552,095
1,990 1,990 New York St Mtg Agy Rev Ser 101
(AMT) 5.400 04/01/32 2,052,088 2,052,088
1,000 1,000 Sales Tax Asset Receivable Rev
Ser A (MBIA Insd) (g) 5.000 10/15/21 1,078,820 1,078,820
7,500 7,500 Sales Tax Asset Rec Ser A (MBIA
Insd) (g) 5.000 10/15/22 8,056,875 8,056,875
------------------------------------------
26,409,552 13,577,509 39,987,061
------------------------------------------
NORTH CAROLINA 2.3%
3,000 3,000 Charlotte, NC Ctf Part Convention
Fac Proj Ser A Rfdg 5.500 08/01/19 3,373,140 3,373,140
1,700 1,700 North Carolina Muni Pwr Agy No 1
Catawba Elec Rev Ser A (MBIA Insd) 5.250 01/01/19 1,856,077 1,856,077
------------------------------------------
3,373,140 1,856,077 5,229,217
------------------------------------------
OHIO 9.9%
705 705 Akron, OH Ctf Part Akron Muni
Baseball Stad Proj 6.500 12/01/07 746,785 746,785
1,500 1,500 Akron, OH Ctf Part Akron Muni
Baseball Stad Proj 6.900 12/01/16 1,617,045 1,617,045
2,000 2,000 Akron, OH Income Tax Rev Cmnty
Learning Ctrs Ser A (FGIC Insd) 5.250 12/01/19 2,210,520 2,210,520
1,000 1,000 Cuyahoga Cnty, OH Hosp Fac Rev
Canton Inc Proj 7.500 01/01/30 1,108,460 1,108,460
1,000 1,000 Delaware Cnty, OH Hlthcare Fac Rev
Mtg Centrum at Willow Brook
(FHA Gtd) (c) 6.550 02/01/35 1,036,820 1,036,820
1,065 1,065 Logan Cnty, OH (MBIA Insd) 5.250 12/01/17 1,190,819 1,190,819
2,045 2,045 Marion Cnty, OH Hosp Impt Rev
Cmnty Hosp Rfdg (i) 6.000 05/15/05 2,076,902 2,076,902
530 530 Miami Cnty, OH Hosp Fac Impt Upper
Vly Med Ctr Ser C Rfdg 6.000 05/15/06 553,002 553,002
1,450 1,450 Ohio Hsg Fin Agy Mtg Rev
Residential Ser A-1 (AMT)
(GNMA Collateralized) 6.050 09/01/17 1,534,840 1,534,840
2,000 2,000 Ohio St Wtr Dev Auth Rev Fresh
Wtr Impt 5.000 12/01/34 2,064,680 2,064,680
5,000 5,000 Ohio St Wtr Dev Auth Wtr Pollutn
Ctl Rev Wtr Quality Ln Fd 5.000 06/01/20 5,425,900 5,425,900
1,650 1,650 Toledo Lucas Cnty, OH Port Auth
Dev Rev Northwest OH Bd Fd Ser C
(AMT) 6.375 11/15/32 1,719,498 1,719,498
870 870 Toledo Lucas Cnty, OH Port Auth
Northwest OH Bd Fd Ser C (AMT) 6.000 05/15/11 941,453 941,453
------------------------------------------
16,679,661 5,547,063 22,226,724
------------------------------------------
OKLAHOMA 4.4%
Page 3 of 5
VAN KAMPEN STRATEGIC SECTOR MUNICIPAL TRUST (VKS) -
VAN KAMPEN SELECT SECTOR MUNICIPAL TRUST (VKL)
PROFORMA PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2004
(UNAUDITED)
VKS VKL PROFORMA
PAR AMOUNT PAR AMOUNT PAR AMOUNT VKS VKL PROFORMA
(000) (000) (000) DESCRIPTION COUPON MATURITY MARKET VALUE MARKET VALUE MARKET VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
3,905 3,905 Jenks, OK Aquarium Auth Rev Rfdg
(MBIA Insd) 5.250 07/01/29 4,178,428 4,178,428
1,475 1,475 Jenks, OK Aquarium Auth Rev Rfdg
(MBIA Insd) 5.250 07/01/33 1,574,666 1,574,666
1,000 1,000 Mc Alester, OK Pub Wks Auth Util
Sys Rev Cap Apprec (FSA Insd) * 02/01/31 258,080 258,080
415 415 Oklahoma Hsg Fin Agy Single Family
Mtg Rev Homeownership Ln Pgm Ser A
(AMT) (GNMA Collateralized) 7.050 09/01/26 415,635 415,635
1,000 1,000 Sapula, OK Muni Auth Cap Impt &
Rfdg (Prerefunded @ 07/01/10)
(FSA Insd) 5.750 07/01/30 1,159,080 1,159,080
1,000 1,000 2,000 Tulsa Cnty, OK Pub Fac Auth Cap
Impt Rev (AMBAC Insd) 6.250 11/01/22 1,168,420 1,168,420 2,336,840
------------------------------------------
7,179,594 2,743,135 9,922,729
-- ---------------------------------------
OREGON 0.5%
1,000 1,000 Portland, OR Swr Sys Rev Ser A
(FGIC Insd) 5.750 08/01/18 0 1,136,680 1,136,680
------------------------------------------
PENNSYLVANIA 1.5%
1,000 1,000 Hempfield, PA Area Sch Dist
Westmoreland Cnty Ser A (FGIC Insd) 5.250 03/15/19 1,111,910 1,111,910
2,000 2,000 Philadelphia, PA Hosp & Higher Ed
Fac Auth Hosp Rev PA Hosp Rfdg
(Escrowed to Maturity) 6.350 07/01/07 2,210,060 2,210,060
------------------------------------------
2,210,060 1,111,910 3,321,970
------------------------------------------
SOUTH CAROLINA 1.9%
2,420 2,420 Beaufort Cnty, SC Tax Increment
New River Redev Proj Area (MBIA
Insd) (i) 5.500 06/01/20 2,730,341 2,730,341
1,500 1,500 South Carolina Jobs Econ Dev Auth
Indl Rev SC Elec & Gas Co Proj Ser
A (AMBAC Insd) 5.200 11/01/27 1,578,675 1,578,675
------------------------------------------
2,730,341 1,578,675 4,309,016
------------------------------------------
SOUTH DAKOTA 1.6%
2,115 2,115 Minnehaha Cnty, SD Ltd Tax Ctfs
Partn (FSA Insd) (g) (i) 5.000 12/01/20 2,273,921 2,273,921
1,250 1,250 South Dakota St Hlth & Ed Fac Auth
Rev Children's Care Hosp Rfdg 6.125 11/01/29 1,329,050 1,329,050
------------------------------------------
0 3,602,971 3,602,971
------------------------------------------
TENNESSEE 1.3%
1,500 1,500 Elizabethton, TN Hlth & Ed Fac Brd
Rev Hosp First Mtg Ser B Impt &
Rfdg 8.000 07/01/33 1,784,130 1,784,130
1,000 1,000 Johnson City, TN Hlth & Ed Fac Brd
Hosp Rev First Mtg MTN States Hlth
Ser A Rfdg (MBIA Insd) 7.500 07/01/25 1,261,640 1,261,640
------------------------------------------
3,045,770 0 3,045,770
------------------------------------------
TEXAS 10.1%
1,190 1,190 Brazos River Auth TX Pollutn Ctl
Rev Adj TXU Elec Co Proj Ser C
Rfdg (AMT) 5.750 05/01/36 1,291,174 1,291,174
2,000 2,000 Dallas-Fort Worth, TX Intl Arpt
Rev Jt Ser A (AMT) (FSA Insd) 5.500 11/01/21 2,170,640 2,170,640
3,000 3,000 Dallas, TX Wtrwks & Swr Sys Rev
Impt & Rfdg (FSA Insd) 5.375 10/01/19 3,316,110 3,316,110
1,500 1,500 Houston, TX Arpt Sys Rev Spl Fac
Continental Airl Ser B (AMT) 6.125 07/15/17 1,194,435 1,194,435
3,720 2,000 5,720 Houston, TX Util Sys Rev First
Lien Ser A Rfdg (FSA Insd) 5.250 05/15/21 4,068,862 2,187,560 6,256,422
1,250 1,250 Matagorda Cnty, TX Navig Dist No
1 Rev Coll Centerpoint Energy
Proj Rfdg 5.600 03/01/27 1,289,200 1,289,200
1,000 1,000 Matagorda Cnty, TX Navig Dist No 1
Rev Houston Lt Rfdg (AMT)
(AMBAC Insd) 5.125 11/01/28 1,056,170 1,056,170
2,000 2,000 North Cent TX Hlth Fac Dev Corp
Rev Hosp Childrens Med Ctr Dallas
(AMBAC Insd) 5.250 08/15/32 2,088,600 2,088,600
4,000 4,000 Wylie, TX Indpt Sch Dist Rfdg
(PSF Gtd) 5.000 08/15/30 4,074,640 4,074,640
------------------------------------------
16,290,591 6,446,800 22,737,391
------------------------------------------
VIRGINIA 0.7%
1,485 1,485 Richmond, VA Indl Dev Auth Govt
Fac Rev Bonds (AMBAC Insd) (i) 5.000 07/15/15 1,667,640 0 1,667,640
------------------------------------------
WASHINGTON 9.0%
1,500 1,500 Chelan Cnty, WA Pub Util Dist
No 001 Cons Rev Chelan Hydro Ser A
(AMT) (MBIA Insd) 5.600 01/01/36 1,591,170 1,591,170
1,370 1,370 Energy Northwest WA Elec Rev Proj
No 3 Ser A Rfdg (FSA Insd) 5.500 07/01/18 1,539,976 1,539,976
1,000 1,000 Grant Cnty, WA Pub Util Dist
No 002 Wanapum Hydro Elec Rev
Ser B Rfdg (AMT) (MBIA Insd) 5.375 01/01/18 1,066,200 1,066,200
3,465 3,465 Seattle, WA Drain & Wastewater Rev
Rfdg (FGIC Insd) (i) 5.250 07/01/21 3,726,018 3,726,018
5,000 5,000 Spokane, WA Pub Fac Dist Hotel
Motel & Sales Use Tax (MBIA Insd) 5.250 09/01/33 5,267,450 5,267,450
2,030 2,030 Washington St Pub Pwr Supply Sys
Nuclear Proj No 3 Rev Ser C Rfdg
(MBIA Insd) * 07/01/13 1,436,956 1,436,956
3,380 3,380 Washington St Pub Pwr Supply Sys
Nuclear Proj No 3 Rev Ser C Rfdg
(MBIA Insd) * 07/01/15 2,150,964 2,150,964
3,000 3,000 Washington St Ser B 5.500 05/01/18 3,441,330 3,441,330
------------------------------------------
17,088,918 3,131,146 20,220,064
------------------------------------------
WISCONSIN 0.6%
Page 4 of 5
VAN KAMPEN STRATEGIC SECTOR MUNICIPAL TRUST (VKS) -
VAN KAMPEN SELECT SECTOR MUNICIPAL TRUST (VKL)
PROFORMA PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2004
(UNAUDITED)
VKS VKL PROFORMA
PAR AMOUNT PAR AMOUNT PAR AMOUNT VKS VKL PROFORMA
(000) (000) (000) DESCRIPTION COUPON MATURITY MARKET VALUE MARKET VALUE MARKET VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
1,205 1,205 Wisconsin St Hlth & Ed Fac Auth
Rev (ACA Insd) 6.150 05/15/25 0 1,276,481 1,276,481
-----------------------------------------
PUERTO RICO 2.7%
4,800 4,800 Puerto Rico Comwlth Hwy & Trans
Auth Hwy Rev Ser Y (FSA Insd) (c) 6.250 07/01/21 0 6,087,648 6,087,648
-----------------------------------------
TOTAL LONG-TERM INVESTMENTS 152.8%
(COST $325,927,008) 243,805,199 100,212,060 344,017,259
-----------------------------------------
SHORT-TERM INVESTMENTS 5.5%
1,700 3,100 4,800 Pinellas Cnty, FL Hlth Fac Pooled
Hosp Ln Pgm Rfdg (h) 1.760 12/01/15 1,700,000 3,100,000 4,800,000
2,500 2,500 Illinois Dev Fin Auth Rev Saint
Augustine College Proj (LOC:
American National B&T) (Variable
Rate Coupon) (h) 1.740 11/01/31 2,500,000 2,500,000
4,200 4,200 Shelby Cnty, KY Lease Rev Ser A
(LOC: U.S. Bank N.A.) (h) 1.740 09/01/34 4,200,000 4,200,000
1,000 1,000 Long Island Pwr Auth NY Elec Sys
Rev Sub Ser 2 (LOC: Bayerische
Landesbank) (h) 1.710 05/01/33 1,000,000 1,000,000
-----------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(COST $12,500,000) 9,400,000 3,100,000 12,500,000
-----------------------------------------
TOTAL INVESTMENTS 158.3%
(COST $338,427,008) 253,205,199 103,312,060 356,517,259
LIABILITIES IN EXCESS OF OTHER ASSETS (1.0%) (385,067) (1,882,878) (2,267,945)
PREFERRED SHARES (INCLUDING ACCRUED DISTRIBUTIONS) (57.3%) (95,037,090) (34,018,445) (129,055,535)
-----------------------------------------
NET ASSETS APPLICABLE TO COMMON SHARES 100.0% $ 157,783,042 $ 67,410,737 $225,193,779(j)
=========================================
Percentages are calculated as a percentage of net assets applicable to common shares.
* Zero coupon bond
(a) Security is a "step-up" bond where the coupon increases or steps up at a predetermined date.
(b) 144A securities are those which are exempt from registration under Rule 144A of the Securities Act of 1933, as
amended. These securities may only be resold in transactions exempt from registration which are normally those
transactions with qualified institutional buyers.
(c) All or a portion of these securities have been physically segregated in connection with open futures contracts.
(d) Non-income producing security.
(e) Issuer has filed for protection in federal bankruptcy court.
(f) These securities are restricted and may be resold only in transactions exempt from registration, which are
normally those transactions with qualified institutional buyers. Restricted securities comprise 0.6%, 5.6% and
2.10% of net assets applicable to common shares.
(g) Securities purchased on a when-issued or delayed delivery basis.
(h) Security includes a put feature allowing the Trust to periodically put the security back to the issuer at
amortized cost on specified put dates. The interest rate shown represents the current interest rate earned by
the Trust based on the most recent reset date.
(i) The Trust owns 100% of the bond issuance.
(j) Does not reflect a non-recurring cost associated with this transaction of approximately $290,000. The
approximate cost and per share cost that will be borne by the common shareholders are as follows:
Approximate Cost Cost Per Share
------------------ ----------------
Van Kampen Strategic Sector Municipal Trust..................................... $ 156,600 $ 0.014
Van Kampen Select Sector Municipal Trust........................................ 133,400 0.028
------------------
$ 290,000
------------------
ACA - American Capital Access
AMBAC - AMBAC Indemnity Corp.
AMT - Alternative Minimum Tax
Connie Lee - Connie Lee Insurance Co.
FGIC - Financial Guaranty Insurance Co.
FHA - Federal Housing Administration
FHA/VA - Federal Housing Administration/Department of Veterans Affairs
FSA - Financial Security Assurance Inc.
GNMA - Government National Mortgage Association
LOC - Letter of Credit
MBIA - Municipal Bond Investors Assurance Corp.
PSF - Public School Fund
XLCA - XL Capital Assurance Inc.
Page 5 of 5
VAN KAMPEN STRATEGIC SECTOR MUNICIPAL TRUST
VAN KAMPEN SELECT SECTOR MUNICIPAL TRUST
PROFORMA CONDENSED STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2004
(UNAUDITED)
AMOUNTS IN THOUSANDS
VAN KAMPEN VAN KAMPEN
STRATEGIC SECTOR SELECT SECTOR
MUNICIPAL TRUST MUNICIPAL TRUST
(VKS) (VKL) ADJUSTMENTS PROFORMA
---------------- --------------- ----------- -------------
ASSETS:
Total Investments (Cost of $241,826, $96,601
and $338,427, respectively) $ 253,205 $ 103,312 $ 356,517
Cash 49 71 120
Receivables:
Interest 3,677 1,717 5,394
Investment Sold 4,581 25 4,606
Other 5 2 7
---------- ---------- ------- ----------
Total Assets 261,517 105,127 366,644
---------- ---------- ------- ----------
LIABILITIES:
Payables:
Investments Purchased 8,040 3,324 11,364
Investment Advisory Fee and Administrative Fees -- 51 51
Variation Margin on Futures 159 24 183
Investment Advisory Fee 128 -- 128
Income Distributions-Common Shares 34 14 48
Other Affiliates 10 6 16
Trustee's Deferred Compensation and
Retirement Plans 238 201 439
Accrued Expenses 88 78 166
Merger Cost -- -- $ 290 (2) 290
---------- ---------- ------- ----------
Total Liabilities 8,697 3,698 290 12,685
Preferred Shares (Including accrued
distributions) 95,037 34,018 129,055
---------- --------- ------- ----------
NET ASSETS APPLICABLE TO COMMON SHARES $ 157,783 $ 67,411 $ (290) $ 224,904
========== ========== ======= ==========
Net Assets Applicable to Common Shares 157,783 67,411 (290) (2) 224,904
Common Shares Outstanding 10,807 4,682 162 (1) 15,651
---------- ---------- ------- ----------
NET ASSET VALUE PER COMMON SHARE $ 14.60 $ 14.40 $ 14.37
========== ========== ======= ==========
NET ASSETS CONSIST OF:
Common Shares ($.01 par value) $ 108 $ 47 $ 2 (1) $ 157
Paid in Surplus 146,198 61,644 (292) (1)(2) 207,550
Net Unrealized Appreciation 10,915 6,641 17,556
Accumulated Undistributed Net Investment Income 1,760 843 2,603
Accumulated Net Realized Loss (1,198) (1,764) (2,962)
---------- ---------- ------- ----------
NET ASSETS APPLICABLE TO COMMON SHARES $ 157,783 $ 67,411 $ (290) $ 224,904
========== ========== ======= ==========
PREFERRED SHARES $ 95,000 $ 34,000 $ 129,000
========== ========== ======= ==========
NET ASSETS INCLUDING PREFERRED SHARES $ 252,783 $ 101,411 $ (290) $ 353,904
========== ========== ======= ==========
(1) The proforma statements presume the issuance by the Van Kampen Select Sector
Municipal Trust of approximately 10,969,133 common shares in exchange for the
assets and liabilities of the Van Kampen Strategic Sector Municipal Trust.
(2) A non-recurring cost associated with this transaction of approximately
$290,000 will be incurred. The approximate cost and per share cost that will be
borne by the common shareholders are as follows:
Approximate Cost Cost Per Share
---------------------- -----------------
Van Kampen Strategic Sector Municipal Trust...................................... $ 156,600 $ 0.014
Van Kampen Select Sector Municipal Trust......................................... 133,400 0.028
----------------------
$ 290,000
----------------------
VAN KAMPEN STRATEGIC SECTOR MUNICIPAL TRUST
VAN KAMPEN SELECT SECTOR MUNICIPAL TRUST
PROFORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2004
(UNAUDITED)
AMOUNTS IN THOUSANDS
VAN KAMPEN VAN KAMPEN
STRATEGIC SECTOR SELECT SECTOR
MUNICIPAL TRUST MUNICIPAL TRUST
(VKS) (VKL) ADJUSTMENTS (1) PROFORMA
---------------- --------------- --------------- ---------------
INVESTMENT INCOME:
Interest $ 12,392 $ 5,107 $ 17,499
-------- -------- ------ --------
EXPENSES:
Investment Advisory Fee 1,583 -- 1,583
Investment Advisory and Administrative Fees -- 632 632
Preferred Share Maintenance 264 110 (28) 346
Trustee's Fees and Related Expenses 78 65 (91) 52
Administration Fee 147 -- 147
Legal 28 20 (3) 45
Custody 17 8 (2) 23
Other 164 106 (96) 174
-------- -------- ------ --------
Total Expenses 2,281 941 (220) 3,002
-------- -------- ------ --------
NET INVESTMENT INCOME $ 10,111 $ 4,166 $ 220 $ 14,497
======== ======== ====== ========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments $ 4,002 $ 395 4,397
Futures (3,552) (488) (4,040)
-------- -------- ------ --------
Net Realized Gain/Loss 450 (93) 357
-------- -------- ------ --------
Unrealized Appreciation/Depreciation:
Beginning of the Period 9,349 5,098 14,447
-------- -------- ------ --------
End of the Period:
Investments 11,379 6,711 18,090
Futures (464) (70) (534)
-------- -------- ------ --------
10,915 6,641 17,556
-------- -------- ------ --------
Net Unrealized Appreciation During the Period 1,566 1,543 $ 3,109
-------- -------- ------ --------
NET REALIZED AND UNREALIZED GAIN $ 2,016 $ 1,450 $ 3,466
======== ======== ====== ========
DISTRIBUTION TO PREFERRED SHAREHOLDERS $ (1,087) $ (380) $ (1,467)
======== ======== ====== ========
NET INCREASE IN NET ASSETS APPLICABLE TO COMMON
SHARES FROM OPERATIONS $ 11,040 $ 5,236 $ 220 $ 16,496
======== ======== ====== ========
(1) Reflects the reduction in other operating expenses as a result of the
elimination of certain duplicative expenses and the result of operating a
larger, more efficient fund.
VAN KAMPEN STRATEGIC SECTOR MUNICIPAL TRUST -- VAN KAMPEN SELECT SECTOR
MUNICIPAL TRUST
NOTES TO PRO FORMA FINANCIAL STATEMENTS
OCTOBER 31, 2004
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
The Acquiring Trust, Van Kampen Select Sector Municipal Trust (the "Acquiring
Trust") is registered as a non-diversified, closed-end management investment
company under the Investment Company Act of 1940 as amended. The Acquiring
Trust's primary investment objective is to seek to provide a high level of
current income exempt from federal income tax, consistent with preservation of
capital. The Acquiring Trust will invest primarily in a portfolio of municipal
securities from those market sectors which the Adviser feels will best meet the
Acquiring Trust's investment objective. The Acquiring Trust commenced investment
operations on November 26, 1993.
The following is a summary of significant accounting policies
consistently followed by the Acquiring Trust in the preparation of its financial
statements. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
A. SECURITY VALUATION Municipal bonds are valued by independent pricing services
or dealers using the mean of the bid and asked prices or, in the absence of
market quotations, at fair value based upon yield data relating to municipal
bonds with similar characteristics and general market conditions. Securities
which are not valued by independent pricing services or dealers are valued at
fair value using procedures established in good faith by the Board of Trustees.
Futures contracts are valued at the settlement price established each day on the
exchange on which they are traded. Short-term securities with remaining
maturities of 60 days or less are valued at amortized cost, which approximates
market value.
B. SECURITY TRANSACTIONS Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Acquiring Trust may purchase and sell securities on a "when-issued" or "delayed
delivery" basis with settlement to occur at a later date. The value of the
security so purchased is subject to market fluctuations during this period. The
Acquiring Trust will segregate assets with the custodian having an aggregate
value at least equal to the amount of the when- issued or delayed delivery
purchase commitments until payment is made.
C. INVESTMENT INCOME Interest income is recorded on an accrual basis. Bond
premium is amortized and discount is accreted over the expected life of each
applicable security.
D. FEDERAL INCOME TAXES It is the Acquiring Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required.
E. DISTRIBUTION OF INCOME AND GAINS The Acquiring Trust declares and pays
monthly dividends from net investment income to common shareholders. Net
realized gains, if any, are distributed annually on a pro rata basis to common
and preferred shareholders. Distributions from net realized gains for book
purposes may include short-term capital gains and gains on futures transactions.
All short-term capital gains and a portion of futures gains are included in
ordinary income for tax purposes.
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 and amendments thereto of the Registrant+
CC-2
(b) Certificate of Vote Establishing Preferred Shares and amendments
thereto+++
2. Bylaws of the Registrant++
3. Not applicable
4. Form of Agreement and Plan of Reorganization++++
5. (a) Form of specimen share certificate for Common Shares of the
Registrant++
(b) Form of specimen share certificate for APS of the Registrant++
6. Investment Advisory Agreement between the Registrant and Van
Kampen Asset Management++
7. Not Applicable
8. (a) Form of Trustee Deferred Compensation Plan++
(b) Form of Trustee Retirement Plan++
9. Custodian Contract and amendments thereto++
10. Not Applicable
11. (a) Opinion of Skadden, Arps, Slate, Meagher & Flom
LLP++
(b) Consent 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) (i) Letter of Representation++
(ii) Form of Letter of Representations++
(e) Support Services Agreement++
(f) Fund Accounting Agreement and amendments thereto++
(g) Amended and Restated Legal Services Agreement++
14. Consent of independent registered public accounting firm++
15. Not Applicable
16. Power of Attorney+
17. (a) Code of Ethics of Investment Adviser++
(b) Code of Ethics of the Funds++
99. (a) Form of Proxy card for the Target Fund++
(b) Form of Proxy card for the Registrant++
+ Filed herewith.
++ To be filed by further amendment.
+++ Filed herewith as Appendix B to the Reorganization Statement of Additional
Information.
++++ Filed herewith as Appendix A to the Reorganization Statement of Additional
Information.
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 Reorganization
discussed in the registration statement closes, it shall file by post-effective
amendment either a copy of the Internal Revenue Service private letter ruling
applied for or an opinion supporting the tax matters discussed in the
registration statement.
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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 May 11, 2005.
VAN KAMPEN SELECT SECTOR 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
CC-5
/s/ Linda Hutton Heagy* Trustee
- -------------------------------------------
Linda Hutton Heagy
/s/ R. Craig Kennedy* Trustee
- -------------------------------------------
R. Craig Kennedy
/s/ Howard J Kerr* Trustee
- -------------------------------------------
Howard J Kerr
/s/ 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 May 11, 2005
- -------------------------------------------
Lou Anne McInnis
Attorney-in-Fact
CC-6
Schedule of Exhibits To Form N-14
Van Kampen Select Sector Municipal Trust
11 (b) Consent of Skadden, Arps, Slate,
Meagher & Flom LLP
16 Power of Attorney